Is real estate the best investment class?

The iconic Lincoln House in Mumbai was recently bought by industrialist Cyrus Poonawalla for Rs 750 crore. The 50,000 sq. ft property had been leased to the US government by Pratabsinhji Jhala, the Maharaja of Wankaner, for a sum of Rs 18 lakh in 1957. In the past 58 years, its value has grown 4,000-times at an annual growth rate of 15.45%. Most people infer that the property has given astronomical returns. Has it?

If you go beyond the headlines and dig deeper, you will find that the return is not as spectacular as it appears. There was no Sensex when Lincoln House was being leased to the US Consulate in 1957. But if we assume that it existed and extrapolate the same 17.22% returns it has notched since its launch in 1980, an investment of Rs 18 lakh would have grown to Rs 1,809 crore by now. In absolute terms, the money would have grown more than 10,000 times.

Investment in equity would have given a 2.5-times higher return than real estate. What if the money was not invested in the Sensex but handled by a skilled portfolio manager? He would have worked harder to pick winning stocks and invested the money to earn better returns than the index.

If his equity fund gave 1% higher returns than the Sensex, then the same sum of Rs 18 lakh would have exceeded the return from real estate and the average Sensex return, swelling to a Rs 2,960-crore corpus, a staggering growth of 16,000-times—four times more than the ‘spectacular’ return delivered by real estate.

If the fund manager was able to outperform the index by a bigger margin of, say 3%, the investment would have grown to Rs 7,833 crore. True, equity can be volatile in the short term. But in the long term, no other asset class can churn out such high returns. Since its inception in 1980, the Sensex has fallen by a maximum 60% in a year.

But every decline has been temporary and the index has eventually moved up. Had the Maharaja of Wankaner invested Rs 18 lakh in equities, his investment might have suffered a few ups and downs. But today his investment would be worth almost Rs 7,800 crore—more than 10-times what Poonawalla paid.