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

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,

Anticipate the next hot spot - simply follow the metro!

Over the next 5 years the metro will have a profound impact on the NCR's RE map. The development of the metro will alter the way its residents define a locations importance and this will have a significant impact on price movement in various parts of the NCR.

In this blog, I will cover some of the micro markets in South Delhi. Currently the prices in Vasant Vihar/Anand Niketan are between Rs.25000-Rs.27000 psf for newly constructed builder apartments. In Shanti Niketan/Westend prices are in the range of Rs.29000-Rs.32000 psf. However,the prices in Panchsheel/Anand Lok are in the Rs.20000to Rs.21000 psf range. GK is about Rs.14000 psf and Maharani Bagh at about Rs.17000 psf.

As the metro expands its wings across the city, I feel there will be a convergence in prices across some micro markets. Simply put, the psf price premiums that currently exist between, let's say, Vasant Vihar and GK will diminsh over time. As per current rates, the price premium between Vasant Vihar and GK is 86% (Rs.26,000 v/s Rs.14,000 psf). By the end of 2012, when a majority of the metro expansion and implementation would have been completed, I expect prices in areas such as GK, East of Kailash, Kailash Colony, Chittaranjan Park to move up very rapidly. This will also have a positive price impact (on whatever limited top quality housing supply is available) in areas such as Kalkaji, Kailash Kunj, Malviya Nagar, Geetanjali Enclave. I do not see a similar psf upward spike in areas such as Vasant Vihar, Anand Niketan and Panchsheel. However, I do feel areas such as Shanti Niketan, West End, Jor Bagh, Malcha Marg, Chankyapuri, Golf Links will continue with their significant price premiums for the forseeable future.

Therefore, as an investment opportunity, I would be very inclined to enter micro markets such as GK, East of Kailash, Kailash Colony, Chittaranjan Park, Hauz Khas, Friends Colony, and Maharani Bagh. The following is my prediction for prices end 2012for some of the micro markets:

1. Vasant Vihar/Anand Niketan -Rs.45,000 - Rs.47,000 psf
2. Panchsheel/Anand Niketan- Rs.39,000 -Rs.41,000 psf
3. Friends Colony/Maharani Bagh -Rs.33,000 -Rs.35,000 psf
4. GK/EOK/Hauz Khas/Chittaranjan Park -Rs.29,000 - Rs.31,000 psf

I'll try and translate what the numbers mean if you are an investor. Over the 5 year period ending 2012, I am predicting a premium compression between A+ (VV), A (Panchsheel), B+ (Maharani) and B(GK) micro markets. This is what I would like to call the convergence of the RE micro markets in South Delhi. Therefore, as per my price prediction for 2012, the premium between A+ and B markets would erode from the current 86% to 57% (still very substantial by any standards).

In summary, if I were an investor with a 5 year horizon, I would sell VV and buy GK !! Please bear in mind that all psf rates are for apartments with top quality construction, with all modern fittings and on wide 60 feet road or more.

Factors influencing residential RE prices in NCR

Over the next few weeks I will write about residential RE investment opportunities in the NCR. I will begin this week by analysing opportunities in Gurgaon.

Let's begin by taking a high level view of how the Gurgaon landscape has evolved over the last few years and how it is expected to further evolve over the next few. If you look at new Gurgaon, it started with developments around MG Road. Today prices on MG Road are anywhere between Rs.5500-Rs.6500 psf for comparable properties. I would like to refer to MG Road as the downtown of Gurgaon as also the fulcrum basis which all other price movement in Gurgaon will be compared. I refer to MG Road as the developments around Sector 25 and Sector 28. I am of the opinion that over the next 5 years (ie.end 2012), all residential/group housing developments between Sector 1-74 would be priced between 0.75-0.8 times the price of downtown Gurgaon. Let's translate that into numbers as I see it in 2012. I expect prices on MG Road to continue their upward trend at 11% p.a. -let's assume the current average price on MG Road of Rs.6000 psf. Therefore, in 2012 I expect the average price on MG Road to be Rs.10,110 psf (compounded growth rate of 11% p.a.). At the same time, I expect prices of all comparable developments between Sectors 1-74 to be between Rs.7582-Rs.8100 psf (0.75-0.8 of Rs.10,110).

