Tuesday, December 24, 2013

The Real Property Market of North India - an Insight

The property market of northern India has scaled great heights in the last few years. From Gurgaon to Noida and now Bharatpur to Bhiwadi in Rajasthan, the property market of northern India has evolved to a great extent.

Decades after the real estate giant DLF developed Gurgaon, the realty boom in northern India has been creating ripples ever since. Initially it was Gurgaon that emerged as the hottest property destinations in Delhi/NCR during the mid 2000s. Then on the other part, Noida in Uttar Pradesh also started gaining popularity as a realty destination. As the country’s economy started gaining new grounds, the real estate landscape also underwent tremendous changes. Now, in the last five years, major cities across north India has joined the realty boom bandwagon. Among them tier II cities like Chandigarh, Jaipur and Manesar are worth mentioning. The real estate market, especially the residential segment in these cities has proliferated rapidly over the last five years. Affordable Flats in Chandigarh, Jaipur and even Manesar have been experiencing a huge demand among the end users.

Coming back to the real estate scenario of the nucleus, that is Delhi/NCR, surrounding areas have been developing at a great pace; so much so that new areas are being included with each passing day, though most of them are nondescript. Mahendragarh and Bhiwani in Haryana have been announced to be a part of NCR. Developers are queuing up and investors are banking on the capital values of these regions. At a more recent event, Bharatpur in Rajasthan, known for its famous Keoladeo Bird Sanctuary has also been declared to be included within NCR. Though the property market in the region is yet to develop, but industry experts opine, that the market will develop pretty soon. It is estimated that these areas will experience at least 15 percent rise in the property prices. So, properties in Bhiwani and Mahendragarh, now available at a price of INR 3000 on an average are bound to increase to at least INR 4000 in the next four years.

Barely a year or two old, the residential property segment of Bharatpur, is already selling at INR 1500 per square feet while the industrial plots come at a cost of nearly INR 200 per square feet. The government’s plan for the development of a rapid rail transit system is expected to add to the realty market of these areas.

On the other hand, Bhiwani, 125 kilometres from Delhi and Mahendragarh about 70 kilometres has already witnessed the foraying in of top international brands in retail; and some leading finance companies have also set up operations in these regions. These are all signs of a bright future of the property market of these areas. At the Rajasthan front, in Bharatpur, builders have already started constructing in-roads. Demand for residential apartments has increased in areas like Manesar, Bhiwadi and even Bharatpur.

The industrial hub of Bhiwadi in Rajasthan is one of the fastest emerging residential townships in northern India. Spread over nearly 5300 acres of area, Bhiwadi has long attracted a lot of attention from investors and developers. Real estate developers have been highly instrumental in developing the property landscape of Bhiwadi. The township today boasts of the presence of well-known developers, like Omaxe, Avalon and Ashiana.

Moreover, the rapid infrastructural developments, like the expansion of the Honda factory has seen an increase in the workforce of the area which in turn has had a positive impact on the real estate market.

So, initially restricted to Gurgaon, Noida, now the real property market has spread to areas like Punjab, Haryana and Rajasthan. Towns like Manesar and Faridabad in Haryana, Bhiwadi and now Bharatpur in Rajasthan; and of course the state capitals like Jaipur and Chandigarh have raised the bar when it comes to the property market of northern India. Following the current status, it can be said that the property market of north India has loads to offer in the coming ten years.

This is a guest post by Sampurna Majumder. Currently she is writing about latest trends related to real estate.

Monday, December 23, 2013

What are the various kinds of risks involved in real estate investment? And what should you as an investor do to minimize those risks?

Author: Sachin Gupta | Find me on Twitter

Any kind of investment whether in Gold, property, stocks, bonds, etc. is subjected to certain risks. While Government securities are considered risk free, there is still some amount of risk involved in those. What if the government defaults as has happened in some of the EU nations? Consciously or unconsciously people do their risk analysis before making any investment. In this post, we will analyze the risks that are involved in real estate investment. Whether one is investing a small amount or substantial amount, going through this risk analysis will help you in foreseeing the potential risks that can creep in your real estate investments.

  • Business risk:

Property investors suffer due to fluctuations in economic activities that affect the variability of rental income generated by the property. Changes in economic conditions prevailing in the country often affect some properties more than others depending on the type of property, its location, and any existing leases. For commercial properties, particularly office space buildings, a property with a well diversified tenant mix is likely to be less subject to business investment risk. Lease deeds that provide the owner with protection against unexpected changes in expenses (e.g., with expense stops in the lease, or leases indexed to WPI, etc.) would have less business risk. Changes in the economic conditions also affect the residential property investors who are primarily looking for capital appreciation gains on the property. With economy slowing down, the capital yields goes drastically down as can be seen in the latest housing price index across many cities in India.

  • Financial risk:

The use of debt (financial leverage) magnifies the investment risk. Financial risk is directly proportional to the amount of debt taken to finance the purchase of property. Based on the prevailing interest rates, the financing costs may go up and eat into the income generated by the property. Financial risks affect both commercial and residential property investor due to the financial leverage. The cost of financing goes up or down depending on the economic situation and prevailing interest rates.

  • Liquidity risk:

This risk occurs when a continuous market with many buyers and sellers and frequent transactions is not available. The more difficult it becomes to sell a property, the greater the likelihood that owner will have to under-sell the property in order to dispose of the investment quickly. Sometimes, it can take from six months to a year or more to sell real estate income properties especially during period of weak demand. We have seen many cases in recent past when investors were forced to undersell because of slow property transactions across the country.

  • Inflation risk:

Unexpected inflation can reduce an investor’s rate of return if the income from the investment does not increase sufficiently to offset the impact of inflation. To overcome this risk, use of leases that allow the Net Operating Income to adjust with unexpected changes in inflation is applied. Higher inflation also eats into the capital gains that are sought by many housing investors.

