Monday, September 30, 2013

Are you a start-up or a growing organization? Find the checklist before you lease your next office space.

Author: Sachin Gupta | Find me on Twitter
Are you a start-up or growing organization? As a small company looking to bring new and innovative products and services to market, you want all your focus on the job at hand. You simply need no deviation from your core activities. While in large companies there is always a team to look into the non-core activities of a firm. The start-up can simply not afford it. The non-core activities include finding the right office space, manufacturing facility, admin tasks, and many such activities. Whereas the focus of a start-up is always on its products, customers, etc. However, there is no getting away from non-core activities.

Being a start-up ourselves, we understand how difficult is to perform these non-core activities within the constrained time and budget. Therefore, let’s start from the first step itself, i.e. finding your next office space. Make no mistake, having a right office space will not only allow you to focus on your core activities but at the same time it will help you to attract talent on your path to glory. So what are the things you as the founder of the start-up should keep in mind before going for office space hunting?

Tip 1 – Area Requirement:
Assess your current team size and the short term increase or decrease in team size. Let’s be clear, that most of the leases with landlord/developer will have a lock-in period of 3 years (it can be negotiated though). Therefore, having an eye on future expansion on team size will help you a great deal to justify the office space you lease for your operations. Having done that, now you need to calculate the area required. Our estimate based on the historical data assigns 80-100 Sq Ft per employee. Therefore, having a team of 10 should mean 800-1000 Sq Ft of carpet area requirement.

Tip 2 – Building efficiency:
It makes sense for you to look for office space buildings with greater efficiency. Now, what is building efficiency? Building efficiency is basically the ratio of usable (carpet) area to super area. In other words, higher the efficiency, the better is the space utilization in the building. Therefore, look for buildings with higher efficiency. For example, the building efficiency for Office Space in Gurgaon varies from 65-80%. Let’s take an example, having assessed your team size; you came to conclusion that you need 1000 Sq Ft of usable area. Now, for 80% building efficiency, the super area (the area on which you will pay rent) will be 1250 Sq Ft. And for 65% building efficiency, the super are will be 1540 Sq. Ft. It’s a no brainer that you will choose the building with 80% efficiency to cut on your monthly rent.

Tip 3 – Parking and Location:
Make sure to check for parking spaces available for your office space. As a standard practice, one parking is made available for every 1000 Sq Ft of area leased. One can also rent or buy the additional car space. If your business requires that your customers visit you frequently, it make sense to find the office space in a locality which is located in central business district, and is easily connected by road, metro, etc. And if you operate a back office call center, then location becomes irrelevant for office space set-up.

Tip 4 – verify other charges in addition to the rent:
Make sure to check the other charges in addition to the monthly rent. Typical charges include CAM (Common area maintenance, electricity, taxes, and lease registration charges). In Grade A buildings, CAM charges would typically be 12 to 16 Rs. / Sq Ft. Electricity charges will be as per actual. And taxes, lease registration charges vary from state to state.

Tip 5 – Read the lease documents carefully:
You would have heard of this phrase a many times “Read the documents carefully” :). Typically, a lease paper should comprise the parties to lease, lease date, lock-in period, minimum rent deposit (6 months, although it is again negotiable), lease term including the lease renewal options, rent appreciation format, CAM charges format, size of the area, and other legal clauses. For more about the lease document, Download "Points to remember before leasing your Office Space in Gurgaon"

Go through the process carefully, and all the best in building a great company!

Have any Questions?

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?

Friday, September 6, 2013

Start-ups and the challenges of finding the right Office Space

Sunday, September 1, 2013

Is it worthwhile to invest in Commercial real estate as compared to Residential Real Estate in India?

Author: Sachin Gupta | Find me on Twitter
People invest their money to achieve targeted rate of returns. Returns vary depending on the investment asset class such as stocks, gold, real estate, mutual funds, fixed deposits, etc. However, in India, majority of people invest their savings primarily into real estate and gold. There are two reasons for it, one – financial markets are complicated to understand and second – they invest in real estate and gold to hedge against inflation (knowingly or unknowingly).

Within real estate, there are various asset classes such as commercial office space, retail spaces, residential, warehouse, institutional, etc. However, about 80% of investment in real estate goes to residential asset class owning to its safe nature and demand from rising middle class.

However commercial real estate or income properties can yield better returns provided one has sufficient knowledge of the city, its expansion plans, industry base, and income levels of the people living in the city. The investor must consider many variables when acquiring income properties:

  1. Market Factors (Demand & Supply)
  2. Occupancy Rates
  3. Tax influences
  4. Level of risk
  5. Amount of debt financing
  6. Proper framework to measure return on investment

Motivations for investment:

  1. Rental income
  2. Capital appreciation
  3. Portfolio diversification
  4. Tax benefits

Understand before investing:

Because of highly competitive nature of the industry and its difficulty in forecasting demand, there are certain times when excess supply is unintentionally produced, thereby increasing vacancy rates, reducing rents, and causing volatility in property values. As an example, even though there may be a definite need for additional Office Space in Gurgaon, the potential for over-development will exist as each developer rushes to deliver additional space to the market before competitors. This phenomenon creates a cyclical pattern in real estate industry.

For example, if the demand for particular property type is less and supply is in excess, then occupancy level and rents will be lower. However, as the demand picks up, the property type will start recovering and occupancy levels and rents will move up.

On the contrary, if demand for particular property type is more and supply is less, then occupancy level and rents will be higher. However, as more space is developed, the property type will come into the balanced stage and occupancy level and rents will come down to optimum/normal stage.

The idea is to understand, what the demand for particular property type is and how much space is already available. As an example, the demand for IT Office Space in Gurgaon is high; however we need to measure the current available space and future developments.

Investment analysis:
In general, when we refer to investment analysis in real estate we are referring to analyzing a particular property to evaluate its investment potential. This analysis should also help answer other important questions: 
  1. Should the property be purchased? 
  2. How long should it be held? 
  3. How should it be financed? 
  4. What are the tax implications of owning the investment? 
  5. How risky is the investment? 
  6. Two key terms: Internal rate of return (IRR), Present value should be calculated

Have any Questions?