Smaller apartments-don’t confuse lower TCO with lower prices
Better late than never! That’s how I would like to sum up this all important trend that finally appears to be taking root in Indian RE. Over the last few years (2003-2007), there has been significant supply of larger than average (>2000 sq ft) apartments across all the major metros and the adjoining suburbs. Whilst this supply was quickly lapped up over the first few years, there appears to be a supply overhang of large apartments because of an unaffordable Total Cost of Ownership (TCO). TCO for an apartment may be arrived at by multiplying size of apartment with price psf of apartment. The TCO needs to come down if developers want to address the needs of a larger section of the market.
TCO can be reduced either by reducing the psf rates or by reducing size of apartments. In the next few years, I feel, TCO will come down primarily due to reduction in size of apartments. In addition, I feel, psf rates of some projects will either come down or remain stagnant for a period of time (I have pointed out specific projects in my post of June 9, 2008). There is already enough evidence of this emerging trend in newer developments in Gurgaon and Faridabad. In Gurgaon, these newer developments are spread across sectors 81, 82, 83, 85, 91, 92, etc. Apartments in these new developments in Gurgaon are available in a TCO range of Rs.30lacs –Rs.40 lacs. In Faridabad, new developments in the “Neharpaar” region are available in TCO range of Rs.25 lacs –Rs.35 lacs! This segment is popularly also referred to as the affordable housing segment. Some people might be quick to point out the vindication of their point of view- I told you prices would fall! However, drawing such a conclusion may be incorrect for the following reasons:
(a)These projects are coming up in newer areas which are currently not inhabited and prices are therefore bound to be lower than inhabited areas.
(b)The TCO in these new developments is significantly lower since the apartment sizes are much smaller- 1150 sq ft (2BR’s) – 1500 sq ft (3BR’s).
(c)The specifications (internal fittings, flooring, etc) in the newer developments may not be of the same quality as in some earlier developments. This is not necessarily true for all developments and I advise a close comparison before making a buy decision.
Investment idea: With increased demand from the affordable housing segment over the next several years, I feel, investments in this segment will be attractively compensated. Please also read my earlier posts dated May 4th, 2008 and May 19th, 2008 for a more detailed analysis of specific prices and developer recommendations.
Fewer bells & whistles
Another factor that will contribute to lowering TCO in some of the newer projects will be developments with fewer frills and amenities. Developers may compromise on amenities such as gymnasium (it may still be there but be under equipped), may insist on one compulsory car park instead of two compulsory car parks, may provide lesser open space in the complex (this gives the developer more area to build and sell) and may build community centers or common areas with fewer bells & whistles.
This is not to say that developments with luxurious and sometimes extravagant amenities will stop being constructed. On the contrary, there is an opposing but parallel trend towards super luxury developments. Some examples that come to mind are Aralias and Magnolias by DLF in Gurgaon (apartments situated on the golf course), Unitech Grande in Noida, Shree Ram Urban Infrastructure’s 50 storeys building in Worli equipped with a 10,000 sq ft luxury spa, etc. As in any market the world over, there is always room for the super luxury apartments. However, the bulk of the demand in the coming years is bound to come from the segment popularly called affordable housing or as I have described it as lower TCO apartments.
Pied-a’-terre
A pied-a'-terre may be defined as a small living unit in a large city or a second home in another city. With rising middle class wealth, more and more people in India are traveling domestically as well as overseas. A few amongst them are able to afford a second home. The need or motivator for a second home varies from person to person. Generally, people buy a second home for one of the following reasons:
(a)Buying a second home as an investment. Money invested wisely in RE can earn good capital appreciation as well as provide rental income.
(b)Buying a second home as a leisure destination. Examples of places where people may buy a second home include hill stations, locations close to a beach or big fun cities such as Mumbai or Delhi.
(c)Buying a second home for a child or loved one. People may buy second homes as a temporary place to stay for their children while they are studying or working in a city. Cities which typically fit this bill are large cities/metros.
(d)Non resident Indians buying a home in India primarily to fulfill the need for short term stays.
The one thing common to all four categories of buyers described above is the need for an affordable, functional, well located pied-a’-terre. Mumbai has historically had a good supply of small apartments (mostly due to a vast population and expensive housing). In the very recent past, a few developers have started developing smaller apartments in the suburbs of Delhi-namely in Gurgaon, Faridabad and Noida. A similar trend appears to be emerging in other metro suburbs of Chennai, Bangalore, etc. However, what is still absent is new supply of small apartments –studios, 1BR’s and 2BR’s in city centre locations and high street addresses. Since the pied-a’-terre segment by definition is a second home, it is unlikely buyers in this segment will have interest in very large (read expensive) apartments. Moreover, city centre locations are always more convenient from a short stay or investment perspective.
In the years to come, the pied-a’-terre segment can be a significant source of new business for developers. However, developers need to better understand the requirements of this segment so they are able to create the appropriate product.
Investment idea: Scout for apartments having a carpet area of 600-1200 sq ft. in city centre locations across metros. As an example, in Delhi, you could find these apartments in locations such as Greater Kailash, Chittaranjan Park, East of Kailash, Malviya Nagar, etc. DDA apartments, though dilapidated, could be very good bargains. If you have a little time and creativity, you can renovate and refurbish some of the DDA apartments in excellent locations such as Yusuf Sarai, Sheikh Sarai, Sarita Vihar, etc. Hire the services of a professional architect or interior designer to spruce up an older property and you should be able to make very good money in a relatively short period of time (incase you wish to resell and not rent it).
Carpet area v/s super built up area
This is a raging debate with policy makers and developers in the country today. I have written about this subject in a detailed post dated May 28, 2008. Suffice to say, developers will soon have to quote rates in terms of carpet area rather than super built up area. This will be a significant step ensuring buyer protection.
Is access the new location?
Anyone with even an elementary knowledge of real estate investing will be quick to extol the virtues of location when selecting a property. However, the difficult question is defining location itself! How does one location become superior to another and command a price premium? This is a debate which is probably as old as the business itself. I do not wish to open up that discussion for debate for the purposes of this post. Suffice to say that the public transportation system in big cities will transform the way we have historically viewed location. How easily one can get in and out of a place will dictate real estate prices in the region. There will be emergence of distributed business districts in big cities (and along with that will come residential development). That is to say, no one business center will hold complete sway over a city’s business and commerce. There will be continued development of competing business centers across the length and breadth of cities. This will expand the geographical landscape of cities into newer areas- eg. Faridabad, Noida and Gurgaon in the NCR. Over the last decade, these three centers have emerged as challengers to the pre eminence of existing business districts such as Connaught Place, Nehru Place and Bhikaji Cama Place . These new centers will further get a fillip over the next decade as access to these locations becomes easier through better roads and public transportation. Access therefore will be a significant driver of real estate prices in India over the next decade. Please also read my post dated 6th May, 2008.
Investment idea: Whoever said, to make money you have to think out of the box. In real estate investing, you need to identify the next big story and be there before it becomes one! Start your research by studying the government’s plans for connecting different parts of the city through public transportation. In summary, where goes the metro there will flow the money!
Gentrification
Gentrification (as defined by Wikipedia), or (urban gentrification), is change in an urban area associated with the influx of an income class above existing residents. Gentrification is characterized by several processes. The area experiences a demographic shift to an increase in median income, and often reduction in household size. More households with higher incomes result in real estate being perceived to be more valuable with increased rent and home prices. Industrial land use declines and is redeveloped into food, retail, office, and high-end residential housing. Lastly, the culture and character of a neighborhood changes. Gentrification can result from urban reinvestment efforts by local governments or developers, which direct money to invest in deteriorating city infrastructure, offer incentives for redevelopment. These efforts have been linked to reductions in local property crime rates, increased property prices and increased revenue to local governments from property taxes.
Investment idea: Taking South Delhi as an example, I anticipate gentrification to occur in the following neighborhoods over the next 5-7 years, namely, Okhla (Indiabulls has already launched residential apartments under the name Castlewood), parts of Kalkaji, Malviya Nagar, Yusuf Sarai, Sheikh Sarai,Pushp Vihar (already happening adjacent to Pushp Vihar with development of new malls) and Sarojini Nagar. Buying competitively priced property in these areas could provide tremendous upside potential as the process of gentrification takes root in these neighborhoods.
Please remember that smart investing is never about timing. I feel, it is about anticipating the undercurrents of change before others and about having conviction in your ideas.