  • Management risk:

The risk is based on the capability of the management and its ability to negotiate leases, respond to economic conditions, and operate/maintain the property efficiently. Even in case of residential properties, with outdated tenant laws across India, we have seen how difficult it gets for the manager or owner to get hold of their property. Therefore, as is the case in commercial properties, property owners must go for registered leases for residential properties as well.

  • Interest rate risk:

Real estate tends to be highly leveraged and thus the rate of return earned by equity investors can be affected by changes in interest rates. Most mortgages are of floating interest rates in India and therefore any monetary policy changes by RBI is keenly watched by the real estate investors. Even if an existing investor has a fixed interest rate loan or no loan at all, the change in the monetary policy by RBI by increasing the level of interest rates may also lower the capital value of a property that a new buyer is willing to pay.

  • Legislative risk:

Regulations such as tenant laws, taxes, registration procedures, stamp duty, restricted use of property, zoning, and other restrictions imposed by the state bodies or municipalities are categorized as legislative risk and must be factored in by the investors.

  • Environmental risk:

Environmental risks such as constructing or buying property in areas where the land use policy is under jurisdiction and therefore have the possibilities of adversely affecting the returns on investment.

Having gone through the above risks, a property investor should do his/her due-diligence before investing in a property:

  • Review of title/deed documents
  • Property survey
  • Government compliance
  • Areas of review/locality
  • Physical inspection
  • Tax matters
  • Insurance policies
  • Pending dues
  • Market studies including the demand for the similar property
  • Review of rent agreements or lease deeds in case the property is already rented.

Have any Questions?

Saturday, December 14, 2013

What lessons can real estate sector in India learn from Aam Aadmi Party?

Author: Sachin Gupta | Find me on Twitter

Well, it’s been an incredible journey for Aam Aadmi Party. Although still in its nascent stage, the party has chosen the path less traveled by political parties so far in India. The party was the product of anti-corruption movement in India with Anna Hazare at its helm. However, due to internal differences among the anti-corruption movement members and a burning desire of the leaders of Aam Aadmi Party (AAP) to make a substantial change to the Indian political system led its entry into formal politics. If the anti-corruption movement was all about putting pressure from outside on the political system in India, the members of Aam Aadmi Party has vowed to make a difference by getting inside the political system. The party is led by Arvind Kejriwal, who has a substantial track record in Indian Revenue Services, RTI activism, other NGOs, and joining Anna Hazare for bringing in Lokpal bill in India.

As things stand in Real Estate sector in India, there is this need to clean up the sector. Property transactions, construction, track record of real estate developers, soaring home prices, housing shortage, etc. are issues that require immediate clean up. And it is in this environment, what we need is a set of leaders who can change or rather clean the existing system and processes. These leaders can be real estate developers, architects, policy makers, or entrepreneurs looking to enter the realty sector in India. What can these new set of leaders learn from the spectacular achievement of Aam Aadmi Party?

  • Take big risks:

Just like Arvind Kejriwal stood against Sheila Dikshit and did not play safe, the leadership in real estate sector needs to take big risks. For example, a builder can come into the real estate sector and act transparently and professionally. Why don’t we still see any real estate developer selling their projects based on the carpet area? Why don’t anyone of the developer state the actual project completion time instead of the industry trend of 3 years? Each one of them knows that the project will be completed in close to 5 years, then why don’t they say it when selling the apartments to customers. Most developers still play safe and the result is that we have a real estate sector which is perceived as corrupt.

  • Efficient execution:

Aam Aadmi Party did not have the resources to compete with well established political parties such as Congress, and BJP. Neither, they had money, nor the backing of big corporate houses. Still, they had the passion, hunger, and discipline to win against all odds. Remember how the established parties will use volunteer by paying about 5000-6000 Rupees in reaching out to voters. AAP simply inspired the existing resources such as volunteers and media to take their message forward to the voters. Similar results can be achieved in realty sector with the contribution of honest government officials, set of developers, and media. The sector would go a long way if few of the government officials simply don’t sit on project approval files and sanction the real estate projects on their merits rather than on black money, and the developers focusing on completing the existing projects rather than building the land bank by diverting the funds.

  • Putting pressure on the existing system and processes:

Aam Aadmi party declared their funding, processes, volunteer model on the website for everyone. They also carried out internal surveys and declared the survey results along with the methodology and data for anyone to scrutinize. Even after the election results, they had been consistent in their approach to sit in the opposition rather than form the government by any means. Contrast this with the political maneuvering we see in India wherein MLAs and MPs are bribed, traded to form governments. Similarly, a set of real estate developers and entrepreneurs can stand on their principles of fair practices, no bribe, timely execution and delivery of projects. And all of this will put pressure on the established developers to fall in line and ultimately sector as a whole will benefit.

  • Perseverance:

Aam Aadmi Party simply did not get lucky and did so well in elections in a year or two. They had been at this anti-corruption movement for about a decade. From Anna Hazare to Arvind Kejriwal, they have persisted with their idea of cleaning the system. Real Estate sector demands that kind of perseverance to truly achieve results. Policy makers will not change over-night and bring in transparent systems of project approvals, financing, taxes, etc. One has to persevere and put pressure on the system continuously by leveraging the support of media, and customers.

Have any Questions?

Thursday, December 5, 2013

What is the Return on Your Investment? Find the detailed analysis of returns on Gold, Silver, Property, Stocks, Bonds in India!

Author: Sachin Gupta | Find me on Twitter

Have any Questions?

Monday, December 2, 2013

Housing Prices in India and price appreciation trends across different cities

Author: Sachin Gupta | Find me on Twitter

How does one justify his/her returns on investment? Simply, by comparing the price point at which they bought and the current/latest price point. Until recently, justifying one’s return on residential property investment was difficult due to lack of credible data. However, now, one can get sense of housing prices appreciation across different cities in India and micro-markets within a particular city. The data is assembled by the team of National Housing Bank and can prove to be very useful for people looking to invest in housing across India.

