Monday, April 30, 2018

What are the major differences between Real Estate Venture Funds, Real Estate Investment Trusts (REIT), and Real Estate Mutual Funds?

Real estate investment from an individual’s point of view is a large investment wherein large amount of money (in Lacs, or in Crores) is required to purchase either a commercial or residential property. The money invested sits there in the asset and over a period of time capital gains are accrued by the investor. The capital gains thus accrued depend on supply demand equilibrium prevailing in the market. If property is available for use, the investor can use it for own purpose or rent it out to earn rental income. Thereby, investment in real estate can fetch twofold returns namely rental yields and capital gains.

However, only investors with deep pockets can afford to invest in real estate asset class. What about retail investors with small amount of money? Can’t they invest in real estate just like they invest in stock markets? Yes, they can by way of participating in either Real Estate Investment Trusts (REIT) or Real Estate Mutual Funds (REMF).  Read more about Real Estate Investment Trust.

Find below the major instruments that can be used by investors to invest in real estate without actually buying a Property:

  • Real Estate Venture Funds

Investment Audience: HNIs, institutional investors and global investors (since minimum investment required by each investor is worth millions, retail investors are outside the purview)

Investment Target: Real Estate Assets (Projects/Ventures), securities (of listed/unlisted entities) or both.

Investment Returns: 25-30% (on an average)

Leading Entities: Indian players (such as Kotak, HDFC, ICICI, Kshitij, DHFL) and international players (such as Actis, Morgan Stanley, Maple Tree, Sun Apollo, Lehman Brothers etc).

  • Real Estate Investment Trusts REITs

Overview: Close ended investment vehicles that invest only in real estate assets (through property or mortgages). It is floated as a company with issued share capital. ( REITs are structured as corporations with issued share capital)

Investment Audience: Retail as well other institutional investors

Investment Target: Real Estate assets only (either through mortgages or property). It invests primarily in ready to use, constructed properties only.

Investment Returns: Returns in the range of 10-15% annually from rental income of property owned by REIT.

  • Real Estate Mutual Funds REMFs

Overview: Close ended funds that invests primarily in securities issued by real estate companies (and to some extent assets as well).

Investment Audience: Retail as well other institutional investors

Investment Target: As per SEBI guidelines, at least 75% of the total assets should be invested in real estate or related securities. Further, a mandatory 35% of assets within the stipulated 75% have to be invested in completed real estate assets. The remaining 25% can be invested in securities related or unrelated to the real estate sector.

Investment Returns: Expected returns in the range of 35% (largely capital gains through investment in securities or sale of assets at time of closure).

Saturday, April 21, 2018

Looking to rent your house or lease your property? Follow these steps to make sure your property is safe and the tenant follows the lease agreement.

Author: Sachin Gupta | Find me on Twitter

Leasing or renting out your property is a demanding job. Not only you need to maintain the property but at the same time you need to be careful in choosing the right tenant with good financials who can pay the monthly rent and other expenses on time.  There have been instances when tenant has refused to vacate the property even after the termination of rental agreement. Because of this, there is certain percentage of landlords who avoid renting out their property to prospective tenants. And it puts the pressure on housing market because on one hand there is demand for housing but rental market is not sufficiently catering to that demand. And therefore capital values of housing stock increases at a rapid rate. Had there been proper laws with respect to safeguarding the interest of landlords, the supply which would have then come into the market would have considerably eased the capital values.

The laws on landlord and tenants in India are outdated and needs complete reforms. However, the central government is encouraging local state governments to amend these laws to encourage investments in housing and construction sector. How fast will states in India will move to abolish its old system is still to be known.

In this environment, how can you as the landlord of residential property or commercial property such as office space, shops or warehouse lease/rent your property? We list down the steps which you should take before leasing or renting out your property:

  • Background checks

First thing first! Since you are renting your property to a prospective tenant, make sure to check his/her background by asking tenant to provide a reference certificate from a colleague/friend or co-worker. At the same time, find out about tenant’s previous landlords and talk to at least one of them. Ask for tenant’s permanent address as well and permanent address can be known by asking tenant to show 2 photo ID cards such as a passport and driving license or a voter card. In most cases, these 2 photo ID cards will have the same permanent address.

  • Police verification

As per the law, these days tenant verification at a local police station is required for landlords. Do not ignore this verification process before you rent out your property. This is a punishable offence under Section 188 of the Indian Penal Code.

