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 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?