More later,
Ashish
Thursday, July 31, 2008
Monday, July 21, 2008
Evaluating buying opportunities in the Resale markets
This is the last in a series of three posts I started writing three weeks ago. In this post, I will evaluate buying an apartment through the resale market including its advantages and disadvantages.
For a complete understanding of which option is most suitable to your circumstances, I recommend you read the preceding two posts regarding buying in a soft launch and a hard launch.
Defining resale option: For the purposes of this post, when I refer to resale options, I would point towards apartments which are still under construction and therefore currently not available for possession. The time to possession would vary from one option to the other and could vary between 6-24 months.
In the current RE environment in India, the resale market offers some very lucrative choices as compared to the options available in soft launch and hard launch.
Advantages:
1. In the current market environment in the NCR (excluding Delhi), resale market offers some of the best deals on buying a new apartment. Infact, the slowdown in sales has prompted a lot of speculators/investors to exit their holdings so as to enable them to meet financial commitments made elsewhere. Tip:During the last 2-3 years, a lot of speculators/investors purchased apartments with the intent of selling them for a quick profit. A lot of these investors have exited their holdings but some of them have been holding on to their stakes in the hope that markets will go back to the accelerated growth rates of the boom years. However, since most of these speculators/investors have other financial commitments, they may not like to hold on too long. Infact, a lot of them have been selling over the last several months (remember, these investors bought them much cheaper and are still selling at a profit) opening up very attractive options for a new set of investors and end users.
2. In the current market environment in the NCR (Faridabad and Gurgaon in particular), resale prices on apartments are cheaper than apartments being offered in hard/soft launch by anywhere between 15-30% (psf rates). Tip:Since an apartment available in the resale market was launched earlier and will (most likely) be completed earlier than a new launch, to purchase an apartment in the resale market you will have a higher upfront outflow. Let me explain further through an example:
Scenario I (Buying in resale market)
Size of apartment =2000 sq ft
Price in resale =Rs.4000 psf
Total price of apartment=Rs.80, 00,000
Installments paid to developer (A) =Rs. 40, 00,000
Profit to seller (B) =Rs.5, 00,000
Brokerage (1% of purchase price) (C) =Rs.80,000
Total outflow for buyer at time of purchase (A) + (B) +(C) =Rs.45, 80,000
Scenario II (Buying in hard/soft launch)
Size of apartment=2000 sq ft
Price in hard/soft launch =Rs.5000 (this is in a comparable development in the neighborhood)
Total price of apartment=Rs.100, 00,000
Payment requested by developer (10% of purchase price) =Rs. 10, 00,000
Total outflow for buyer at time of purchase=Rs. 10, 00,000
Therefore, when you compare scenario I and II, you can see the reason why developers price the apartments higher than comparable options in the resale market. As a buyer in scenario I, you will start paying interest on a much larger amount as compared to scenario II. However, always remember that, down the line you will end up paying the same amount towards interest in scenario II as the developer begins to demand future payments. Tip:In scenario I, you are paying a higher amount towards interest but the apartment is probably 12-18 months from possession. In scenario II, you are not paying anything towards interest now but the apartment is probably 36 months from possession. In addition, you are paying 25% more towards the base psf price in scenario II. If you can afford to pay the equated monthly installment (EMI) in scenario I right away, it is certainly a better economic decision than scenario II. Remember that in scenario II also you will have to start paying EMI’s -maybe 6 months from the time you make payment towards booking the apartment.
3. Since you are purchasing the apartment in resale market, the developer has probably already started construction on the project. This gives you the ability to go see the construction activity before buying and therefore gives you a sense of confidence about the capability of the developer. This is in direct contrast to soft/hard launch where you may not be able to gauge a developers capability. Ofcourse, this is relevant incase the developer is a completely unknown entity and has no past record.
Disadvantages:
1. A significant percentage of deals that are closed in the resale market in India have a “non-cheque” component attached to them. This is the component that needs to be paid to the seller of the apartment in cash! The buyers like to take a part of the payment in cash so they can avoid paying taxes on the capital gains. As a buyer of the apartment, you have the following disadvantages of paying part of the payment in cash:
(a) The bank will not finance the cash component of the apartment towards home loan. Therefore, the component to be paid in cash will be part of your contribution (in addition to the 15% down payment you have to shell out). This is one of the biggest reasons why some end users choose soft/hard launch option even though it may be more expensive-there is no cash component involved in soft/hard launch. Tip:Some sellers may be willing to take the entire amount in cheque. However, to accommodate this request, they will increase the psf price marginally to offset the incidence of capital gains tax they will incur. Ask your broker to negotiate this on your behalf.
(b) If you make part payment in cash, you may have a problem with capital gains incidence at the time of sale. Let’s take an example- say you buy the apartment for Rs.80 lacs (70 lacs cheque and 10 lacs in cash) and you sell after 3 years for Rs.100lacs. Therefore, your profit is Rs.20 lacs. However, if the buyer of your apartment wants to pay the entire amount in cheque your capital gains incidence will be on Rs.30 lacs (Rs. 100 lacs less Rs.70 lacs). If you had not paid any amount in cash at the time of purchase, your capital gains would have been on Rs.20 lacs.
Resale opportunities in NCR in the current market
1. I believe there are significantly discounted opportunities available in the resale market in Faridabad and Gurgaon. Tip:Options in the resale market are currently available at a discount of between 15-35% compared to new launch prices in the same area. Consider options in sectors 78-89 in Faridabad and Sohna road in Gurgaon.
2. To evaluate a good opportunity in the resale markets, compare psf rates with comparable new developments. Tip:A discount of 15% or more to comparable new launch prices may be a strong buy signal. Ofcourse, you must consider other points I have highlighted above to make a final decision.
More later,
Ashish
For a complete understanding of which option is most suitable to your circumstances, I recommend you read the preceding two posts regarding buying in a soft launch and a hard launch.
Defining resale option: For the purposes of this post, when I refer to resale options, I would point towards apartments which are still under construction and therefore currently not available for possession. The time to possession would vary from one option to the other and could vary between 6-24 months.
In the current RE environment in India, the resale market offers some very lucrative choices as compared to the options available in soft launch and hard launch.
Advantages:
1. In the current market environment in the NCR (excluding Delhi), resale market offers some of the best deals on buying a new apartment. Infact, the slowdown in sales has prompted a lot of speculators/investors to exit their holdings so as to enable them to meet financial commitments made elsewhere. Tip:During the last 2-3 years, a lot of speculators/investors purchased apartments with the intent of selling them for a quick profit. A lot of these investors have exited their holdings but some of them have been holding on to their stakes in the hope that markets will go back to the accelerated growth rates of the boom years. However, since most of these speculators/investors have other financial commitments, they may not like to hold on too long. Infact, a lot of them have been selling over the last several months (remember, these investors bought them much cheaper and are still selling at a profit) opening up very attractive options for a new set of investors and end users.
2. In the current market environment in the NCR (Faridabad and Gurgaon in particular), resale prices on apartments are cheaper than apartments being offered in hard/soft launch by anywhere between 15-30% (psf rates). Tip:Since an apartment available in the resale market was launched earlier and will (most likely) be completed earlier than a new launch, to purchase an apartment in the resale market you will have a higher upfront outflow. Let me explain further through an example:
Scenario I (Buying in resale market)
Size of apartment =2000 sq ft
Price in resale =Rs.4000 psf
Total price of apartment=Rs.80, 00,000
Installments paid to developer (A) =Rs. 40, 00,000
Profit to seller (B) =Rs.5, 00,000
Brokerage (1% of purchase price) (C) =Rs.80,000
Total outflow for buyer at time of purchase (A) + (B) +(C) =Rs.45, 80,000
Scenario II (Buying in hard/soft launch)
Size of apartment=2000 sq ft
Price in hard/soft launch =Rs.5000 (this is in a comparable development in the neighborhood)
Total price of apartment=Rs.100, 00,000
Payment requested by developer (10% of purchase price) =Rs. 10, 00,000
Total outflow for buyer at time of purchase=Rs. 10, 00,000
Therefore, when you compare scenario I and II, you can see the reason why developers price the apartments higher than comparable options in the resale market. As a buyer in scenario I, you will start paying interest on a much larger amount as compared to scenario II. However, always remember that, down the line you will end up paying the same amount towards interest in scenario II as the developer begins to demand future payments. Tip:In scenario I, you are paying a higher amount towards interest but the apartment is probably 12-18 months from possession. In scenario II, you are not paying anything towards interest now but the apartment is probably 36 months from possession. In addition, you are paying 25% more towards the base psf price in scenario II. If you can afford to pay the equated monthly installment (EMI) in scenario I right away, it is certainly a better economic decision than scenario II. Remember that in scenario II also you will have to start paying EMI’s -maybe 6 months from the time you make payment towards booking the apartment.
