Wednesday, December 11, 2019

Cyclical nature of commercial real estate

Author: Sachin Gupta | Find me on Twitter

This post deals with commercial real estate in India. For the last 2 years, one would have noticed that most real estate developers and private equity funds have focused their energies on development of residential real estate across India.

Why did this happen? Why did real estate developers in last 2 years solely focus on residential real estate? Well, the answer lies in global economic slowdown. Due to global economic slowdown, companies started to lay off employees and there was freeze on investment in new projects. And all of this resulted in lack of demand for commercial office space by companies. Due to lack of demand of office space, developers ignored the commercial real estate and that has resulted in tight supply of office space.

And now that, economy is starting to show signs of recovery, there is again demand for office space and therefore it is pushing up the prices of commercial real estate. So, the situation now is – demand is increasing but supply is tight. And in this condition, rentals are bound to go up.

Why does this happen? Why do we sometimes see oversupply of commercial real estate and sometimes tight supply? It is because of the cyclical nature of the real estate industry. Some underlying facts regarding the commercial real estate are:

  1. It is a very large market and it is highly competitive
  2. Ownership of commercial real estate is highly fragmented across the country


Why does commercial real estate development follow a cyclical pattern? During the boom time, when local real estate developers and investors sense that vacancy rates are declining and rents are rising, they believe more development may be feasible. Consequently, developers begin to analyze markets to determine if additional space, if developed, can be leased profitably. Because many competing developers may sense this opportunity simultaneously, they may all begin to develop at once in order to satisfy the demand. Even though there may be a definite need for additional space, the potential for over-development will exist as each developer rushes to deliver additional space to the market before competitors. There is no way to determine exactly how much space should be developed because the depth and extent of demand are difficult to predict. As a result, commercial real estate is sometimes said to be prone to periodic cycles of over-development.

One would have seen during the 2004-2008 boom time in India, when plethora of shopping malls came up in Mumbai, Delhi NCR, Bangalore, Chennai, and other economic centers in India. Because there was demand for retail space, developers jumped up and created an oversupply of malls across India. The important point to notice is that it is very difficult to predict the exact demand and therefore oversupply will happen in commercial real estate.

On the other hand, when economy is going down and growth is shrinking, developers may ignore the development of commercial real estate because of lack of demand from companies. However, as soon as, economy picks up, the tight supply of commercial real estate again pushes up the rentals and vacancy rates starts to fall.

And the cycle continues like this. There will be periods of oversupply and there will be periods of tight supply.



Let’s analyze this diagram above.

  1. When economy is in recovery phase, the demand for commercial real estate increases which reduces the vacancy rates and rentals go up. 
  2. Seeing the fall in vacancy rates and improving rentals, developers start developing the additional space. Rentals start to cool off because there is supply of additional space. 
  3. However, because it is difficult to predict the actual demand, the oversupply of space is seen in the market. Rentals fall.
  4. Increasing vacancy rates and falling rentals drive away the developers from developing the commercial real estate and supply is tightened.

One full cycle takes 5-6 years and all the 4 steps mentioned above repeat themselves.


With this in mind, can you time the market as far as investment is concerned??





Have any Questions?

Wednesday, December 4, 2019

How to calculate Reverse Mortgage Loan Monthly Payments?

Author: Sachin Gupta | Find me on Twitter

In our previous post, we covered the concept of Reverse Mortgage Loan (RML). We covered elements such as definition of Reverse mortgage Loan, eligibility criteria, amount that can be availed, and modes & nature of payments.

People from across the country showed substantial interest in Reverse Mortgage Loan.  And there were queries from ‘formula to calculate monthly payment’ to ‘paying the amount back to bank’. We cover all of this below:

Installment Amount = ((PV*LTVR-OTDA)*I)/ (((1+I)^n)-1)

Where, PV=Property Value;
LTVR=LTV Ratio;
OTDA=One Time Disbursement Amount;
n=No. Of Installment Payments;
I= the value of 'I' will depend on Disbursement Frequency selected.

For Example,
Property Value (PV) = 10, 00,000
LTV Ratio (LTVR) =80%
One Time Disbursement Amount (OTDA) =0
Loan Disbursement Period=15 Years
Disbursement Frequency=Monthly
Interest Rate (IR) = 9.25 %

Calculations: On the basis of the inputs:
The disbursement frequency selected is Monthly so 'I' will be IR/12(i.e. 9.25%/12)
No. of installment payments (n) will be calculated monthly e.g. if 15 is selected then the n=15*12=180
Putting the values in the formula:
Installment Amount=Rs.2, 070;


Here is a detailed example of Mr. Sharma, 62 years of age and own a property worth Rupees 1.5 Crores in Gurgaon. Mr. Sharma lives with his wife 59 years of age. Both his sons are married and settled abroad. On knowing about the merits of Reverse Mortgage Loan (RML), Mr. Sharma decided to check on the eligibility and monthly payment that he will be getting.

