An investor faces several investment alternatives throughout his life. The decision of where to invest is always a dilemma for the investor. In Nepal, an average middle-class investor is left with only two major options apart from bank deposits: Share market or real estate. This article is especially for those investors.
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To be honest, this will probably be biased because I like investing in shares. But I will try to avoid my preconceived biases as much as I can although there may still be some left. Investment in shares is better than investing in real estate doesn’t mean investment in real estate is a bad investment. Investment in real estate has been very lucrative and profitable to Nepalese investors in the recent 10-15 years. Due to this, people investing in real estate often quote that Real estate investment is a no-loss business i.e. the money invested in real estate is never lost because the price of land will never decline as it has been seen for the past 15 years. However, the result of 15 years cannot be taken as a guideline for an eternity of time to come.
So, I would like to distinguish these two different investment vehicles not on the results they generated in the past 15 years but on various other factors that affect investment decisions:
1. Trading Costs
Trading expenses, though most investors ignore while making an investment decision, is actually the most important one. These costs reduce the amount of profit that will be left in the investor’s hand. For investment in shares in Nepal, an investor has to incur 0.27 percent to 0.4 percent broker commission along with Rs. 25 for Demat charges in order to transfer ownership. So, the total trading cost (buying + selling) will be 0.54 percent to 0.8 percent plus Rs. 50 [Taxes are not included which is assumed equal for these two investments]. So, if an investor buys shares, holds for a year, and sells it, he/she will incur a trading cost of 0.54% to 0.8% plus Rs. 50. [If he gains 10% in share value, his return before taxes will be 10 percent-0.54 percent or 0.8 percent=9.46 percent or 9.20 percent].
For investment in real estate, broker commission (informal) is 2-3 percent of investment amount [total 4 percent-6 percent after buying + selling] along with 4.5 percent for ownership transfer (25 percent discount for female) which adds up to 8-10 percent. Hence the price of real estate has to increase 10 percent for the investor to just break even.
2. Ease in trading
I don’t need to explain this in detail. One phone call to the broker, your trade is executed and the share is transferred to your Demat account within 5 working days. This gets easier if the investor uses an online trading system. Easy to buy and easy to sell. In the case of real estate, it may take months to find a buyer or seller and after that 45-60 days is usually taken between purchase agreement and actual ownership transfer and a lot of paperwork.
3. Amount of investment
1 piece of land in urban areas will probably cost you Rs. 50 lakh or more. So, your minimum amount of investment is Rs. 50 lakh which is relatively higher for a middle-class person earning Rs. 20,000-30,000 per month. But you can get 10 kitta shares of a good company for Rs. 1000 in an IPO/FPO and occasionally in the secondary market. The minimum amount required for investment in shares is Rs. 1000 (the price of a T-shirt).
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Shares are more liquid than real estate. You can purchase shares, transfer ownership and be ready to sell within 5 days after the purchase. I don’t think I would be able to do the same with real estate. In case of emergency, shares are the better option to go after for the cash.
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Where there is an investment, there is the talk of diversification everywhere. Diversification is important in investment because it provides safety by minimizing the risk. When one sector of the economy is hammered by sudden economic or natural changes, other sectors may fare well thus reducing the overall loss. Investment in shares may provide adequate diversification than real estate as the investors can invest in different companies related to various sectors of the economy such as manufacturing, trading, financial (banking and insurance), service, hydropower, and others. This helps the investors to reduce risks as the loss from one sector can be recovered from others. Investment in real estate may be comparatively riskier because the slowdown in the economy may cause the real estate market to crash nationwide.
6. Annual Income
Annual income is most important to those investors who have to live off the income generated from their investment to fulfill their needs. So, it is necessary to evaluate the income to be generated from their investment while making investment decisions excluding capital gains [as capital gains are too uncertain and hard to predict.] Investment in shares provides quarterly or annual income in the form of dividends. So, an investor who needs income can focus on the high yield dividend-paying stocks. High yield dividend-paying stocks can provide 5-12 percent annual income to investors [e.g. NTC was trading at Rs. 400 at one time and provided 45-50 percent cash dividend to the shareholders]. In another case, investment in real estate, especially land provides no annual income (unless you lease in which case the income is generally 1-2 percent of the investment amount). Rental income from real estate investment other than land is also 2-3 percent of the investment amount which is too small for the huge investment that is to be done in it.
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The stock market is more transparent in the case of Nepal. The securities are listed on Nepal Stock Exchange ( NEPSE). The price of each security is quoted every day so that investors know what price any security is trading. Brokers are organized and regulated. They are legalized by the government. Securities Board of Nepal (SEBON) governs and monitors securities trading. So, there is less chance that investors will be cheated while investing in the share market except for the losses he/she bears through his trading.
On the other hand, real estate investment is vaguer and highly disorganized. The investors are regularly deceived by the brokers. The brokers are not regulated by the government. The price of real estate is manipulated by the brokers as there is no quoted price.
These are the reason why I prefer shares to real estate. In summary, low trading costs, ease in trading, higher liquidity, more diversification, the low minimum capital required, higher periodic income, and transparency are the major factors that give investment in share advantage over investment in real estate in the case of Nepal.
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