3. Since you are purchasing the apartment in resale market, the developer has probably already started construction on the project. This gives you the ability to go see the construction activity before buying and therefore gives you a sense of confidence about the capability of the developer. This is in direct contrast to soft/hard launch where you may not be able to gauge a developers capability. Ofcourse, this is relevant incase the developer is a completely unknown entity and has no past record.
Disadvantages:
1. A significant percentage of deals that are closed in the resale market in India have a “non-cheque” component attached to them. This is the component that needs to be paid to the seller of the apartment in cash! The buyers like to take a part of the payment in cash so they can avoid paying taxes on the capital gains. As a buyer of the apartment, you have the following disadvantages of paying part of the payment in cash:
(a) The bank will not finance the cash component of the apartment towards home loan. Therefore, the component to be paid in cash will be part of your contribution (in addition to the 15% down payment you have to shell out). This is one of the biggest reasons why some end users choose soft/hard launch option even though it may be more expensive-there is no cash component involved in soft/hard launch. Tip:Some sellers may be willing to take the entire amount in cheque. However, to accommodate this request, they will increase the psf price marginally to offset the incidence of capital gains tax they will incur. Ask your broker to negotiate this on your behalf.
(b) If you make part payment in cash, you may have a problem with capital gains incidence at the time of sale. Let’s take an example- say you buy the apartment for Rs.80 lacs (70 lacs cheque and 10 lacs in cash) and you sell after 3 years for Rs.100lacs. Therefore, your profit is Rs.20 lacs. However, if the buyer of your apartment wants to pay the entire amount in cheque your capital gains incidence will be on Rs.30 lacs (Rs. 100 lacs less Rs.70 lacs). If you had not paid any amount in cash at the time of purchase, your capital gains would have been on Rs.20 lacs.
Resale opportunities in NCR in the current market
1. I believe there are significantly discounted opportunities available in the resale market in Faridabad and Gurgaon. Tip:Options in the resale market are currently available at a discount of between 15-35% compared to new launch prices in the same area. Consider options in sectors 78-89 in Faridabad and Sohna road in Gurgaon.
2. To evaluate a good opportunity in the resale markets, compare psf rates with comparable new developments. Tip:A discount of 15% or more to comparable new launch prices may be a strong buy signal. Ofcourse, you must consider other points I have highlighted above to make a final decision.
More later,
Ashish
Monday, July 14, 2008
Evaluating Hard launch as a buying option
In this post, I will attempt to weigh the pros and cons of buying an apartment in a hard launch. This is a continuation of my post of 7th July,08 in which I had evaluated the pros and cons of buying in a soft launch.
Hard launch
In robust economic times, developers normally skip the soft launch stage and go straight for the hard launch. In not so good times (like we are experiencing currently in RE markets across India), developers normally go through a soft launch before going for a big bang hard launch-to learn more about a soft launch, read my previous post. Let’s evaluate the advantages and disadvantages of a hard launch.
Advantages:
1. At the stage of hard launch, developers mostly have financing tied up for the project. This is good from an investor’s perspective since it reduces chances of project delays for lack of capital. Needless to say, the project could still get delayed due to other reasons.
2. Detailed information about the project is available at hard launch stage. This is in contrast to information scarcity at soft launch stage. As an investor, more information is always better than less information.
Disadvantages:
1. Depending on the developer and the project, a hard launch may be preceded by one or more soft launch promotions. If you missed the opportunity to invest at soft launch stage, hard launch prices are unlikely to give you an upside in the short to medium term. Infact, at the time of hard launch, a lot of short term investors may be seeking an exit (also read my previous post on soft launch). This could depress the price of the project (since at time of hard launch, investors who invested in soft launch are trying to exit and so is the developer trying to sell inventory) in the resale market. I will dwell on resale market at length in my next post.
Questions you must ask before buying in hard launch:
1. Check with your broker if the hard launch was preceded by a soft launch. If it was, then you need to find out if there is a lock in period for soft launch investors before they offload their apartments in the resale market. Tip: If there is no lock in for soft launch investors you may find a better price for the same apartment type in the resale market.
2. RE brokers such as www.axiomestates.com, www.atoneplace.com, etc. promote new options through property fairs overseas. These brokers could earn anywhere between 3-5% commission from the developers for apartments sold through soft launch and hard launch. Don’t be shy and negotiate with your broker. Ask him or her to share a part of the brokerage with you. Tip: Brokers will typically retain 1%-1.5% and pass the rest back to investors.
3. Check prices for comparable developments in the neighborhood. Sometimes apartments in the resale market (same project or similar development in the vicinity) can be had for a 10-25% discount to prices being offered in a new launch or hard launch. Tip: In the resale market you may have to cough up a higher amount upfront (since building was launched earlier and some payments have already been made) which could increase your interest cost as compared to hard launch. Do the math carefully.
4. Look beyond the headlines! Don’t just look at the psf rate to make your buying decision. This could be misleading. Therefore, you need to ask at least the following questions:
a. Is the development approved for availing a home loan and ask names of banks
that are extending home loans?
b. What is the total size of the development? Remember-the more the number of units in the development, the longer it will take the developer to offload the inventory. This will reduce the developers ability to increase prices and therefore your chances to exit at a profit (if that indeed is the intention).
c. Know the payment plan (you don’t want to be surprised with unanticipated demands for future payments)
d. Ask for layout plans of the development
e. Make sure to enquire about any hidden costs eg. Will you end up paying a Preferential location charge (PLC) at time of allotment which you were not expecting, will you have to buy two car parks instead of one that you were prepared for, check out if there are other costs such as External Development Charges (EDC), Infrastructure Development Charges (IDC), EEC and FFC charges (Developers in Faridabad have started charging this), electrical charges, club charges, etc.
f. Maintenance charges-I personally feel this cost to become very significant part of home ownership in India. Currently, charges vary between Rs.1.5-Rs.6 psf (depending on development) but could be rising at 6% p.a. or more.
5. What percentage of units have already been sold?
6. When is construction expected to start?
In summary, hard launch offers may be attractive under robust market conditions when absorption capacity of the markets is high. However, under the current market conditions (July,2008) I would analyze every offer with a fine toothed comb. In most metro markets, there are attractively priced opportunities available in the resale market. Tip: Evaluate resale options which are farthest away from possession since the discount on such properties is likely to be highest I current market conditions. eg. Some under construction projects on Sohna Road in Gurgaon. Having said that, some hard launch offers are genuinely attractive because the developer is reputed, the price is right and all necessary information is available to make an informed decision. As long as this holds true, you may actually be getting a better deal than the resale market.
In the next post, I will evaluate the pros & cons of buying in the resale market.
More later,
Ashish
Hard launch
In robust economic times, developers normally skip the soft launch stage and go straight for the hard launch. In not so good times (like we are experiencing currently in RE markets across India), developers normally go through a soft launch before going for a big bang hard launch-to learn more about a soft launch, read my previous post. Let’s evaluate the advantages and disadvantages of a hard launch.
Advantages:
1. At the stage of hard launch, developers mostly have financing tied up for the project. This is good from an investor’s perspective since it reduces chances of project delays for lack of capital. Needless to say, the project could still get delayed due to other reasons.
2. Detailed information about the project is available at hard launch stage. This is in contrast to information scarcity at soft launch stage. As an investor, more information is always better than less information.
Disadvantages:
1. Depending on the developer and the project, a hard launch may be preceded by one or more soft launch promotions. If you missed the opportunity to invest at soft launch stage, hard launch prices are unlikely to give you an upside in the short to medium term. Infact, at the time of hard launch, a lot of short term investors may be seeking an exit (also read my previous post on soft launch). This could depress the price of the project (since at time of hard launch, investors who invested in soft launch are trying to exit and so is the developer trying to sell inventory) in the resale market. I will dwell on resale market at length in my next post.
Questions you must ask before buying in hard launch:
1. Check with your broker if the hard launch was preceded by a soft launch. If it was, then you need to find out if there is a lock in period for soft launch investors before they offload their apartments in the resale market. Tip: If there is no lock in for soft launch investors you may find a better price for the same apartment type in the resale market.