While he is clearly eligible for the same (find Reverse Mortgage Loan Eligibility criteria), he found it rather cumbersome to calculate the monthly payment that he will receive.

Property Value PV = 1.5 Crores (15000000)
Loan to Value Ratio (LTVR) = 80% (As specified by RBI)
One Time Disbursement Amount (OTDA) = 0 (No amount is disbursed in one go, instead banks pay monthly payments to applicant)
Loan Disbursement Period (n) = 15 years or 180 months
Disbursement frequency = Monthly
Current Interest Rate (I) = 10.25% yearly or (10.25/12)% = 0.854167% monthly

Calculating the monthly installment amount by putting all these value in given formula in excel:
Installment Amount = (((PV*LTVR)-OTDA)*I)/ (((1+I)^n)-1)
Installment amount = 28294

So, Mr. Sharma will be getting a monthly payment of Rupees 28294 for 15 years. Upon completion of 15 years, Mr. Sharma can either extend his Reverse Mortgage Loan (RML) payments or pay the outstanding amount to bank to get back his house.



Have any Questions?

Wednesday, November 27, 2019

Free home decor apps for the amateur and home owners

With an abundance of information on our palms, we need not go looking for anything. This is the age of DIY (Do it yourself). Nearly everything can be done and recreated at home, including your home itself. There are millions of design ideas readily available on the internet. We explore the best free home decor apps helping you virtually construct your living space before actually investing on it. Here’s a list of our favorite free apps because the best things in life are free.


  • Pinterest

Free
Available on iOS and Android

Pinterest is perhaps the most popular app today to browse through any kind of design idea. You can choose from millions of boards and pins of professionals and amateurs alike. Beautifully addictive this app is perfect for the ones seeking inspiration for your next home improvement plan, however big or small your budget may be.


  • Houzz

Free
Available on iOS and Android

Houzz is one of the best free interiors, home decor and home solutions app today. Apart from having a great collection of ideas and photo library, this app covers interiors and home decor in its length and breadth. You can not only choose ideas, but products, DIY and consult experts. This is a great free app to have on your smart-phones to get a range of home improvement ideas.


  • iHandy Level

Free
Available on iOS and Android

As the name suggest this app is an extremely handy level checker for your wall art, furniture, shelves and anything you can think of. This is a must have home solutions app.


  • Snapshop Showroom

Free
Available on iOS

Snapshop Showroom is a great app that helps you visualize how your furniture looks in your set up using augmented reality. Just snap a picture of the space you wish to redecorate and choose from a wide range of furniture and upholstery options. You can place it , rotate etc. and see if it deems fit. It also offers an option to buy your furniture from popular brands like IKEA.


  • Photo Measures Lite

Free
Available on iOS and Android

This has happened to all of us at some point of time, when we head to a store and forget the measurements and angles. Consider using Photo Measures Lite. Just snap a picture of the space and mark the desired measurements and angles. Easy and extremely helpful!


This is a guest post by Sulabha who is passionate in writing blogs and articles on Home d├ęcor, mobiles and Real Estate. Sulabha has written several blogs on home design, latest trends in industry of real estate market, latest demands on apartments in Hyderabad, commercial properties, land or plots.

Wednesday, November 20, 2019

Joint Venture agreement and registration process between a land owner and the real estate developer in India.

Author: Sachin Gupta | Find me on Twitter

In one of our earlier post, we covered the topic of joint venture agreement between landowner and the real estate developer. Keeping in mind the interest shown by audience in that article and the number of emails that we received about a sample joint venture agreement, we have decided to write another post covering sample agreement and registration process between a land owner and the real estate developer.

An owner of a piece of land (an individual or a company) can enter into an agreement with a developer to construct residential or commercial premises on land owned by the former, with the developer getting a right to sell the whole or part of the building to be built. The consideration payable to the owner in this case may be in the form of a lump sum (to be paid upfront or in installments) or alternatively in the form of a share in the property to be built or a combination of payment plus part of the property to be built.

Find below the sample joint venture agreement between a land owner and the real estate developer.




Source: National Housing Bank




Have any Questions?

Wednesday, November 13, 2019

What makes residential property rates go up & down???

Author: Sachin Gupta | Find me on Twitter

Recently one of my best pal visited one of the zillions property agent/dealer in Delhi NCR region, inquiring about the residential properties in Gurgaon and Greater Noida. He was looking to buy the residential property from an investment perspective. Now, just like any common man with black or white money (none of my business) in his pocket, he threw a plethora of questions on the poor property dealer. What is the current price in this region, that region, and that region?...what was the price last year? Is the property rights true or not?...what do you think of residential property appreciation?....what makes residential property go up & down?...and many such simple but make no mistake important questions.

