Friday, September 27, 2013

Stamp Duty & Property Registration Charges in India

Author: Sachin Gupta | Find me on Twitter
Real Estate has always been the priority asset class for majority of Indians to invest their lifelong savings. Whether one is investing for end-use or for investment purpose, he/she needs to take notice of various costs associated with real estate. Other than paying the market value of property in consideration, there are costs such as brokerage charges, insurance, taxes, and stamp duty & registration charges.

In this article, Stamp duty and registration charges are presented in Gurgaon, Noida, Mumbai, Bangalore, Chennai, Hyderabad, Kolkata, Pune, Ahmedabad, Faridabad, Delhi, Ghaziabad, Kochi, Jaipur, and other cities (states) in India.

Have any Questions?

Tuesday, September 24, 2013

Own an Office space property? How to make best use of it and generate maximum revenues?

Author: Sachin Gupta | Find me on Twitter
You chose office space property – why?

Many of us invest in real estate for hedge against inflation, wealth creation, and returns. Within real estate some of us have the propensity to take on higher risk and invest in commercial real estate. Now that you have invested with a reputed builder in a commercial real estate project and own an office space property. There are possibilities that you would have conducted your own due-diligence about the builder, its track record. During the construction phase, builder promised you assured returns and you were satisfied with the entire deal. Finally the construction has been completed and the office space property has been offered to you. Now what?

Now, you would like to either use the office space property for your own use or lease it out to other tenants. Either way, you would like to justify your investment for office space property. Hence income generated by leasing out the office space property will signify how successful has your investment been. If there is demand for office space, then income from leasing will justify your investment. However, if the property remains vacant for considerable period of time then the investment may turn out to be a burden. How can you as the owner of the office space property make best use it?

Enhance the property value

At any given point of time there will be supply of many similar office space properties in the market and user will have the option to choose from those options. For example, the market for Office Space in Gurgaon continues to remain upbeat. However, to stand out from the crowd, you can enhance the value of your property by following below presented tips:

  1. Make sure your builder has delivered on what was promised at the time of contract agreement including the super area, carpet area, and efficiency of the building. It is noticed that tenants prefer office spaces where building space utilization is high. This is to make sure that they are able to utilize majority of the space for their staff and minimum amount of space is lost for common areas such as reception, corridors, etc.
  2. Parking: Parking is a key consideration for tenants when occupying a particular office space. Make sure that parking space allotted for your office space is properly demarcated. If required, do not hesitate to buy or rent the additional parking space from the builder. 
  3. Facilities: Facilities such as power back-up, maintenance, and house-keeping enhances the value of entire premises and not just your individual office space property. Before taking possession, verify if these facilities are properly in place or not. In many cases, builder outsources the property management function to third parties. It is advisable to check the credentials of the property management company so that future disputes related to property management can be avoided.
  4. Form an association with other property owners and make sure that there is an easy entry and exit for people from the building premises. Nobody likes to visit the building that has bad entry and exit points.
  5. For your individual office space unit, check if the lifts are working properly.
  6. Go for fit-outs of your office space property and adjust the rent accordingly. There is likelihood that tenants will choose the ready to use office space as opposed to bare shell space. Negotiate for rent with tenants for your ready to move space.

Market it properly

Having made sure that your office space is in proper condition, it’s time to market it and generate qualified leads.  There are multitudes of channels to reach out to prospective tenants and one can choose among these channels based on his/her comfort.
  1. Spread the word that your office space is ready to occupy with all its features and unique selling points. Inform your friends, colleagues, relatives, and people within your network.
  2. Hire a professional real estate broker and again highlight the unique selling points of your property.
  3. Use internet and list your Office Space on property portals. Make sure, you advertise your property on a platform that is not too crowded and at the same time has the capability to bring leads to you. Provide latest pictures of your property and other unique points. Advertise Office Space here.