2. RE brokers such as www.axiomestates.com, www.atoneplace.com, etc. promote new options through property fairs overseas. These brokers could earn anywhere between 3-5% commission from the developers for apartments sold through soft launch and hard launch. Don’t be shy and negotiate with your broker. Ask him or her to share a part of the brokerage with you. Tip: Brokers will typically retain 1%-1.5% and pass the rest back to investors.
3. Check prices for comparable developments in the neighborhood. Sometimes apartments in the resale market (same project or similar development in the vicinity) can be had for a 10-25% discount to prices being offered in a new launch or hard launch. Tip: In the resale market you may have to cough up a higher amount upfront (since building was launched earlier and some payments have already been made) which could increase your interest cost as compared to hard launch. Do the math carefully.
4. Look beyond the headlines! Don’t just look at the psf rate to make your buying decision. This could be misleading. Therefore, you need to ask at least the following questions:
a. Is the development approved for availing a home loan and ask names of banks
that are extending home loans?
b. What is the total size of the development? Remember-the more the number of units in the development, the longer it will take the developer to offload the inventory. This will reduce the developers ability to increase prices and therefore your chances to exit at a profit (if that indeed is the intention).
c. Know the payment plan (you don’t want to be surprised with unanticipated demands for future payments)
d. Ask for layout plans of the development
e. Make sure to enquire about any hidden costs eg. Will you end up paying a Preferential location charge (PLC) at time of allotment which you were not expecting, will you have to buy two car parks instead of one that you were prepared for, check out if there are other costs such as External Development Charges (EDC), Infrastructure Development Charges (IDC), EEC and FFC charges (Developers in Faridabad have started charging this), electrical charges, club charges, etc.
f. Maintenance charges-I personally feel this cost to become very significant part of home ownership in India. Currently, charges vary between Rs.1.5-Rs.6 psf (depending on development) but could be rising at 6% p.a. or more.
5. What percentage of units have already been sold?
6. When is construction expected to start?
In summary, hard launch offers may be attractive under robust market conditions when absorption capacity of the markets is high. However, under the current market conditions (July,2008) I would analyze every offer with a fine toothed comb. In most metro markets, there are attractively priced opportunities available in the resale market. Tip: Evaluate resale options which are farthest away from possession since the discount on such properties is likely to be highest I current market conditions. eg. Some under construction projects on Sohna Road in Gurgaon. Having said that, some hard launch offers are genuinely attractive because the developer is reputed, the price is right and all necessary information is available to make an informed decision. As long as this holds true, you may actually be getting a better deal than the resale market.
In the next post, I will evaluate the pros & cons of buying in the resale market.
More later,
Ashish
Monday, July 7, 2008
Soft launch (Pre-sales) v/sHard launch v/s Resale
In the next three posts on this blog, I will attempt to weigh the pros and cons of the three buying categories or options available to you as an investor, namely, soft launch, hard launch and resale. In this post, I will attempt to evaluate the advantages and disadvantages of soft launch.
Soft launch (also known as “pre-sales”)
Developers are permitted to start sales of their projects once they receive a license from the authorities to start work on the project. However, often times, developers start offering inventory through a soft launch rather than go in for a "big bang" hard launch. The reason for opting for a soft launch may be to evaluate the response from the market and some times developers choose the soft launch route since they may not yet have tied up the required capital to execute the project. They, therefore, rely on pre-sales to raise part of the capital required to execute the project. Let us evaluate the advantages and disadvantages of soft launch offers:
Advantages:
1. Normally offered at 10-15% discount to the hard launch price. The actual discount offered depends on the market conditions and reputation of the developer.
2. If you are a HNI and are able to commit significant capital (eg. Buy 10% of total inventory available with the developer), it may be possible to negotiate the discount further, the payment plan and location of apartments, etc.
Disadvantages:
1. A soft launch may go through several stages (before the hard launch) depending on how much capital the developer wants to raise. Stage 1 (when discount offered is highest) is normally open to select HNI’s. Being on that select list requires being well connected in the industry through well established brokers and the investment community. If the developer is not able to sell the required number of units in Stage 1, he may decide to extend the offer to a larger number of people (through the mass broking community). At Stage 2, the discount offered is likely to be lower than Stage 1.
2. If the developer is not able to generate enough interest in the project (despite soft launch efforts) and raise the required amount of capital, he may have to delay the project. This could result in your investment made in Stage 1 or 2 lying idle for an extended period. Unless pre agreed (only possible in stage 1 to HNI’s), no compensation will be available while project is delayed.
3. The effective discount is less than promised. If the market conditions are not favorable, the hard launch price may be lower than was originally assumed by the developer. Therefore, as an investor if your objective was to enter at soft launch and exit at hard launch (60 -120 days), making a neat profit in the process, you could be in for a surprise. The actual hard launch price would depend on the market conditions and response to the soft launch. Do your own analysis of what profit you may be able to realize at hard launch. Do not ONLY rely on the advise of your broker or take the word of the developer at face value. To make the promised or expected profit, you may have to wait longer thereby reducing your return (the longer it takes to realize the profit the lesser the return).
4. Complete or exhaustive information may not be available at soft launch stage to make an informed decision eg. Will you end up paying a Preferential location charge (PLC) at time of allotment which you were not expecting, will you have to buy two car parks which you were not prepared for, etc.?
Questions you must ask before buying in soft launch:
1. Look beyond the headlines! Don’t just look at the psf rate to make your buying decision. This could be misleading. At the outset, atleast ask the following questions:
a.Is the development approved for availing a home loan and ask names of banks
that are extending home loans?
b.What is the total size of the development? Remember-the more the number of units in the development, the longer the soft launch is likely to last. This in turn impacts the hard launch date and therefore delays your time to exit (if that is indeed the intention) at a profit.
c.Know the payment plan (you don’t want to be surprised with demands for future payments)
d.Ask for layout plans of the development
e.Make sure to enquire about any hidden costs eg. Will you end up paying a Preferential location charge (PLC) at time of allotment which you were not expecting, will you have to buy two car parks instead of one that you were prepared for, check out if there are other costs such as External Development Charges (EDC), Infrastructure Development Charges (IDC), EEC and FFC charges (Developers in Faridabad have started charging this), electrical charges, club charges, etc.
f.Maintenance charges-I personally feel this cost to become very significant part of home ownership in India. Currently, charges vary between Rs.1.5-Rs.6 psf (depending on development) but could be rising at 6% p.a. or more.
2. Are you getting the apartment in Stage-I of soft launch or have the prices already been increased and the apartment is now available in Stage-II of soft launch? This is important since this will help determine the potential upside at time of hard launch.
3. What percentage of units have already been sold?
4. When is the hard launch expected?
5. When is construction expected to start?
6. Is there a lock in period before the soft launch apartment can be sold? Some developers may impose a 3-12 month lock in period before you are able to sell your apartment in the resale market.
In summary, soft launch may be enticing (especially with brokers trying to convince you this being a once in a lifetime offer ) but not always attractive. Having said that, some soft launch offers are genuinely attractive because the developer is reputed, the price is right and all necessary information is available to make an informed decision. As long as this holds true, you may be in for making a neat profit in a relatively short period of time. To keep it simple, just follow the first rule of investing - know your product well and ask questions. If you are comfortable with the answers you get, go ahead and commit capital. On the flip side, be careful, since you may not always get what you see.
If you have questions about specific offerings, please feel free write or post a comment. In the next post, I will evaluate hard launch offers.
Happy investing.
Later,
Ashish
Soft launch (also known as “pre-sales”)
Developers are permitted to start sales of their projects once they receive a license from the authorities to start work on the project. However, often times, developers start offering inventory through a soft launch rather than go in for a "big bang" hard launch. The reason for opting for a soft launch may be to evaluate the response from the market and some times developers choose the soft launch route since they may not yet have tied up the required capital to execute the project. They, therefore, rely on pre-sales to raise part of the capital required to execute the project. Let us evaluate the advantages and disadvantages of soft launch offers:
Advantages:
1. Normally offered at 10-15% discount to the hard launch price. The actual discount offered depends on the market conditions and reputation of the developer.
2. If you are a HNI and are able to commit significant capital (eg. Buy 10% of total inventory available with the developer), it may be possible to negotiate the discount further, the payment plan and location of apartments, etc.