If the above is my hypothesis, let's see where the investment opportunity is:

1. Invest on MG Road-11% compounded growth over a 5 year period is a great investment opportunity by any measure. In addition, MG Road offers ready to move in property options and therefore can either be bought for self use or rented. If you rent, you can expect approx. 4.5% return on investment which will be in addition to the 11% compounded return. Sure beats the bank deposit and compares very favorably with equity returns minus the heartburn that comes with frequent stock market gyrations!

2. Invest in upcoming sectors- what would be the definition of upcoming sectors? I'll try and be as precise as possible in my coverage of these sectors. This would include upcoming developments particularly in sectors 47 through to sector 57. Currently, you can get investment opportunities in these sectors in a price range of Rs.2800-Rs.3500 psf (under construction). If as per my earlier hypothesis the price in these sectors would be between Rs. 7600-Rs.8100 in 2012-the upside potential is incredible. Such an upside translates to a compounded growth of 130% - 170% over the next 5 years! Ofcourse, you must remember that all of these properties will be ready for possession over the next 9-24 months. Therefore, there will be no additional rental income over this period atleast till June,2010.

3. Beyond Sector 74- I expect prices in sectors 75-95 to be 0.7 times of prices between sectors 47-57. In 2012, I am predicting a price of Rs.7600-Rs.8100 in Sectors 47-57- therefore, the price in developments in sectors 75-95 should be between Rs.5320-Rs.5670 psf. Currently, the offer price in these sectors is between Rs.2250-Rs.2500. In addition, the apartments in these sectors are generally smaller in size (therefore a smaller capital outlay). Such a price in 2012 translates to a compounded average growth rate of 127-136% over the 5 year period. This compares favorably with the investment opportunities in sectors 47-57. However, I would personally prefer an investment in sectors 47-57 since that development would occur sooner, rentals could begin by mid 2010 and metro connectvity will occur before by end 2012.

OTHER FACTORS INFLUENCING PRICE:

1. Apartment size-Between 2003-2006, there was a tremendous demand for large apartments in Gurgaon. I believe there was a latent unmet demand created for such apartments due to insufficient alternatives in the capital city. However, most new projects announced between 2003-2006 had more than a sufficient mix of large apartments on offer in their overall development plans. In the short to medium term, I think, this demand will be met with the existing supply and the expected new supply coming into the market over the next 24 months. As a thumb rule (it's my own thumb rule!), for every 100 average sized apartment there should be a demand for 10 large apartments. The current and expected supply in Gurgaon far exceeds this ratio.

Definition of large v/s average v/s small v/s trophy property-
Average (all sizes are super area with an efficiency assumption of 85%):
1. 2BR+2Bath : 1100 sq ft-1300 sq ft
2. 3BR+3Bath: 1725 sq ft -1900 sq ft
3. 4BR+4Bath: 2500 sq ft -2750 sq ft

Large
1. 2BR+2Bath: >1400 sq ft
2. 3BR+3Bath: >2000 sq ft
3. 4BR+4Bath: >2900 sq ft

Small

1. 2BR+2Bath: <1100 sq ft
2. 3BR+3Bath: <1700 sq ft
3. 4BR+4Bath: <2500 sq ft

Trophy
1. 4BR+4Bath and above: Properties with an extraordinary location/view, size greater than 50% of average sized apartment,limited supply,celebrity connection,etc.

Impact on price due to deviation from average size-Due to an under developed market and due to a significant demand for larger apartments till 2007, there has been no "per square foot" price differential between large and average sized apartments. However, going forward, I expect a 5% lower price for an apartment which deviates in size (by 10%) from an average apartment size. For ease of understanding, let's take an example-An average sized 3BR should not be more than 1900 sq ft. However, the market will absorb 3BR's upto 2000 sq ft without a discount. However, when the size exceeds 2000 sq ft by more than 10% ie.an apartment of 2200 sq ft I expect the price psf to be lower than the previailing price by atleast 5% .

Trophy properties- Sometimes apartments may be much larger than the average sized apartment but still command a premium. The psf price of these apartments may be influenced by factors other than discussed above such as celebrity value (previously owned by celebrity), status symbol, limited supply, etc. Such apartments can be 5000 sq ft or above and may command a premium in terms of "psf" rate in comparison to similar properties of average size.

I will continue with more in my next post....................

later,
Ashish