Due-diligence of tenants
  1. Financial statements/income statement – balance sheet
  2. Credit ratings (if available)
  3. Any analyst reports on the firm/industry
  4. Bank relationships
  5. Existing obligations (debt, other leases)

Closing the lease

Underwriting leases is a very important component of risk assessment, which ultimately affects the cash flow produced by the property and hence its value. There are varieties of terms in a lease document; therefore, it is advisable that you hire a professional agency or an advocate to complete this task successfully.

Have any Questions?

Tuesday, September 17, 2013

Real Estate Bubble in India! Will it bust and will property prices come down in India?

Author: Sachin Gupta | Find me on Twitter
On recent interaction of our team with broker’s community in Delhi NCR region, one can easily feel that the business is down on accounts of slow transactions. One of them even quipped, “If players such as DLF start launching 80:20 schemes you can understand”. One of us asked…but “why are prices still moving up”?

Well, our team discussed the scenario "will real estate prices fall”? Sales volumes are shrinking; government policies are not helping the sector either…so, will prices come down? Here are some of ideas we came up with which suggest “YES” prices will come down.

Why did prices appreciate so fast in recent years?
  • Favorable demographics
Well, we all know about favorable demographics theory and it still exists. It will continue to exist. The urban population is supposed to grow from 340 million in 2008 to 590 million in 2030. During the same period, the urban middle class households will rise from 22 million to 91 million. However, what we need to mention here is that this kind of urbanization needs affordable housing and not swanky villas and luxury apartments. We need apartments that can be provided for about Rs. 1 million in order to satiate this massive urbanization. Do we find anything within this budget? NO…unless the government policies, builders interests are aligned, we may never have the kind of affordable housing that we as a county require.
  • Shortage of housing
We all know there is a shortage of housing in India…or shall we say affordable housing. Till 2012, the housing shortage was estimated at 26.53 million. How can this huge gap be filled? Well, it isn’t going to be filled anytime soon because misaligned interest of government policies, lack of focus on affordable housing, and developers interests.
  • A move towards nuclear family
Families are getting nuclear and all of them require housing.
  • Easy credit
During those good old days of 2003-2008, credit was cheap and economy was growing. People borrowed at low interest rates and invested heavily in Property in India….primarily in residential asset class.
  • Increase in black money that needed to be parked
Government records suggest that there are only 35 million taxpayers, about 3% of the population. Out of which 1.5 million declare yearly earnings of more than 10 Lac rupees. Shall we believe this? NO.
Well, we all know businesses under-report their incomes to save on taxes. This unaccounted income now has to be parked somewhere and real estate is the place it is parked because of ability of real estate to absorb huge amount of cash.
  • RBI released excess liquidity into the economy during 2009-12
Post Lehman Brothers collapse, all major economies around the world provided stimulus to their economy to keep the investment and demand going. This excess liquidity through various channels ended up in Real Estate in India and prices were zooming.

Why would prices now come down?
  • High inflation and lack of affordable housing
What has changed now, that will bring prices down? Demographics, housing shortage, and formation of nuclear families are still prevalent fundamentals. True, but as we discussed, the need of the hour is affordable housing to fulfill this demand. However, as things stands “government is not in any hurry to fix the issue of affordable housing”. The Income levels have not kept pace with inflation, Supply of affordable housing projects is low, and lack of job growth has all put pressure on real estate and there are no takers now.
  • Elections coming up
Elections will further put pressure on realty sector. Real estate has been a parking place for unaccounted funds. The need for funds in upcoming Lok-Sabha and state elections will aggravate the outflow of money from this sector over the next 18 months.
  • Rising government subsidies
When government subsidies rise, it tightens the liquidity in the economy and cost of borrowing increases. Subsidies remain high and all attempts towards fiscal consolidation looks unrealistic. Today, subsidies account for 42% of gross fiscal deficit, exactly twice as many times a decade ago. Therefore, high rate of interest will further put pressure on real estate sector.
  • Exit of foreign funds
Foreign private equity funds invested over $20 billion into Indian real estate during 2006-13. After 7-8 years, these funds are reaching their end of term and, so, would have to sell their holdings. Again, this will put pressure on real estate sector and developer might be forced to lower the prices.