Disadvantages:
1. A soft launch may go through several stages (before the hard launch) depending on how much capital the developer wants to raise. Stage 1 (when discount offered is highest) is normally open to select HNI’s. Being on that select list requires being well connected in the industry through well established brokers and the investment community. If the developer is not able to sell the required number of units in Stage 1, he may decide to extend the offer to a larger number of people (through the mass broking community). At Stage 2, the discount offered is likely to be lower than Stage 1.
2. If the developer is not able to generate enough interest in the project (despite soft launch efforts) and raise the required amount of capital, he may have to delay the project. This could result in your investment made in Stage 1 or 2 lying idle for an extended period. Unless pre agreed (only possible in stage 1 to HNI’s), no compensation will be available while project is delayed.
3. The effective discount is less than promised. If the market conditions are not favorable, the hard launch price may be lower than was originally assumed by the developer. Therefore, as an investor if your objective was to enter at soft launch and exit at hard launch (60 -120 days), making a neat profit in the process, you could be in for a surprise. The actual hard launch price would depend on the market conditions and response to the soft launch. Do your own analysis of what profit you may be able to realize at hard launch. Do not ONLY rely on the advise of your broker or take the word of the developer at face value. To make the promised or expected profit, you may have to wait longer thereby reducing your return (the longer it takes to realize the profit the lesser the return).
4. Complete or exhaustive information may not be available at soft launch stage to make an informed decision eg. Will you end up paying a Preferential location charge (PLC) at time of allotment which you were not expecting, will you have to buy two car parks which you were not prepared for, etc.?
Questions you must ask before buying in soft launch:
1. Look beyond the headlines! Don’t just look at the psf rate to make your buying decision. This could be misleading. At the outset, atleast ask the following questions:
a.Is the development approved for availing a home loan and ask names of banks
that are extending home loans?
b.What is the total size of the development? Remember-the more the number of units in the development, the longer the soft launch is likely to last. This in turn impacts the hard launch date and therefore delays your time to exit (if that is indeed the intention) at a profit.
c.Know the payment plan (you don’t want to be surprised with demands for future payments)
d.Ask for layout plans of the development
e.Make sure to enquire about any hidden costs eg. Will you end up paying a Preferential location charge (PLC) at time of allotment which you were not expecting, will you have to buy two car parks instead of one that you were prepared for, check out if there are other costs such as External Development Charges (EDC), Infrastructure Development Charges (IDC), EEC and FFC charges (Developers in Faridabad have started charging this), electrical charges, club charges, etc.
f.Maintenance charges-I personally feel this cost to become very significant part of home ownership in India. Currently, charges vary between Rs.1.5-Rs.6 psf (depending on development) but could be rising at 6% p.a. or more.
2. Are you getting the apartment in Stage-I of soft launch or have the prices already been increased and the apartment is now available in Stage-II of soft launch? This is important since this will help determine the potential upside at time of hard launch.
3. What percentage of units have already been sold?
4. When is the hard launch expected?
5. When is construction expected to start?
6. Is there a lock in period before the soft launch apartment can be sold? Some developers may impose a 3-12 month lock in period before you are able to sell your apartment in the resale market.
In summary, soft launch may be enticing (especially with brokers trying to convince you this being a once in a lifetime offer ) but not always attractive. Having said that, some soft launch offers are genuinely attractive because the developer is reputed, the price is right and all necessary information is available to make an informed decision. As long as this holds true, you may be in for making a neat profit in a relatively short period of time. To keep it simple, just follow the first rule of investing - know your product well and ask questions. If you are comfortable with the answers you get, go ahead and commit capital. On the flip side, be careful, since you may not always get what you see.
If you have questions about specific offerings, please feel free write or post a comment. In the next post, I will evaluate hard launch offers.
Happy investing.
Later,
Ashish
Tuesday, July 1, 2008
The urgent need for a RE market regulator
This article has been written for www.meridharti.com by Mr.S.K.Mittal. Mr.Mittal is the President of Association of Certified Realtors of India (http://acri.in). He is also CEO & Director of Saksham Advisory services Pvt Ltd.
Real Estate is the second largest employer in India. In the last five years it has seen remarkable growth, but the last 6 months have been somewhat rough on the industry.
In the boom years (2003 -2007), some developers exploited practices like “pre-launch sales”. In addition, a booming market attracted a large number of newcomers who set themselves up as colonizers and developers, and collected large amounts of money from buyers. Since there was an unmet demand in the market, developers were easily and quickly able to sell their product to unsuspecting and often ill informed consumers. Speculators inundated the markets along with a small number of end consumers (by some estimates 60-70% of the market was speculator driven) who were all hungry for quick profits (and a few to get a roof over their heads). This rush of speculative capital often did not concern itself performing adequate levels of diligence and scrutiny before deciding on a project to invest in. The end motive was quick profits and therefore long term viability of projects was often not questioned.
To ensure long term growth and sustainability of the RE markets in India, it is important to have a regulator. From a regulatory perspective, it is important to debate and resolve issues concerning investor protection. One of the key issues being how an investor gets information whether a particular developer/colonizer has the ability and competence to execute a given project? To sell their product, developers may promise the sky to buyers, knowing very well that it will not be possible to fulfill all their promises. The concept of builder rating is just starting out in India though it is not mandatory. However, increasingly developers are turning to capital markets for raising funds, which will compel them to open their books to wider scrutiny. This will lead to higher levels of transparency and augurs well for the long term growth of the RE markets.
In India, the broking business is also free to all. There is no system in place for either registration or licensing. Wherever, some efforts are made to introduce licensing, they are not enforced. Because of an unprecedented and unanticipated growth in the RE industry over the last few years, the required regulatory framework is not in place from a policy, implementation and enforcement point of view.
Finally, moving in the right direction
About two years ago, the Ministry of Urban Development started working on a proposed legislation “The Real Estate Management (Regulation and Control) Bill”, which will lead to the appointment of a regulator.
This bill (when ready) will work as a model which all states can adopt. This includes licensing of all constituents of the industry such as builders, architects, contractors, brokers, etc. The provision for licensing will mean credentials of new builders will be evaluated (and possibly rated) before they are allowed in. The free-for-all scenario that exists today will end. Not surprisingly, the developer lobby is not supporting the idea of a regulator. However, it is a matter of time before a regulator for Real Estate industry becomes a reality.
In the present scheme of things, all regulations and controls apply only up to the stage developers get their licenses. During implementation or after completion of the project, there are no checks and there is no system for taking action in case the final product does not match up to the promised standards (except recourse to courts). The appointment of a regulator is expected to address all of these issues.
Another problem rampant within the sector today is that developers do not maintain project wise financial discipline. Sometimes they take on more projects than their financial strength would allow them to. This results in projects getting delayed. I feel that with the appointment of a regulator, disclosure standards will improve. Builders will have to make project-wise disclosures of fund flow (SEBI has made this mandatory already for industries), maintaining better financial discipline.
Rating, a tool that promotes transparency and makes the buyer’s task of choosing the right project easy, could also get a fillip with the appointment of a regulator. At present, while associations like National Real Estate Development Council (NAREDCO) are trying to promote ratings, they lack the statutory power to make it mandatory. A regulator could do so, at least for large sized projects.
The industry should realize importance of transparency and disclosures as it will take the industry to the next level with the help of large global funds. Before Securities and Exchange Board of India (SEBI) became a reality, there were apprehensions on formation of SEBI as regulator for capital markets. Just imagine whether the capital market could have gotten such large foreign capital if all policies framed by SEBI were not in place.
Presently, the Ministry of Urban Development is holding consultations with all parties and one can expect modifications to the present draft legislation. A high power committee has been formed under leadership of Mr Deepak Parekh. We can all hope to see better regulatory environment for Real Estate sector sooner rather than later.
Monday, June 23, 2008
India Real Estate 2020
This article has been contributed by Mr. Rohit Malhotra, CEO, Realtech. Realtech (www.realtechgroup.in) is a leading North India based Real Estate developer promoted by a team of young, dynamic entrpreneurs. Since founding the company just over 3 years ago, Realtech has undertaken projects across office, retail, residential and hospitality verticals.
India’s progress over the next 20 years will be intimately linked to events within the region and around the world. The World Bank estimates that India will become the third or fourth largest economy in the world by 2020, with the GDP per capita to double by 2020. Thus, India is viewed as a key element in the "Chindia" and the "BRIC" economies, which are seen as key emerging markets playing an expanding role in the global economies. The scale of development might end up a lot larger in India than even China. India is a two-speed market with small medium and large players. Since India's political system is more defined, investor appetite in India is longer term -- 6-10 years.
