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.




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Thursday, December 19, 2013

What impact does interest rate have on the state of real estate sector in India?

Author: Sachin Gupta | Find me on Twitter

18th December 2013 was keenly watched by the markets and industries alike, particularly the real estate sector in India. RBI governor was to announce the monetary policy and interest rates hike was expected because of the stubbornly high inflation prevailing in the economy. However, to the surprise of all and sundry, Raghuram Rajan refrained from rate hike and brought smiles to the market and industry.

Commenting on the policy, Real estate major DLF Group Executive Director Rajeev Talwar said: "It's a welcome step. This is the first sign of recovery. If government can release food stocks to contain food-based inflation then possibly in coming time RBI may be able to take more steps for recovery of the economy. RBI governor has taken a bold step by keeping the rates flat." Most other real estate developers and consultants welcomed the step. So, what kind of impact can interest rate have on property sector in India, let’s explore.


  • Firstly, what are interest rates?

Consider an investment portfolio having investments in all productive activities in the economy based on their respective share of the economy to the total value of all productive activity in the economy, the rate of current earnings on such a portfolio would be equivalent to the real rate of interest. Such a rate would also be the rate required by economic units to save rather than consume from current income. This is also the minimum rate of interest that any investor, be it in realty sector, would least likely expect from their investments. Therefore, when RBI announces that Repo rate would stay unchanged at 7.75%, it was welcomed by the industry.


  • Relation to inflation:

In addition to the real rate of interest, a concern that all investors have when making investment decisions is how inflation will affect investment returns. Inflation in India is particularly high; however, of all the commodities which form the basis of calculating inflation, the food inflation has been highest. And RBI was worried about curbing the inflation which eats into returns on investments or future incomes. However, RBI’s view is that most of the concern for inflation is the supply side and having had excellent monsoon would probably bring the inflation down due to bumper crops. Therefore, Rajan refrained from raising interest rates.


  • Effect of interest rate on real estate supply:

Real estate supply is the addition of new stock of housing, office spaces, retail spaces, etc. to the market. Now, when a real estate developer decides to bring that supply to the market, he/she has to justify at-least the real rate of return on his/her investment. If the returns are low, investors would rather save their money than invest in realty projects. Therefore, when interest rates are low, it encourages builders to invest in real estate projects rather than save their money. At the same time, they can borrow funds from the market at lower rates and thereby cost of building real estate projects come down. Additionally, the debt servicing for the leading real estate developers come down and there is renewed excitement for all the real estate players. Financing real estate projects involves borrowing on a long-term or short-term basis. Because large amounts are usually borrowed for property development, financing costs are significant in amount and weigh heavily in the decision to develop real estate projects. Therefore, the lower the financing costs, the better it is for builders to bring new supply to the market.


  • Effect of interest rate on real estate demand:

The demand for housing or commercial property is generally determined by the population growth, household income, household preferences for other goods and investments, and the interest rate that must be paid to finance the loan. Now, an individual who is looking to invest in a property will certainly evaluate his/her financing costs and higher the financing costs, the less likely, that individual would be to refrain from investing in property. For example, an individual buys an apartment at Rs. 30 Lacs. He procures a loan of Rs. 20 Lacs for 20 years at 11%. The EMI or monthly payment will be Rs. 20643.77. However, as we noticed today, State Bank of India has recently reduced their lending rates. And even a drop of 50 basis points or 0.5% would bring down the EMIs from Rs. 20643.77 to Rs. 19967.60. Thereby, cost of financing goes down by Rs. 676.17 a month or Rs. 8114.04 a year. Hence, bringing interest rates down encourages buyers to invest in property.
































  • Desired Scenario:

Having the desired equilibrium between inflation and interest rates will lead to the growth of realty sector where both suppliers and consumers of real estate feel encouraged in participating.  And this will eventually lead to the overall growth of the Indian economy.


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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.



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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



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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.

Observations:

  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.




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