Here is a trend for housing prices appreciation till quarter July-Sept 2013.

Following point should be kept in mind:
The above chart shows the housing price appreciation across various quarters in different cities. For example, in Faridabad, housing prices have doubled from 2007 to Sept 2013. While in Patna, housing prices have appreciated 1.5 times from 2007 to Sept 2013. However, it does not suggest that housing prices were same in 2007 in these cities.


  1. Chennai has witnessed the highest housing price appreciation across India with prices increasing about 3.18 times from 2007 to Sept 2013. Within Chennai Ayanavaram; Purasawalkam; Kolathur; Virugambakkam; Anna Nagar; Kilpauk; Nungambakkam registered maximum appreciation of more than 6 times within the same period. While, Chetpet; Egmore saw the lowest price appreciation of about 1.8 times during the same period.
  2. Housing prices in Hyderabad and Kochi have depreciated from 2007 to Sept 2013. However, certain micro markets in Hyderabad such as Shamshabad; Kapra, Uppal Kalan, L.B.Nagar have seen slight appreciation during the same period.
  3. Faridabad housing prices have appreciated almost twice during the period 2007 to Sept 2013. Maximum price appreciation of 2.34X have been witnessed in the Neharpar region of Sector -75, Sector -76, Sector -83, Sector - 85, Sector – 86.
  4. Patna has seen price appreciation of 1.50X during the 2007 – Sept 2013 period. Kankar Bagh; Phoolwari; Bailey Road (New); Gola Road in Patna have appreciated by 1.71X during the same period.
  5. Ahmedabad and Lucknow have appreciated 1.91X in this period. Bhadra, Dudheswar, Gaikwad Haveli, Girdhar Nagar, Wadigam in Ahmedabd saw price appreciation of 3.45X during the period 2007 – Sept 2013. While in Lucknow micro markets such as Malviya Nagar; Tilak Nagar; Rajendra Nagar; Raja Ji Puram;Aish Bagh; Raja Bazaar; Sarojni Nagar Pratham; Hind Nagar; Sharda Nagar; Om Nagar; Chitra Gupt Nagar witnessed maximum price appreciation of 2.22X.
  6. Housing prices in Jaipur and Bangalore have remained static during the period of 2007 – Sept 2013. However Lavelle Road in Bangalore has appreciated tremendously by 2.61X during the same period. While in Jaipur Agra Road has seen maximum appreciation of about 2.64X in the same period.
  7. Pune and Bhopal appreciated by about 2.20X from 2007 – Sept 2013. Kharadi; Hinjewadi; Thergaon; Chinchwad; Baner; Yerwada; Wakad; Pimple Saudagar; Chakan in Pune grew approximately by 3X during the same period. While in Bhopal maximum housing prices appreciation was seen in Koh – e- Fiza, Shyamala Hills.
  8. Housing prices in Kolkata grew by 2X from 2007 – Sept 2013. Rajpur Sonarpur; Barrackpur; Bidhan Nagar; Thakurpukur, Sorsona; Bhawanipur witnessed the most significant appreciation. While Rajarhat; Madhyam Gram; Chandan Nagar; Barahnagar grew at below average rate.
  9. Mumbai witnessed the price growth of 2.22X from 2007 – Sept 2013. Lower Parel, Matunga East, Mahim West grew at rapid rate of 3.71X during the same period. Vashi, Khar Garh Road, Pokaran Road 1 &2, Kalyan, Mira Road, Virar Vasai, Badlapur grew at below average rate.
  10. Delhi along with the NCR region grew at 1.90X from 2007 to Sept 2013. Dakshinpuri, Hari Nagar, Jahangir Puri, Jhilmil Colony, Sangam Vihar, Mangol Puri, Ghazipur Dairy, Khyala(I-III), Sriniwas Puri, Sultan Puri were the fastest growing sub-markets in Delhi.

Have any Questions?

Monday, November 25, 2013

Who are the private & public sector banks, and housing finance companies that offer home loans to customers in India?

Author: Sachin Gupta | Find me on Twitter

As we highlighted in our previous post about home loan that housing finance disbursed to individuals has grown at a rate of 20% year on year. It presents an opportunity to existing banks, and housing finance companies to develop new products in order to satiate this massive demand for home loan across India. At the same time, the sheer market size of housing finance sector presents new entrants the big opportunity to innovate and target specific customer segments within the housing finance market.

As on today, the need of long term finance for housing in the country is catered to by the following types of institutions:

  1. Financial Institutions
  2. Scheduled Commercial Banks
  3. Scheduled Cooperative Banks (Scheduled State Co-operative Banks, Scheduled District Co-op Banks and Urban Co-op Banks)
  4. Regional Rural Banks,
  5. Agriculture and Rural Development Banks
  6. Housing Finance Companies
  7. State Level Apex Co-operative Housing Finance Societies
  8. NBFCs/MFIs/SHGs have also been lending for housing though in a small way.

Here is a comprehensive list of these public and private sector banks, housing finance companies:

Have any Questions?

Wednesday, November 20, 2013

Why US like sub-prime (housing) crisis will not happen in India?

Author: Sachin Gupta | Find me on Twitter

If one were to observe the recent trends across real estate sector in India, he/she would realize that market is slow. Damn slow. From increasing unsold stock of housing units to slowdown in office space absorption across major cities in India, the trend has been depressing to say the least. Will it lead to price correction? Yes, we predict so, read "Real Estate Bubble in India" to get a sense.

However, question to be asked is “will prices fall so dramatically that it leads to US like sub-prime crisis”? And the answer is BIG ‘NO’. Why? Let us explore!

First of all what is a sub-prime crisis?