India’s urban population is expected to rise to around 40 per cent by 2020. The face of urban poverty in 2020 is unlikely to be very different from what it is today, given that the largest indicator of poverty in cities is not so much lack of income, as lack of decent housing and civic amenities. While improving infrastructure in existing cities/towns is not to be ignored, in the next two decades there will be need to encourage growth of new townships and take up regional urban development plans where growth corridors can be identified and public-private partnerships promoted for investment in alternative nodes of development. Such centres will have considerable impact in improving the urban profile of the country.
The Indian real estate sector has witnessed an equivalent growth, driven by the booming economy, favorable demographics and liberalized foreign direct investment (FDI) regime. Growing at a scorching 30 per cent p.a., it has emerged as one of the most appealing investment sectors for domestic as well as foreign investors. India has 10 of the 30 fastest-growing urban areas in the world. Based on current trends, a massive 700 million people (roughly equivalent to the current population of Europe) will move to cities by 2050. This will have significant implications for demand for urban infrastructure, real estate, and services.
This is no fast burn as a 700% increase is forecast in the Indian property market. India is already achieving GDP of US $1.50 trillion. Currently, the overall property market in India is estimated to be worth about $12 billion. Policies to enhance financial sector growth, openness to trade, rural-urban migration, capital formation, education, and environment — together labelled the `FORCE' factors — will be critical to sustaining growth.
There is now an air of certainty of significant inflow of funds in infrastructure, increase in production capacity and creation of new employment opportunities but how to make this a reality is the enormity of the challenge before us.
Monday, June 9, 2008
Is the NCR real estate market in a bubble?
Maybe, this should have been the very first topic I should have addressed on this blog. Better late than never. Over the last 6 months, the media has written a lot about the high RE prices across major metros in India. Infact, there have been several people in the media and industry who have described the Indian RE market as a bubble. I will try and examine this assertion through this writing. I will focus on the NCR for the purposes of this blog.
There may be some truth to the assertion that the NCR RE market is overpriced. However, it would be unfair to characterize the entire market (which is infact a summation of several micro markets) with one broad brush. Having said that, I guess the question I may have raised in your mind is -which micro markets in the NCR are overpriced? This is a difficult question to answer but I will try and attempt it. I am going to begin by examining some micro markets:
1. Apartments in Delhi suburbs (Noida and Gurgaon in particular) where the aptts. are priced over Rs.5500 psf, are still under construction and more than 12 months from handing over possession, I feel, are overpriced eg. Unitech Grande (Noida), Jaypee Greens (Noida), Karma Lakelands (Gurgaon), Magnolias (Gurgaon), Palm Springs (Gurgaon). Use this criteria to determine if the project of your interest is priced right.
2. As I have already indicated in one of my earlier blogs, I believe, there is limited absorption capacity for aptts. which are larger than average (see my first blog). Ofcourse, there is room for a few such projects but I feel the current supply far exceeds demand. Aptts. where the TCO (total cost of ownership) is more than Rs.1.50 crores (in Delhi suburbs such as Noida and Gurgaon) will have limited absorption capacity. TCO for an aptt. can go up either because of high PSF rate or because the apartment size is too large -eg. 4000, 5000 and even 10,000 sq ft apartments !!
3. It may come as a surprise to some of you reading this blog, but I feel that the Delhi market, in most parts, is not overpriced. However, I feel aptt. sizes will need to get smaller to maintain affordability in Delhi. With increasing nuclearisation of families, I feel, there is a demand for studio, 1BR and 2BR aptts. This, however, is not happening as of now. If this doesn't happen, the TCO will have a negative bearing on demand for large aptts eg. a 2000 sq ft 3BR in Vasant Vihat can cost you Rs.5 cr ($1.25 Mi)! As an investor, it is important to "emotionally disassociate" yourself from the buying decision. Just because you can afford to buy a Rs.5 cr aptt. does not suddenly mean that the markets buying power as a whole has moved up. In other words, resist the temptation of extrapolating your riches to that of the market!
In summary, I feel, NCR prices have risen very fast over the last 4 years and that is what gives the impression of an all around bubble. However, if one looks closely, there are enough affordable investment opportunities still available (Gurgaon, Faridabad and even Delhi-read my previous blogs). I feel the pent up demand (built up over several decades!) has been met in the short term through the significant supply that has been created. From here onwards, the price rise will be more orderly and much in line with other economic indicators such as GDP growth rates and inflation. In addition, developers need to address the need for smaller, functional apartments at high end addresses (if you find one at the right price.....just grab it!).
In my next blog, I will write about how new supply in Delhi (is there land still available in Delhi !?!) will impact the RE map of the city.
Later,
Ashish
There may be some truth to the assertion that the NCR RE market is overpriced. However, it would be unfair to characterize the entire market (which is infact a summation of several micro markets) with one broad brush. Having said that, I guess the question I may have raised in your mind is -which micro markets in the NCR are overpriced? This is a difficult question to answer but I will try and attempt it. I am going to begin by examining some micro markets:
1. Apartments in Delhi suburbs (Noida and Gurgaon in particular) where the aptts. are priced over Rs.5500 psf, are still under construction and more than 12 months from handing over possession, I feel, are overpriced eg. Unitech Grande (Noida), Jaypee Greens (Noida), Karma Lakelands (Gurgaon), Magnolias (Gurgaon), Palm Springs (Gurgaon). Use this criteria to determine if the project of your interest is priced right.
2. As I have already indicated in one of my earlier blogs, I believe, there is limited absorption capacity for aptts. which are larger than average (see my first blog). Ofcourse, there is room for a few such projects but I feel the current supply far exceeds demand. Aptts. where the TCO (total cost of ownership) is more than Rs.1.50 crores (in Delhi suburbs such as Noida and Gurgaon) will have limited absorption capacity. TCO for an aptt. can go up either because of high PSF rate or because the apartment size is too large -eg. 4000, 5000 and even 10,000 sq ft apartments !!
3. It may come as a surprise to some of you reading this blog, but I feel that the Delhi market, in most parts, is not overpriced. However, I feel aptt. sizes will need to get smaller to maintain affordability in Delhi. With increasing nuclearisation of families, I feel, there is a demand for studio, 1BR and 2BR aptts. This, however, is not happening as of now. If this doesn't happen, the TCO will have a negative bearing on demand for large aptts eg. a 2000 sq ft 3BR in Vasant Vihat can cost you Rs.5 cr ($1.25 Mi)! As an investor, it is important to "emotionally disassociate" yourself from the buying decision. Just because you can afford to buy a Rs.5 cr aptt. does not suddenly mean that the markets buying power as a whole has moved up. In other words, resist the temptation of extrapolating your riches to that of the market!
In summary, I feel, NCR prices have risen very fast over the last 4 years and that is what gives the impression of an all around bubble. However, if one looks closely, there are enough affordable investment opportunities still available (Gurgaon, Faridabad and even Delhi-read my previous blogs). I feel the pent up demand (built up over several decades!) has been met in the short term through the significant supply that has been created. From here onwards, the price rise will be more orderly and much in line with other economic indicators such as GDP growth rates and inflation. In addition, developers need to address the need for smaller, functional apartments at high end addresses (if you find one at the right price.....just grab it!).
In my next blog, I will write about how new supply in Delhi (is there land still available in Delhi !?!) will impact the RE map of the city.
Later,
Ashish
Tuesday, June 3, 2008
Leverage - the new cocaine !
Have you ever wondered how private equity (PE) funds, hedge funds and other such private pools of capital, are able to generate extraordinary returns in markets that appear to be behaving quite ordinarily !?! Besides the genuine genius of some managers who manage these funds, they use a weapon which in normal circumstances is not available in large quantities to individuals and that is called Leverage. In keeping with the spirit of this blog which is to democratise access to "intelligent analysis", I would like to share in this particular writing how individuals can maximize returns in RE investing by using leverage.
Leverage (or gearing) can be loosely defined as, using given resources in such a way that the potential positive or negative outcome is magnified. It generally refers to using borrowed funds, or debt, so as to attempt to increase the returns to equity. I feel the best way to illustrate its affects on returns would be through a few examples. By the end of it, you will appreciate why leverage is often called the cocaine of financial markets! Just like the real thing, its consumption can take you to great heights and its misuse can destroy you.
