" You remember the PITTIE drafters company? the drafters we used in college, are selling their factory land and are moving out to a new location to make a killing on the real estate prices, they would have made more money in this deal than in running the company till date. Hence, always invest in the real estate". so said a friend of mine who studied engineering with me.
That sentence is making me think. Is it important to be a real estate businessman before being a normal one? I was wondering, either they ran the company very poorly, or invested in the real estate too much to not invest in the company, in which case they ran PITTIE drafting company as a real estate company. Take another case, HLL sold their prime real estate, the office in south Mumbai for Rs 425 cr (pardon if my nos are wrong), it was touted as a major decision they took 40 years back. Look at the financials, even if they would have bought this prime real estate for a cr and waited 40 years to get to Rs 425 cr, can it be termed as an important decision to make? purely from the financial point of view, ROCE for this decision will be less than 14% without adjusting for the inflation. Hence, why do companies particularly in India, like to make big investments in real estate than in the companies they wish to run? My gut is, real estate in India is a bit murky business and if someone wants to invest an undeclared income, real estate could be a primary driver.
Actually, in any country, if real estate is growing more than the GDP growth, my guess is, its a wrong signal since real estate should be growing on the back of economic growth. The land is valuable only if it can generate more wealth by using it than selling.
Why do people buy flats? my thinking is, its a pure emotional driver than a financial one. One more reason can be, money is easily available in the form of a loan for the real estate, hence to push ourselves in regular savings mode, this can be a good investment. Purely, if one was to make a financial decision and not get driven by the loan availability, you will choose to never invest in a flat as that money can fetch better returns in any other business that delivers ROCE in excess of 30%. The added benefit of not staying in your flat, others buy, decorate and rent better flats to you at much lower rentals and no sweat of getting tagged to a location.
Think about it....
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