It was about 5 years ago, some of us were in business schools and the shocking news of Lehman Brothers going bust filled the classroom. Most of us were new to business jargon like ‘sub-prime’, ‘securitization of home loans’, ‘derivatives’ and therefore could not grasp the solid reasoning behind the banking crisis. However, as days passed by, we began to understand this better by discussing with professors; peers; and reading articles. One of the better anecdotes that explains US sub-prime (housing) crisis goes like this:

“Linda is the proprietor of a bar in the city. In order to increase sales, she decides to allow her loyal customers - most of whom are unemployed alcoholics - to drink now but pay later. She keeps track of the drinks consumed on a ledger (thereby granting the customers loans). Word gets around and as a result increasing numbers of customers flood into Linda's bar. Taking advantage of her customers' freedom from immediate payment constraints, Linda increases her prices for wine and beer, the most-consumed beverages. Her sales volume increases massively.

A young and dynamic customer service consultant at the local bank recognizes these customer debts as valuable future assets and increases Linda’s borrowing limit. He sees no reason for undue concern since he has the debts of the alcoholics as collateral. At the bank's corporate headquarters, expert bankers transform these customer assets into DRINKBONDS, ALKBONDS and PUKEBONDS. These securities are then traded on markets worldwide.

No one really understands what these abbreviations mean and how the securities are guaranteed. Nevertheless, as their prices continuously climb, the securities become top-selling items.

One day, although the prices are still climbing, a risk manager (subsequently of course fired due to his negativity) of the bank decides that slowly the time has come to demand payment of the debts incurred by the drinkers at Linda's bar. However they cannot pay back the debts. Linda cannot fulfill her loan obligations and claims bankruptcy.

DRINKBOND and ALKBOND drop in price by 95%. PUKEBOND performs better, stabilizing in price after dropping by 80%.

The suppliers of Linda's bar, having granted her generous payment due dates and having invested in the securities are faced with a new situation. Her wine supplier claims bankruptcy, her beer supplier is taken over by a competitor.

The bank is saved by the Government following dramatic round-the-clock consultations by leaders from the governing political parties (and vested interests). The funds required for this purpose are obtained by a tax levied on the non-drinkers”.

Well, simply, replace unemployed alcoholics by home loan seekers, Linda with a housing company, and throw in a mortgage company and investment banks with all their financial engineering skills. And what you had was major financial crisis.

Why can’t it happen in India?

Reason 1: Black money
Yes, it’s actually true that no matter how much we curse the existence of black money into the real estate sector, but it actually won’t allow a sub-prime (housing) crisis to happen in India. In US, banks started to lend 100% of home value at lower rates in initial years (known as teaser loans in India) to borrowers and this led to default when home prices fell. However, in India, even if a bank lend 100% of home value to its borrowers, a borrower will still have to pool in the equal amount of cash to buy the house at market value. 

For example:
A housing deal takes place between a buyer and seller and the market price is Rs 80 Lacs. However, as per the government circle rates, the home value on paper is 35 Lacs. Due to high stamp duty charges, the buyer will not report the actual value of Rs 80 Lacs to the registrar office. And the seller will not report the actual value of 80 Lacs in order to save on capital gains taxes. Therefore, what we get is a property which is worth Rs 80 Lacs, is actually registered at Rs 35 Lacs. The remaining 45 Lacs is paid in cash by the buyer to the seller. So, even if the buyer’s bank offered 100% of home value which is 35 Lacs on paper, the remaining 45 Lacs is arranged by the buyer. And who on earth would walk away from this home where he/she has invested 45 Lacs of their cash even if the home prices dip.

Reason 2: RBI Policies
Reserve Bank of India (RBI) has put in place certain policy measures which until a few years ago looked conservative to many people. But these very measures will not allow the Indian banking system to lend aggressively and these measures are:
  • In India Banks provide home loans for about 70-80% of property value. The remaining 20-30% has to be arranged by the buyer. Whereas, in US this norm was relaxed and banks began giving loans equal to the entire value of the house.
  • In India, banks check the credit worthiness of the borrowers and lend only to people who have income records and have the capacity to pay EMIs. Whereas in US, home loans were granted to people with no documented income, job or assets. 
  • In US, banks came up with teaser loans (interest rates are low in initial 4-5 years and then are aligned to market rates). Borrowers were happy to get home loans at sub-prime rates; however, they found EMIs too hard to pay as soon as the interest rates were realigned to market rates. And they simply walked away. In India, the concept of teaser loans is not allowed.
  • Non-recourse debt in US. This kind of debt is secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable. If the borrower defaults, the lender/issuer can seize the collateral, but the lender's recovery is limited to the collateral. However, in India, the borrower is personally liable. In other words, banks can seize his/her other assets to recover their claim.

Add to these above reasons, the fundamental issues of housing shortage and emotional attachment of owning a home will make sure that housing sub-prime crisis will not happen in India.

In a nutshell:

Have any Questions?

Thursday, November 14, 2013

What are the lessons that we as buyers can learn from Campa Cola fiasco in Mumbai?

Author: Sachin Gupta | Find me on Twitter

Campa Cola is in news and thankfully Supreme Court has stayed the Campa cola society demolition. The next hearing is on November 19, 2013. But what went wrong? The society was built in 1980s and the plan for 9 buildings of 5 floors was sanctioned. However, rules were flouted and only 7 buildings were constructed. 4 of those buildings were of 6 floors, 2 buildings of 20 floors, and 1 building of 17 floors. BMC seeks to demolish these buildings in order to set a precedent that such unauthorized construction will not be tolerated. BMC and the residents are against each other for last decade or so. One can surely ask BMC a question, why the hell did you allow the construction of these apartments in first place? And why didn’t you penalize the builders then and there? We can ask many such questions to BMC, and maybe the local politicians.