Example 1:
(A)Purchase price of apartment = Rs.1,00,00,000
Self funding (15%) = Rs. 15,00,000
Home loan (85%) = Rs.85,00,000
Rate of interest (ROI) on loan = 11%
Period of loan = 15 years
Equated monthly instalment (EMI)= Rs.96,610
Expected price appreciation in property =12% p.a. (with a GDP growth rate of 8% p.a., I believe, this is a realistic assumption for the 5 year period in this example)
Period of holding property before reselling =5 years
(B)Property price at end of 5 years (assumed 12% compounded growth) = Rs.1,76,00,000
(C)Interest paid over this 5 year period = Rs.43,10,092
Therefore, profit from transaction = (B)-(A)-(C) =Rs.32,89,908
The important point to be noted here is obviously the effect of leverage. As an investor, your equity in the transaction was a mere Rs.15,00,000 and you made a profit of Rs.32,89,908 in the 5 year period. Therefore, as an investor, you tripled your investment in 5 years. Ofcourse, the one big assumption in the example is that you are able to get a loan sanctioned and can afford to pay the EMI of Rs.96,610 for 5 years. If you get regular income either in a job or are self employed, most banks would be willing to extend this loan to you.
The above example was to show you the effect of leverage. Ofcourse, the amount you borrow can be increased or decreased based on your repayment capacity. Keep in mind that the more you borrow (based on assumptions in example above), the more your returns will be accentuated. Ofcourse, if some of the assumptions change, the outcome could be painfully different as I will illustrate in example 3.
Example 2 (No leverage):
Let's assume the identical secnario as described in example 1 except without leverage.
Investors equity =Rs.1,00,00,000
Profit at end of 5 years =Rs.76,00,000
Therefore, in this scenario, the investor made Rs.76,00,000 on an investment of Rs.1,00,00,000. This means the investor failed to even double his or her money as opposed to tripling the investment with use of leverage as in example 1!!
Example 3:
Let's assume all things remain same as in example 1 except for 2 things-rate of interest on loan and expected rate of appreciation of property.
(A)Purchase price of apartment = Rs.1,00,00,000
Self funding (15%) = Rs. 15,00,000
Home loan (85%) = Rs.85,00,000
Rate of interest (ROI) on loan = 12%
Period of loan = 15 years
Equated monthly instalment (EMI)= Rs.1,02,014
Expected price appreciation in property =7% p.a. (you may have assumed a higher growth but your assumption could be wrong and you may end up with only a 7% growth or even lower)
Period of holding property before reselling =5 years
(B)Property price at end of 5 years (assumed 7% compounded growth) = Rs.1,40,25,517
(C)Interest paid over this 5 year period = Rs.47,31,306
Therefore, profit/loss from transaction = (B)-(A)-(C) = (-) 7,05,789
Now, that's what is a bad outcome of using leverage. As an investor, you could actually lose money by using leverage. In this scenario, if you had not used leverage, as an investor you would still have made a profit of Rs.40,25,517 or 40% on your investment of Rs.1,00,00,000. By using leverage, the investor could lose Rs.7,05,789 due to the cost of interest! Careful-learn to consume cocaine before you do.
This is a fascinating subject and almost perfected to a science by the financial engineers working at large banks and funds. Suffice to say, as an investor you can use the use same principles and magnify your returns.
What are you waiting for ?
more later,
Ashish
Leverage (or gearing) can be loosely defined as, using given resources in such a way that the potential positive or negative outcome is magnified. It generally refers to using borrowed funds, or debt, so as to attempt to increase the returns to equity. I feel the best way to illustrate its affects on returns would be through a few examples. By the end of it, you will appreciate why leverage is often called the cocaine of financial markets! Just like the real thing, its consumption can take you to great heights and its misuse can destroy you.
Example 1:
(A)Purchase price of apartment = Rs.1,00,00,000
Self funding (15%) = Rs. 15,00,000
Home loan (85%) = Rs.85,00,000
Rate of interest (ROI) on loan = 11%
Period of loan = 15 years
Equated monthly instalment (EMI)= Rs.96,610
Expected price appreciation in property =12% p.a. (with a GDP growth rate of 8% p.a., I believe, this is a realistic assumption for the 5 year period in this example)
Period of holding property before reselling =5 years
(B)Property price at end of 5 years (assumed 12% compounded growth) = Rs.1,76,00,000
(C)Interest paid over this 5 year period = Rs.43,10,092
Therefore, profit from transaction = (B)-(A)-(C) =Rs.32,89,908
The important point to be noted here is obviously the effect of leverage. As an investor, your equity in the transaction was a mere Rs.15,00,000 and you made a profit of Rs.32,89,908 in the 5 year period. Therefore, as an investor, you tripled your investment in 5 years. Ofcourse, the one big assumption in the example is that you are able to get a loan sanctioned and can afford to pay the EMI of Rs.96,610 for 5 years. If you get regular income either in a job or are self employed, most banks would be willing to extend this loan to you.
The above example was to show you the effect of leverage. Ofcourse, the amount you borrow can be increased or decreased based on your repayment capacity. Keep in mind that the more you borrow (based on assumptions in example above), the more your returns will be accentuated. Ofcourse, if some of the assumptions change, the outcome could be painfully different as I will illustrate in example 3.
Example 2 (No leverage):
Let's assume the identical secnario as described in example 1 except without leverage.
Investors equity =Rs.1,00,00,000
Profit at end of 5 years =Rs.76,00,000
Therefore, in this scenario, the investor made Rs.76,00,000 on an investment of Rs.1,00,00,000. This means the investor failed to even double his or her money as opposed to tripling the investment with use of leverage as in example 1!!
Example 3:
Let's assume all things remain same as in example 1 except for 2 things-rate of interest on loan and expected rate of appreciation of property.
(A)Purchase price of apartment = Rs.1,00,00,000
Self funding (15%) = Rs. 15,00,000
Home loan (85%) = Rs.85,00,000
Rate of interest (ROI) on loan = 12%
Period of loan = 15 years
Equated monthly instalment (EMI)= Rs.1,02,014
Expected price appreciation in property =7% p.a. (you may have assumed a higher growth but your assumption could be wrong and you may end up with only a 7% growth or even lower)
Period of holding property before reselling =5 years
(B)Property price at end of 5 years (assumed 7% compounded growth) = Rs.1,40,25,517
(C)Interest paid over this 5 year period = Rs.47,31,306
Therefore, profit/loss from transaction = (B)-(A)-(C) = (-) 7,05,789
Now, that's what is a bad outcome of using leverage. As an investor, you could actually lose money by using leverage. In this scenario, if you had not used leverage, as an investor you would still have made a profit of Rs.40,25,517 or 40% on your investment of Rs.1,00,00,000. By using leverage, the investor could lose Rs.7,05,789 due to the cost of interest! Careful-learn to consume cocaine before you do.
This is a fascinating subject and almost perfected to a science by the financial engineers working at large banks and funds. Suffice to say, as an investor you can use the use same principles and magnify your returns.
What are you waiting for ?
more later,
Ashish
Wednesday, May 28, 2008
The dirty little secret no developer wants you to know....
Ever thought what you are actually paying for when you buy a developer apartment in India? You may think you do but may be surprised to read what I'm about to tell you next. You may have heard of carpet area v/s super area. For those of you not familiar with the terminology, carpet area is the covered area inside your apartment (excluding balconies or patio or terrace) and super area is the carpet area plus the loading developers add for things such as elevators, fire escapes, staircase, etc (Yes, you pay for that too!). This loading I referred to can vary anywhere between 15 -30%!! The problem is most agreements you enter into with developers when buying an apartment only state the super area and not the carpet area. As you may have realised by now.....that is a big problem. Therefore, two apartment complexes next to each other may have different loading but an identical price. Obviously, the price is not the same (as it may appear on the face of it) as in one case you are getting less space for the same money!
Why has the market nor the regulator cared to address this very significant and apparent anamoly? Well, to be fair, one of the government agencies (the name escapes me) did float the idea of making it mandatory for developers to disclose the carpet area. I'm sure the builder lobby viewed this as an attempt to hack the "hen that lays the golden eggs" and therefore the plan is still to be implemented. However, as a buyer or an investor it is your privilege to get this information and I suggest you demand it.
