In recent years investments by Indians in non-financial assets have taken an increasingly larger share of household financial savings. Data on household savings reveals that the share of non-financial assets has increased from 48% in 2007-08 to 60% in 2013-14. A large proportion of these investments is in the form of real estate holding.

Investment in real estate (over and above house for own use) is a popular investment (often primary) option for many Indian households. This is usually done by purchasing residential apartments or residential plots. Like with gold, real estate is seen as a ‘safe investment’ by most Indians. So how does one evaluate if this is indeed a wise investment choice?

Evaluating the performance of investment in real estate is tricky. Data availability for judging the return on real investment investments is sketchy at best. The problem is compounded by the fact that returns for real estate investments are idiosyncratic. They vary dramatically between locations and even between two properties in the same location.

The best we currently have is the National Housing Bank (NHB) residence index for various cities with base year 2007 and last available data for period July-September 2014. This period is not long enough to make a final pronouncement about the track record of real estate investment, but it is a start. The NHB index suggests that the best residential market in these seven years has been Chennai with compounded rise in residential prices of 19.4% and the worst is Kochi at -1.7%. The price rise for most cities is in the range of 5%-10%.

Compare this with the 10.5% return for Nifty Index for the same period and the 15%+ return from stock market in the long run, and suddenly real estate is not quite the money spinner investors might think it is.

There are some inherent problems in real estate investing as well. The first of which is diversification. Most people can afford only one (or two) additional properties over and above the house for own use. This lack of diversification is especially troubling because the returns on properties are not uniform. Investments are restricted to work-city or home-city because monitoring property situated in other places is not practical. This limitation prevents investment in city that is expected to give the best returns.

The second big problem with real estate investments is that the transaction risks with real estate are significantly higher than those for financial investments. Non-completion of project by developers or unauthorised construction by the developers or sale of same property to multiple buyers by fraudulent sellers are some of the transaction risks associated with real estate.

So does this mean that one should stay away from real estate? After all, real estate does provide a very good protection against inflation over the long term as both rental incomes and the capital values increase with inflation.

The real estate investments have the potential to provide a multiple sale value to amount invested as money gets locked in for a long time and leverage is possible through a home loan.

The answer to that question lies in taking a long hard look at your investment priorities. After buying a house for self use additional investment in property should be done only after meeting basic retirement and children’s education needs through financial investments like bank deposits, mutual funds, life insurance policies. Priority of investing is therefore to invest first in financial assets followed by real estate and not the other way round.