However, we will focus our attention on buyers in this post. We need to learn the lesson and learn it quickly. The primary lesson that we as buyers can learn is to be demanding, to be an extrovert property buyer, and asking questions. At the end of the day, you are going to invest your lifelong savings and none of us want to go through the pain that Campa cola residents have gone through. So, what are the things which we should be vary of before investing in a residential project? We have put together a comprehensive list and it surely does make sense to ask these questions from the real estate developer.

Have any Questions?

Thursday, November 7, 2013

Market for Office Space in Gurgaon and analysis of micro markets such as MG Road, Sohna Road, NH-8, Golf Course Road, Udyog Vihar, Cyber City, IMT Manesar

Author: Sachin Gupta | Find me on Twitter

Delhi NCR region comprises of the national capital Delhi, and satellite towns of Gurgaon, Noida, Faridabad, Ghaziabad, and Greater Noida. Among all the cities, Gurgaon has truly become the millennium city. Ever since Maruti set-up their base in the city and subsequent turn of events with back office services company such as Genpact started their operation from here, the city has never looked back. Many auto ancillaries, IT, ITES companies have set-up their office and manufacturing facilities here. This has led to real estate boom for residential and commercial real estate alike. Companies continue to lease office space in Gurgaon and it is no surprise that Gurgaon leads the way for commercial real estate development in Delhi NCR region.

Here is an overview of some of the office space micro markets in Gurgaon:

Udyog Vihar and IMT Manesar offers space for office space and industrial units and have been developed by HSIIDC (Haryana State Industrial & Infrastructure Development Corporation LTD). The other office space micro markets such as MG Road, Sohna Road, Cyber City, Golf Course Road and Golf Course Extension Road, NH-8 have been developed by private property developers in Gurgaon.

Some of the most prominent real estate developers in these micro markets are:

The rental and capital values differ in these micro markets on account of proximity to Delhi, age of property, presence of social infrastructure, and connectivity.

Companies looking to buy or lease office space in Gurgaon will have to pay highest rental/capital amount for micro market of MG Road, whereas IMT Manesar offers lowest value.

Overall, the office space absorption in 2013 across entire Delhi NCR region has fallen substantially which has put pressure on rental and capital values.

Have any Questions?

Tuesday, November 5, 2013

How to calculate EMIs, Home Loan payments, home affordability, pre-payment of a loan in Microsoft Excel?

Author: Sachin Gupta | Find me on Twitter

Many a times, we have been inundated with queries such as how to calculate the Equated Monthly Installments (EMIs), what is the formula for checking the home affordability, what amount will I have to pay if I pre pay my home loan? These are basic yet important questions and therefore, understanding these concepts is crucial for real estate investment. Here we present the formulas in Microsoft Excel for you to calculate EMIs, Interest payments, home affordability, pre payment, changing the loan tenure.

Equated Monthly Installments (EMIs):
As the name suggests, EMIs are the monthly payments you will make for loan against property or any other thing.

Here is an example:
Loan Amount (Rs) - 100000
Interest Rate (%) - 11
Loan Tenure (Years) - 20

EMI (Rs) - 1032
Total Interest Payable (Rs) - 147725
Total of Payments (Principal + Interest) (Rs) - 247725

The formula for calculating EMI in excel is given below:
=PMT(rate, nper, pv, [fv], [type])
Rate = Interest Rate in percent, nper=Loan tenure in months, pv=present value or principal amount, fv=future value

During the EMI Calculations, leave out ‘fv’ and ‘type’ and fill in the other values.
=PMT((Interest Rate/12)%, Loan Tenure*12,- Loan Amount)
=PMT((11/12)%, 20*12,- 100000)
EMI = Rs. 1032

In this calculation, we divide interest rate by 12 to arrive at the monthly interest charged.

Interest that is paid on each EMI:
=IPMT(rate, per, nper, pv, [fv], [type])
IPMT – Interest paid for a given EMI
Rate – rate of interest
Per - The month for which you want to find the interest and must be in the range 1 to nper.
Nper- total number of months
Pv – present value or principal amount
Fv- future value
Type- optional

=IPMT((11/12)%, 1, 240, -100000)
=Rs. 916.67 (It means, on your first EMI of Rs 1032, the interest paid will be Rs 916.67)

=IPMT((11/12)%, 240, 240, -100000)
=Rs. 9.38 (It means, on your 240th EMI of Rs 1032, the interest paid will be Rs 9.38)

=IPMT((11/12)%, 200, 240, -100000)
=Rs. 322.15 (It means, on your 200th EMI of Rs 1032, the interest paid will be Rs 322.15)

Similarly, you can calculate for other monthly EMIs by just changing the ‘per’ value from 1 to 240

Total Interest paid during the tenure of the loan:
=CUMIPMT(rate, nper, pv, start_period, end_period, type)
=CUMIPMT((11/12)%, 240, 100000, 1, 240, 0)
=(Rs. 147725.21)

In our example, start period is 1 and end period is 240. You can also calculate the total interest paid say for a period of 13 to 228. In other words, how much interest did you pay from second year on-wards up to the end of 19th year.

=CUMIPMT((11/12)%, 240, 100000, 13, 228, 0)
=(Rs. 136089.79)

Home Affordability:
Home affordability is the measure of the value of the home that you can afford given your current household income. Detailed analysis of home affordability is given here.

Pre Payment or changing the tenure of the loan:
Suppose, you secured a home loan of Rs 100000 in 2008 and have paid 60 EMIs thus far. You have now decided to pre pay your entire loan amount. What will be the value that you will have to pay now? Here is the answer:
=IPMT(rate, per, nper, pv, [fv], [type])/rate
=IPMT((11/12)%, 61, 240, -100000)/ (11/12)%
=(Rs. 90813.93)

Similarly, you can calculate for any period. Say, for example, you have paid 88 EMIs and now want to pre pay the loan amount. Just replace the value of ‘per’ to 89 from 61.
=IPMT((11/12)%, 89, 240, -100000)/ (11/12)%
=(Rs. 84471.24)

Having arrived at the loan balance using the above formula, you can either pre pay the entire balance amount or reduce the tenure of the loan to arrive at new EMIs using the payment formula.
=PMT(rate, nper, pv, [fv], [type])


Have any Questions?