Let's take an example and you will be suprised at what the numbers reveal;
Case 1 (Load of 15%):
Aptt. super area =2500 sq ft (including balconies)
Effective carpet area= 2174 sq ft (2500/1.15)
Balcony space = 275 sq ft (this is based on a 2500 sq ft aptt. I own in Gurgaon. The numbers therefore are real and not assumptions)
Therefore, carpet area (excluding balconies) = 1899 sq ft
Market price = Rs.6000 per sq ft
Total purchase price = Rs. 1,50,00,000 (based on super area of 2500 sq ft)
Implied or effective price =Rs.7899 per sq ft (based on carpet area of 1899 sq ft)
Case 2 (Load of 25%):
Aptt. super area= 2500 sq ft (including balconies)
Effective carpet area= 2000 sq ft (2500/1.25)
Balcony space = 275 sq ft (as above)
Therefore, carpet area (excluding balconies) = 1725 sq ft
Market price = Rs.6000 per sq ft
Total purchase price = Rs.1,50,00,000
Implied or effective price =Rs.8696 per sq ft (based on carpet area of 1725 sq ft)
Case 3 (No load):
Let's compare case 1 & 2 above with builder apartments available in Delhi. In the case of builder apartments in Delhi, the square footage is generally not discussed. However, the advantage in case of Delhi apartments is that in general these apartments are available for viewing before buying (ofcourse, you can get a substantial discount if you are willing to commit to purchase before start of construction). Therefore, you can actually measure the carpet area of the apartments. If GK is quoted at Rs.14000 psf, it is based on carpet area and not super area unlike Gurgaon/Faridabad where quoted prices are based on super area.
In summary, the load factor in a development can make the difference between a good buy and a bad buy!
More on this later,
Ashish
Why has the market nor the regulator cared to address this very significant and apparent anamoly? Well, to be fair, one of the government agencies (the name escapes me) did float the idea of making it mandatory for developers to disclose the carpet area. I'm sure the builder lobby viewed this as an attempt to hack the "hen that lays the golden eggs" and therefore the plan is still to be implemented. However, as a buyer or an investor it is your privilege to get this information and I suggest you demand it.
Let's take an example and you will be suprised at what the numbers reveal;
Case 1 (Load of 15%):
Aptt. super area =2500 sq ft (including balconies)
Effective carpet area= 2174 sq ft (2500/1.15)
Balcony space = 275 sq ft (this is based on a 2500 sq ft aptt. I own in Gurgaon. The numbers therefore are real and not assumptions)
Therefore, carpet area (excluding balconies) = 1899 sq ft
Market price = Rs.6000 per sq ft
Total purchase price = Rs. 1,50,00,000 (based on super area of 2500 sq ft)
Implied or effective price =Rs.7899 per sq ft (based on carpet area of 1899 sq ft)
Case 2 (Load of 25%):
Aptt. super area= 2500 sq ft (including balconies)
Effective carpet area= 2000 sq ft (2500/1.25)
Balcony space = 275 sq ft (as above)
Therefore, carpet area (excluding balconies) = 1725 sq ft
Market price = Rs.6000 per sq ft
Total purchase price = Rs.1,50,00,000
Implied or effective price =Rs.8696 per sq ft (based on carpet area of 1725 sq ft)
Case 3 (No load):
Let's compare case 1 & 2 above with builder apartments available in Delhi. In the case of builder apartments in Delhi, the square footage is generally not discussed. However, the advantage in case of Delhi apartments is that in general these apartments are available for viewing before buying (ofcourse, you can get a substantial discount if you are willing to commit to purchase before start of construction). Therefore, you can actually measure the carpet area of the apartments. If GK is quoted at Rs.14000 psf, it is based on carpet area and not super area unlike Gurgaon/Faridabad where quoted prices are based on super area.
In summary, the load factor in a development can make the difference between a good buy and a bad buy!
Ashish
Monday, May 19, 2008
Is Faridabad the new kid on the block !?!
Talk of step fatherly treatment and Faridabad would be right up there when compared to the original son of the soil -Gurgaon! Haryana govt has definitely not focused adequately on developing Faridabad as an important growth center considering its strategic NCR location. Despite the state governments indifference, I feel, Faridabad is most certainly going to be an important source of RE growth over the next 5 years. Why? Because, whatever you do, you cannot take away its gene pool! It is afterall 20 minutes away from South Delhi locations such as Nehru Place, GK, Friends Colony, Maharani Bagh. In addition, Jasola is emerging as a significant business district in its own right- much like Nehru Place and Bhikaji Cama Place and is less than 20 minutes away from Faridabad. Some of the better hospitals of the city such as Apollo Hospital and Escort Heart Instt. are within 20 minutes driving distance from Faridabad. Ofcourse, the other positive factor influencing prices in Faridabad in the near term would be the implementation of the metro project. It was initially expected to have been implemented by 2010 but some "babu" in the govt office had another agenda and the metro is now expected to be in Faridabad by 2012.
Ofcourse, one has to be precise and careful when referring to Faridabad since Faridabad extends (on either side of Mathura Road) all the way upto Sectors 60/61 which are probably 45 -60 minutes from Apollo hospital and/or South Delhi. Therefore, all of Faridabad must not be viewed with the same lens. For the purposes of this particular writing, I will be focusing on an emerging investment destination in Faridabad called "Nahar Paar"-its name simply meaning the other side of the canal. The canal being the Gurgaon canal which separates old/existing Faridabad and this emerging destination. The Nahar Paar region is spread across approximately 3000 acres (extending from Sector 66 to 90) of which over 2000 acres has already been acquired by developers over the last several years. The largest land bank here is with BPTP (~1500 acres) followed by smaller players such as DD Motors (you know something is wrong with the markets when a company which doesn't even have a vague resemblance to RE business in it's corporate identity is one of the largest land bankers!), Era, Uppals, KLJ, Omaxe, etc.
In Faridabad, one can invest either in land or apartments depending on one's budget. I personally prefer apartments since they are easy to manage (even if you eventually want to sell out), are more liquid as an investment and easier to get a loan for (a RE investor's cocaine....more on that in a separate blog). I will evaluate a few of the options currently on the market and some caveats before entering the Faridabad market.
1. BPTP- They have multiple apartment projects on offer such as The Resort, Park Grandeura and Princess Park. The specifications are different for these apartments and therefore they are available at different price points ranging between Rs.1550-Rs.2250 psf. All prices are for 2BR's. 3BR prices may be different.
2. Omaxe-They have two projects on offer curently-Omaxe Heights in sector 86 and Omaxe Spa Valley in Sec 78. I think Omaxe Heights will only be available in resale and is currently available between Rs.1600-Rs.1700. The price varies depending on floor, availability, etc. Omaxe spa valley is their premium project and the price varies between Rs.2250-Rs.2300.
3.Era-Promoted by Era Constructions which is a respectable name in the construction business but new to property development. They are, however, listed on the stock exchange. Available between Rs.1450-1525 psf.
4. Uppals-Launched around 15th April,08 and currently available with only 10% down payment at Rs.1900 psf.
My order of preference is as listed above. However, avoid the temptation of spending on a luxury apartment in Faridabad (unless you want to live in it) since it is primarily a budget market and may not attract luxury buyers in the short to medium term. It is probably the only micro market 30 minutes from Delhi's border where you can still buy a brand new apartment for under Rs.30 lacs !! I think it is a steal and the only way for this market is up and up.
There are atleast 10 other developers in the Nahar Paar area of Faridabad most of whom I would avoid. They are new, inexperienced and driven only by greed and optimism. Don't get me wrong. I would love to support a good newcomer but in tough times hope without a plan could be like being in a boat without a rudder!
CAVEAT EMPTOR: This is where this market gets a little tricky especially when you compare it to Gurgaon. As investors or end users we are very often driven by the headline number when we get into a deal. The headline number I am referring to is the per sq foot rate. However, this may not be enough. You also need to look at the extras such as External Dev. charges (EDC), Infrastructure Development charges (IDC), Preferrential location charges (PLC), Interest bearing (or interest free incase of Faridabad!) maintenance security (IBMS), car parking and club charges. Faridabad has two charges which I have never seen in any development in Gurgaon, namely, EEC/FFC and electricity charges (electrical charges exist in Gurgaon but not charged per KVA!!). I'll try and make this simple-when you go scouting a deal, ask for two prices from the broker-per square foot price (the headline price we discussed earlier) and psf price of extras. Nobody will be able to give you the second price off the cuff because that question has probably not been asked before. But that's exactly what you need to know to ensure you are getting a good deal. The price for extras in Gurgaon is generally between Rs.250-300 psf. In Faridabad it is between Rs.450-600! Therefore, the headline price in Faridabad is attractive but not as attractive as it may appear at first. But I reiterate-still a great deal!
More later,
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