  • Solid Lease agreement

Prepare a lease agreement which safeguards your interests and you should have the following in a typical lease agreement:
    • Basic clauses
A typical lease agreement must list the parties to the agreement at a specified date, namely you and the tenant, along with the address of the property which is being leased out. In the basic clause, you should also state the lease term including the time length for which agreement is being made, renewal option, and rent appreciation method. The expenses such as electricity, gas, water bill, maintenance charges should also be mentioned clearly in the basic clause of a lease agreement.

    • Security deposit clause
Your lease agreement should require the tenant to put up a security deposit equivalent to one month rent or more depending on the negotiation. The security deposits vary for commercial and residential properties. The security deposits also vary from state to state in India. For example, in Bangalore, for residential property, tenant pays 10 months’ rent as security deposit whereas in Delhi NCR the security deposit is about 2-3 months’ rent. For commercial property, the standard security deposit is around 6 months. Make sure that security deposits clause is clearly defined within the lease agreement.

    • Maintenance of the property
The lease should tell the tenant that he is required to properly maintain the property. If you are renting out a furnished property, make a check list of the items which are being provided as part of the property such as furniture, appliances, etc.  Include this checklist in the lease agreement as an appendix. Whatever, you want from your tenant as part of his/her responsibilities, make sure it is part of lease and is not just conveyed orally. The maintenance clause should be included in the lease agreement because if a tenant leaves the property in bad shape then leasing the property again might become difficult or else you would have to spend considerable amount of money to make the property rent-able again. The idea is to make sure that tenant gives you the property back in same shape as you handed over to him/her.

    • Concealed defects and responsibility for fixing it
If there is something that needs to be fixed in the property in coming 2-3 months, then clearly tell this to tenant. For example, if the roof of the property needs to be fixed in 6 months time, then it becomes your responsibility as an owner to include this fact in the agreement. A tenant will appreciate the fact that you have been forthcoming in your description of the property. If possible, try to fix all the things before letting it out.

    • Sub-leasing clause
Sub leasing clause is extremely important and you as the owner of the property should pay attention to it. We have seen in past how a tenant has sub leased the property to another tenant or in some cases have shared the property space with his/her colleagues or friends. To avoid this situation, clearly mark out the condition that prior to sub-leasing the property space, the tenant will take permission from you. But with our experience, we encourage landlords to rather cancel the current lease agreement and make a new lease with the new tenant. In a nutshell, you should not allow your tenant to sublease the property. And get that condition in the agreement.

    • Termination notice
The best practice is to know your jurisdiction’s rules on terminating a lease and include those details in your lease so your tenant will not be surprised. Clearly include the termination notice period as well in the lease agreement. For example, one month notice period is practiced in Delhi NCR for residential properties.

  • Registering the lease agreement

Now that lease agreement has the above mentioned clauses, it’s time to register the lease agreement. If you are leasing or renting your property for a short time period in India, a lease agreement is not mandatory, but the agreement is required if the property is being rented out for over 11 months. The agreement is registered with the local registrar office.

So, as a landlord, did you follow the above process of renting your property??

Have any Questions?

Monday, April 9, 2018

What is a completion certificate and how to apply for it?

Author: Sachin Gupta | Find me on Twitter

In our last post, we discussed various approvals that are needed to construct a house. We also discussed that no matter if you are constructing your own house or buying it from the real estate developer; you still need to get approvals from relevant authorities within your city.

An important approval (or document) among all the approvals is completion certificate (CC). As the name suggests, this certificate is granted after the completion of the construction of your house or a group housing society. The certificate is issued when the property is ready to be moved in. A completion certificate is issued by the local development authority/Municipal Corporation certifying that:

  1. All necessary works have been completed according to the design plan and other directions, and
  2. The property is fit for moving in.
  3. The construction is carried out as per the building codes set up by the development authority.
  4. The building adheres to the earthquake guidelines, fire fighting guidelines, and do not breach any safety parameters.
  5. The interior work also has been completed as per the approved layout map. 
  6. The development authority has no role in the choice of interior fixtures such as bath fittings, electrical fittings. Fans, cooling systems, ventilation systems such as an exhaust fan, airconditioning, appliances, furniture, electronic items, kitchen fittings, are decided by the homeowner and the development authority has no role in that.

Therefore, it is your duty to apply for a completion certificate when the house you are constructing is ready to be moved in. Or you should ask your developer to get the completion certificate in case you are buying the property in a group housing society such as a high rise or low rise apartment complex.

Find below the procedure for obtaining the completion certificate:

Have any Questions?