Saturday, November 2, 2013

What should I do if the builder has delayed the housing project or the delivery is not as stated in the builder buyer agreement?

Author: Sachin Gupta | Find me on Twitter

Hello, and very warm greetings for Diwali. During the past one week, our team spent time meeting with some of the customers, readers, real estate consultants. During our interaction with customers, we noticed that most of them were frustrated with the construction progress of their homes which they have booked with real estate developers. Recently, a study published by PropEquity also showed the fact that construction progress is slow and many a residential projects will be delayed considerably.

As we write this on Diwali, a festival of light and happiness, we believe, there is no point in getting frustrated with housing project delays or any other housing related issues. In fact, you should take solid steps to overcome your housing related challenges. We list few of them here:

1. Read the document carefully:
That’s right, even though you should have read the document carefully before signing the builder buyer agreement. You can still do it, read it now carefully. And look for penalty clauses which are stated in the agreement. Approach your developer and ask for the compensation as stated in the builder buyer agreement. Even though, this compensation will be pittance relative to what you would be paying to banks in form of EMIs. Still, claim it.

Also do not forget to check if there are any deviations in the project layout, project plan, size of the apartment, specifications, amenities, etc. If there are any deviations in any of these from what was stated in the builder buyer agreement then approach your builder and discuss the things in detail. Ask for compensation wherever applicable. If possible, take the help of your legal associates.

2. Form a group with other buyers:
Yes, you read it right. You are not the only one sailing in this boat. Visit the construction site on a regular basis and interact with other buyers who are visiting the site. Make a group and discuss the common issues and approach the builder. There is no better way of putting pressure on the developer than a group of buyers coming together. As a group, you can explore various options such as cancellation, shifting to other housing projects by the same developer which is nearing completion, legal action, etc.

3. Rate and review the project:
Now that you have thorough understanding of the real estate sector and ways of working of the property developers, share this with prospective buyers. You can easily rate and review your project at www.nirrtigo.com and alert the prospective buyers of the positives and negatives of a particular developer. Just like, you would like to read reviews for things such as cars, phones, etc. others are also interested in taking tips from you about the housing projects, real estate developers, etc. So, go for it.

4. Use social media:
Social media has enabled all of us in voicing our opinions and most brands whether big or small are always conscious of the fact that social media can make or break their position in the industry. Whatever you do, from forming groups to reviewing projects, keep sharing it on popular social media such as Facebook, Twitter, blog, and LinkedIn. In fact, you can always look to form groups on these social media channels as well.

5. Approach the relevant authority:
Once, you have a group of people who are facing the similar set of challenges as you. It makes sense to approach the relevant government authority. And recently, government of India has set up a Real Estate Regulatory Authority to protect consumer interests. Approach the authority for speedy adjudication of your disputes with the real estate developer.

Above all, be calm and keep discussing the issues within the group. With so many avenues for you to take recourse to, we are quite sure that you will be able to resolve your housing issues. Good luck!

Have any Questions?

Tuesday, October 29, 2013

How does the new Real Estate Regulatory Bill in India help me? What impact will this bill have on real estate sector in India? And what are its shortcomings...

Author: Sachin Gupta | Find me on Twitter

In June 2013, Government of India brought in Real Estate Regulatory Bill to provide for a uniform regulatory environment, to protect consumer interests, help speedy adjudication of disputes and ensure orderly growth of the real estate sector and has been much awaited by all aspiring home buyers.

The Real Estate (Regulation and Development) Bill, 2013 is a pioneering initiative to protect the interest of consumers, to promote fair play in real estate transactions and to ensure timely execution of projects.

The Bill focuses on 3 principle parties namely, the real estate developer, the buyer, and the regulator.

What does the Bill intend to provide in nutshell?

  1. Introduction of the concept of using only ‘carpet area’ for sale which has till now been ambiguously sold as super area, super built up area etc.
  2. Register real estate agents which have hitherto been un-regulated, with clear responsibilities.
  3. Promoters (Builders) to register all projects, prior to sale; and only after having received all Approvals from development/municipal authorities and functions.
  4. Real Estate Authority(s) and Appellate Tribunal in the States, to enforce accountability norms for the promoter buyer and the real estate agents.
  5. Timely completion of projects, and prevent fund diversion.
  6. Speedy and specialized adjudication mechanism to settle disputes between the promoter, buyer and real estate agents.
  7. Developers or builders have to put aside 70 per cent of the proceeds of a particular project in a separate bank account which will help to fund the project and in timely delivery.

Well, in its present form the bill appears to be a "Real Estate Thana" and every wrong doing by real estate developer can be reported in this "Thana" and necessary action will be taken as per the Bill's guidelines. However, we all know, how long and tedious it gets to get justice from "Police Thanas". So, let’s wait and watch what action or justice comes out from this new "Real Estate Thana".

Make no mistake, even though the bill falls short on policy front...yet it could prove to be helpful for buyers. However, the bill would have served the larger purpose if it were to encourage people including builders, buyers, and government agencies to do right things instead of taking action when something wrong has been committed. Lets explore...

What is needed?
We need environment ministry, income tax authorities, revenue department to work in tandem with Real Estate Regulatory Authority to provide clearances, keep a check on fair practices, and study the real estate market regularly.