When would prices start depreciating?

We predict from November-December 2013 onwards, the prices might start to come down. With festive season of Diwali behind and an eye on elections, funds will move away from real estate sector and that is the time when one can expect price fall.

Have any Questions?

Sunday, September 8, 2013

Solutions for reducing the uninterrupted influx of black money into the real estate sector

Author: Sachin Gupta | Find me on Twitter
Talking to any common man on the street about real estate sector would draw animated conversations on how the sector is riddled with black money, corruption, and political maneuvering. In this section, we will focus on how the black money enters the real estate sector, its effects on economy, and ways to tackle it.

How black money enters the market?

1. Parking place:
Real estate has become the parking place for businesses to park their unaccounted cash in real estate particularly in residential real estate asset class. Most business houses, small or large, even though claims to be doing the business by rule of law but would under-report their profits to save on tax. And that under-reported income would land in the real estate sector which tends to raise the prices of real estate in a land scarce country like ours.

2. High rates of stamp duty and registration charges:
Stamp duty and registration charges account for 12.5 to 15% of property value in most states across the country. As an example, the property with market value of Rs. 1 Crore would elicit Rs. 12.5 to 15 Lacs for stamp duty and registration charges. However, the circle rates (or government decided rates) of property in most cities are much lower as compared to the market value of the property. There lies the incentive to under-report the true market value of the property to save on stamp duty and registration charges. The amount saved is paid in cash to the seller and that cash is again ploughed back into the real estate sector giving rise to a vicious circle leading to ridiculously exorbitant property prices.

3. Capital Gains Tax:
Most of us have observed the real estate deals wherein cash forms the significant part of whole deal. There are instances when cash constitutes as high as 75% of the total property value. Now, cash transactions are encouraged in real estate sector to save on capital gains tax which is 30% of the total gains. There is data available which suggests that more than 70% of that cash is again ploughed back into the real estate sector leading to rapid appreciation is real estate prices. The comprehensive knowledge of capital gains tax including exemption on profit from home sale can be found from following sources.
Capital gains tax exemption makes sale of house more profitable
Tax exemption on profit from home sale

Effects of black money

1. Unaffordable prices of property:
The entering of black money leads to irrational prices in real estate sector. In a country, where demand for affordable property is high and land supply is limited, the whole influx of black money spirals out the prices of property to a level which is almost unreachable for the middle class families. We all have seen how housing prices have multiplied in many cities across the country in the past decade and yet the rental prices haven’t kept the same pace of appreciation.

2. Negative impact on economy:
Real estate is an asset class where money is invested; it sits there and over a period of time produce capital value appreciation on account of true demand in a rational economy. However, when black money or the excess money enters the sector, it not only drives the property prices to irrational level but also leads to deviation of funds from productive sectors. This excess money which has been the subject of greed could have been invested in entrepreneurial ventures, business expansion plans, or if reported genuinely can be collected by government in the form of tax revenues. This would result in circulation of that money into the economy and subsequently expansion of economy creating more jobs, more demand, and production of goods and services.

Ways to eliminate the black money

1. Decrease of stamp duty and registration charges:
The reduction in stamp duty and registration charges can result in proper reporting of the true market value of the property. Even though, government revenues may get affected on account of reduced stamp duty and registration charges, it can however be compensated on accounts of capital gains tax.

2. Paying in Cheques:
We all have been inspired by Anna Hazare movement against corruption; however, we would do that cause a great justice by doing our bit when it comes to property transactions. What can we do? Well, quite simple, Stop paying or accepting in cash when it comes to property buying or selling. The simple yet practical step would reduce the entering of black money into the property sector and would drive away the speculators from entering the market to make quick bucks.

Have any Questions?