Case Study Comparing Real Estate Investment Performance with Other Asset Classes Anand Moorthy, Founder and CEO, Props AMC
A person who owns a commercial property of 7,000 SFt built-up area in Mumbai which is currently rented. The property is owned by an individual who bought this property back in 2009 when it was under construction. The base price of the property is INR 14,00,00,000 but with registration, stamp duty, car park charges, brokerage and the property was refurbished before renting it out making the actual total purchase value as INR 16,10,30,280. Multiple instalments were paid till possession of the property in 2012. The property is 70% leveraged for a total of 9 years and 9 months (holding period) till now on a 15-year loan tenure, the EMI was paid regularly on monthly basis including some pre-payments of principals in between.
The income from the property in the current financial year is INR 1,26,60,000 as rental income and it pays expenses as Maintenance (paid monthly) and property tax (paid annually) making annual expense in the current financial year as 17,40,000. In a span of 9 years 9 months of holding period the property was under-construction for around 2 years and vacant for 2.7 years hence rental income is generated for 4 years 10 months. With an average current market rate of lookalike properties in and around the building as INR 35,714 per SFt the market value of the property is taken as approx. INR 25,00,00,000
Although the property made – 1.55 in Multiple on the capital of ‘holding period’, it performed in:
– Property Net Yield (Current FY Return On Capital) as 7.86% and
– Market Yield (Current FY Return On Market Value) of 5.06%
– XIRR (Extended Internal Rate of Return) calculated for the holding period is of 6.58%,
Every property thus has an own contribution (own equity + holding cost + interest contribution + principal paid) over a holding period and assuming the same capital contribution is invested.
Say in HDFC Bank stock, ICICI Prudential Bluechip Equity Mutual Fund, S&P BSE Sensex Index , Gold (commodity) the returns would have been V/s XIRR made is demonstrated below in the Fig-1
When we see these numbers in lumpsum amount invested over 9 years and 9 months:
|Instrument||Capital Contribution (In Cr)||Value as of today
|HDFC Bank Stock||20.5||94||25.50|
|ICICI Prudential Bluechip Equity mutual fund||20.5||43||12.82%|
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