  1. The idea is to have a single window clearance mechanism wherein real estate developers submit their plans for approvals and the regulator approves or disapprove the same. It is estimated that, this alone can reduce the cost of housing by about 20%. Phew…
  2. Income tax department to check who is buying the property from developers. In other words, it should be made mandatory by law for real estate developers to disclose the buyer details. This will ensure true demand for the housing and keep away speculators. After all housing is a need first and then investment vehicle.
  3. Revenue department to study the real estate and housing market carefully and then levy stamp duty. It is widely believed that reducing stamp duty and registration charges will encourage buyer and seller to report the market value of property instead of the circle rate value. Thereby, eliminating cash from resale market.
  4. Environment ministry to provide timely and consistent environment clearances with regards to water, natural resources, forestation, etc.
  5. Land acquisition department to ensure that land has been acquired as per the governing law.

Well, we do not live in an ideal world and let's hope slowly but surely, the role of real estate regulator evolves and we have an act that promotes fair practices on part of all the concerned parties involved.


Have any Questions?

Saturday, October 19, 2013

Grave injustice - The BMC is wrong to target flat owners of Campa Cola Compund Worli instead of builders

Grave injustice!

The BMC is wrong to target flat owners instead of builders

To right a wrong is justice. But when that involves punishing the innocent and rewarding the culprits, justice is not served. Yet, the residents of the Campa Cola compound in Worli, Mumbai, face a very similar situation.
To summarize, about 60 years ago, in 1955, the BMC leased 17,901 sq mt to Pure Drinks Ltd, which then converted 13,409 sq mt of the entire plot into a residential zone, and gave the development rights to PSB construction, Yusuf Patel and B.K. Gupta. In 1983, their plans to build nine buildings of five floors each were sanctioned. However, the builders eventually constructed seven high-rise buildings from 1981 to 1989. While four of the buildings are limited to about six storeys, two towers of 20 floors and 17 floors were also constructed. This despite the fact that the BMC issued several stop work notices and a penalty in 1986. Or as the Supreme Court states in its judgment, “It is a different story that after issuing a ‘stop work notice’, the authorities of the Corporation buckled under pressure from the developers/builders and turned a blind eye to the illegal constructions made between 1984 and 1989.” So the builders built, sold and gave possession of all the flats, without an occupation certificate (OC) and hid material facts such as the lack of BMC approval, the sanctions, stop work notices, etc. Nor did the builders execute a conveyance to the buyers.

A review of the facts suggest that had some of the buildings not appealed to the Bombay High Court for a water connection, this case would probably  have never come to where it is today. The BMC, instead of providing a water connection to the other  buildings, issued a demolition notice, stating that the original sanctioned plan allowed for only five floors. The demolition notices cover an area of approximately 8,000 sq mt. Yet, a 2010 order by the chief minister’s office states that the area beyond the permissible FSI limit in this case is only 1,774 sq mt. And if that wasn’t odd enough, the Supreme Court has upheld both – the BMC’s demolition notices and the chief minister’s order! Which begs the question – how can the BMC demolish 8,000 sq mt when the Supreme Court has agreed that only 1,774 sq mt is illegal?

But this case is not just about legal discrepancies. There are much larger issues at stake. The BMC seeks to demolish these buildings in order to set a precedent that such unauthorized construction will not be tolerated. In doing so, it harms 102 flat owners, and over 200 innocent families. Demolishing these buildings serves no purpose other than an empty chest thumping in the name of making an example of unscrupulous builders, and worse, rewarding Pure Drinks with the FSI that will result from the broken flats. Nor does the BMC seek any punishment for the builders, the actual lawbreakers.

In another twist to the case, Pure Drinks sold the remaining, undeveloped parcel of land to Krishna Developers, who sought to develop the property. But the plot remains undivided as per BMC records and due to the ongoing issues, the builder has been unable to construct as planned. Many residents allege that the builder is hand in glove with the BMC to destroy the 8,000 sq mt, and buy out the remaining five floors to ensure a large, prime piece of real estate for the builder and his backers, while the current residents, many old and infirm would be out on the streets.

It is also rather unimaginable, how the BMC plans to demolish over 15 floors of a building while leaving the remaining five intact, without any harm to their foundation or structure? By the BMC’s own admission, there are over 65,000 illegal structures in Mumbai. Experts believe that number is actually far greater. Then why is the BMC hell bent on singling out this group of residents, when it can  easily charge them a penalty, destroy a much smaller part of it, regularize it and make it legal?

BMC supporters allege that the residents are at fault for buying an apartment without an oc. But in a city like Mumbai, it wouldn’t be an exaggeration to say that over 30 per cent of all apartment owners must lack an OC. Besides, at a time when most people buy an apartment before it has even been constructed, there is no choice but to rely on the builder and hope that the plans have been approved by the BMC. To set a precedent that builders will go unpunished, and buyers will be homeless is devoid of compassion, but most importantly, logic.

Courtesy: Business India

Wednesday, October 16, 2013

What are the various kinds of taxes and charges you have to pay when buying a property, residential plot, or apartment in India?

Author: Sachin Gupta | Find me on Twitter

Ok, you have finalized your property; i.e. residential plot or an apartment. Now what? Well, in addition to paying the property price, there are other charges which are incurred and are broadly categorized as follows:

  1. Transaction charges
  2. Stamp duty and registration charges
  3. Service tax
  4. Value Added Tax (VAT)
  5. Capital gains tax to be borne out by the seller for a resale transaction

Transaction charges:
Transaction charges are those that are spent in availing the services of property broker. In case, you are buying an under construction property from real estate developer, then transaction charges are Nil. However, if you are buying the property from resale market such as a residential plot or a completed apartment, you will be paying the brokerage fee which is equivalent to 1% of the property value.

Stamp Duty and Registration Charges:
Real Estate Stamp duty is a type of tax accumulation by the Government of India. Stamp duty is established on the agreement value or on the market value whichever is greater.

For other states across India, click stamp duty and registration charges in India

The procedure also includes a registration fee for properties costing more than Rs. 30,000, which is fixed at 1% of the market value or the agreement value, whichever is higher.

Service Tax:
Service tax is applicable for under-construction property. In other words, if you are buying in an under construction project (apartment, flat, villa, etc.) from real estate developer, then you will be liable for service tax on property price. 

Service tax under composition scheme stands at 3.71% of property price.

Value Added Tax (VAT):
Recently, supreme court of India ruling states that the sale of an under construction property would be liable to VAT. It is likely that real estate builders will pass on this additional VAT on buyers. The VAT under composition scheme stands at 3% of property price.

Here is an example showing different charges for buying an apartment in Gurgaon, Haryana.

So the question to be asked is, if you would like to purchase an under construction property or completed one? While, in an under-construction property you will pay as per the construction plan whereas in a completed project the entire amount is payable within mutually agreed upon time period of 2-3 months.

In an under-construction property, you can make payment through cheque (white) whereas for a completed property you will end up paying by cheque and cash (black). The amount of money you pay by cash is dependent on the market value of the property minus the value of property as per the government circle rate. Why do a seller prefer cash component? Well, to save on capital gain taxes which stand at 20%.

Now, that you have a bit of information about various charges and taxes in property transaction. You decide J

Have any Questions?

Saturday, October 12, 2013

Selling tricks used by real estate developers and how to avoid them

Author: Sachin Gupta | Find me on Twitter

Greetings of the start of the festive season in India  Happy Navratri 2013!

With festive season around, the spirits are high. Most of us buy big ticket items during this time of the year. The big ticket items may vary from buying a house, car, gold, etc. It is also that time of the year in India when marketers will come up with sale offers; discount offers to lure customers in making a purchase decision.

However, buying a home is a lifelong commitment and you will be paying EMIs for several years and therefore don’t fall in the trap of these discounts, offers, schemes, etc. Instead, you should do your due-diligence so that you do not repent later.

We have put together a list of 9 things that the sales executive of a real estate developer will throw at you in order to close the deal. Make sure to research all these 9 things just like this smart buyer has 

So, Are you a smart buyer???

Have any Questions?

Friday, October 11, 2013

Land Development Process in India

Author: Sachin Gupta | Find me on Twitter

Land development:

  1. Acquisition of land with the intention of constructing utilities and surface improvements
  2. Reselling some or all of the developed sites to project developers or in case of housing to home builders.

Key criteria for land development business:

Before proceeding with the development, however, there must be evidence that the project is feasible or that market acceptance of the end-product (single family houses, offices, warehouses, etc.) is highly likely. This step is important even though the land developer may or may not be the developer of the final product. In other words, in the land development phase, the developer must anticipate and understand the demand for the final product (or products in the case of a mixed-use land development). For example, the economic drivers may alter the land use for residential, industrial, or for commercial developments such as Office Space in Gurgaon.

In residential land development, it is common to find firms specializing in the acquisition of raw land in suburban fringe areas and developing sites for single family detached units or for multiple uses, such as combinations of single family units, multifamily apartments and cluster housing.

Based on the market segment in which the end use will likely sell, the land developer
  1. Acquires land
  2. Develops a land use and traffic circulation plan
  3. Constructs streets, lighting, and subsurface improvements (utilities, drainage, sewage)
  4. The developer then subdivides individual sites, and sells smaller sites to builders and project developers.
  5. The developer may also retain some retail sites for later sale if the site has suitable highway frontage.
  6. The land developers usually stand ready to sell sites to other project developers as long as those project developers abide by the required development controls. These controls usually include construction of buildings of adequate quality, maintenance, landscaping, and so on. These controls are usually specified in deed restrictions and/or provisions in an agreement governing the operation of a business park owner’s association.
Important note: Land developers and builders or project developers may or may not be the same entities.

Feasibility study:
Many land development firms usually exist in a given urban market.
  1. They enter the market for raw land by contacting landowners or land brokers and obtaining information on tracts of land available for sale.
  2. These developers then engage consultants to conduct market studies to assess the demand for end use that would ultimately be developed and price ranges for each use.
  3. The developer then completes a preliminary land plan, estimates the land development cost, and analyzes whether the tract can be purchased and developed profitably.

General observation:

In many cases the developer is more of a facilitator of the development process than a firm that undertakes all necessary functions in the land development process. Many functions may be done by consulting firms (land planners, civil engineers, and landscape architects) and contractors (roads and utility construction companies). In these instances, the developer owns the land, obtains the necessary financing, and implements the overall development plan, but may not employ a staff that is directly involved in construction or design. The developer must also interact with public sector officials in obtaining various project approvals and changes in zoning when necessary, and then market sites to project developers and/or builders.

The land development process:
  • Acquisition of land – use of the option contract
The developer usually negotiates an option contract because it takes time to accomplish various tasks and activities prior to the decision to actually purchase the land. Some of these activities are:
Site inspection, preliminary market study, preliminary cost estimates, soil studies, engineering, feasibility, appraisal, and design strategy, bidding and/or negotiating with contractors, plan for public approvals, plan for financing.

Option periods can be very short (one month for small residential land development) or as long as 3 years or more (regional shopping centers)

  • Financing and development
When financing the land acquisition and development process, a number of structures may be available to the developer.
  1. The developer may purchase the land for cash. The developer may then obtain a loan for the cost of improvements and interest carry.
  2. The developer may purchase the land by making a down payment only. The seller finances all or a portion of the land sale by taking back a purchase-money mortgage from the developer. The developer then acquires a loan for improvements only. The seller of the land (mortgagee) agrees to subordinate the lien represented by the purchase-money mortgage to the development loan, and the developer repays the sellers’ mortgage from funds as parcels are sold and after payments on the development loan are made.
  3. The developer purchases the land by making a down payment and obtaining one loan based on a percentage of the appraised value of land plus improvements. The funds pay off the seller and construction improvements. 

An example showing the possible land development process in Haryana, India:

Land Development Process in Haryana
Land Development process in Haryana

Have any Questions?