Now, let me explain you why i called the property dealer "poor" because most of them are in the business not by choice but by 'no choice'. There is a saying these days "In India, whoever is out of job is either a Neta or a property dealer". However, they seem to be good at facilitating things and in the process makes a good commission if deal comes through. Now, asking these simple yet important questions to these property dealers is not going to satisfy many of the common people just like my friend.

So, what makes residential property prices go up & down? Lets Break It Down (L BID) to smaller elements. We all would agree that Demand and Supply are the two smaller elements of movement in property prices.

Now, what affects Demand? L BID again and we get 5 core smaller elements:

  • Economic base (Nature of employment in the region under consideration)
  • Income assessment of the people living in that region
  • Population Growth
  • Interest rate trends
  • Property tax rates

Just to illustrate, one would have noticed that certain regions are dominated by particular industry (IT in Bangalore) and income levels of people in IT industry are higher compared to say manufacturing industry. What do we understand from this?? I guess, you guessed it right, if population growth and interest rate trends are favorable then residential property rates would appreciate much faster in IT dominated region than in manufacturing region.

Now, what affects Supply? L BID again and we get 3 core smaller elements:

  • Land availability
  • Factors of production such as labor, capital(money), materials
  • Environmental restrictions, building codes, other regulations

Just to illustrate, one would have noticed that in certain regions huge amount of land is available such as outskirts of major metro cities (Gurgaon, Noida, Faridabad around Delhi). Since there is shortage of usable land in Delhi, the property prices tends to move up because for a limited amount of land thousands of people are running and each one has the money to outclass the other. In-fact, within a city say Delhi, in certain areas such as GK, because of shortage of usable land and other appealing facilities such as retail, educational, recreational, etc. the prices tend to move up compared to other areas within Delhi.

Finally, having understood the Demand & Supply elements, the current market equilibrium is done in order to understand the current property rates and why they are moving up or down.

So folks, whenever in doubt regarding the property prices or related things, L BID the issue and don't throw these questions on poor chap (property dealer).



Have any Questions?

Wednesday, November 6, 2019

Commercial Office Space in India - Leasing Vs. Owning analysis

Author: Sachin Gupta | Find me on Twitter
 
This post covers the topic of Commercial Office Space in India and why businesses choose to lease office space than owning a piece of commercial real estate!

Businesses use real estate as part of business operations along with manpower, machinery, and other resources to produce desired output. Even though the primary business of these corporations is not real estate investment, they have to make many decisions regarding the use of real estate because real estate is typically an integral part of the firm’s operations. For example, real estate is used for office space, warehouse, manufacturing, retail, and so on. Vast majority of real estate used by business firms is leased and not owned because of following reasons:
  1. Space requirements are less than the quantity of space that they would have to purchase in order to satisfy their needs in a desired location. Even if they lease the remaining space to other business firms, still leasing would be preferred than owning mainly because
    • Large capital to purchase the desired space
    • A purchase would put the business firm in real estate business which can take away the focus from firm’s core activities.
  2. Even if business firm manages to occupy all the space that is available with the purchase, the firm will still prefer to lease
    • Owning would reduce operating flexibility: if the business firm desires to move its operations from the purchased location, then space selling or leasing to other firms will constraint the movement or slow it down. Instead, had the firm leased the space then they can move without having to worry for real estate space.
    • If the space is owned, then it must be maintained, operated. These activities may result in loss of focus of the firm from their core activities. Operating and managing properties is usually done more cost effectively by firms that specialize in the real estate operations.
    • Flexibility of scaling down the business. That means if a firm decides to scale down its operations then the firm can do it easily if the space has been leased than owned. Scale down means use of less space.
  3. Real estate business activities should be performed by professionals trained in real estate business. Some of the following activities are:
    • Selecting the right tract of land and developing the right amount of space
    • Leasing that space to many different tenants, for example, builders develop Office Space in Gurgaon and lease it to many different tenants with different office space sizes.
    • Hiring personnel, collecting rents, and maintain the facility
    • Finding financing for the investment or development
    • Doing continuous research about real estate markets in order to decide when to sell, raise or lower rents, renovate and so on.
    • Many other such activities.


Have any Questions?
 

Thursday, October 31, 2019

Resale Vs. New property – 10 Things to think about

Buying a resale property differs from buying a newly constructed one, both in terms of legality as well as the buying process. The properties listed on resale are often priced higher than the original cost considering factors like new amenities, pricing trends in the vicinity, ease of commuting to the city, malls, schools and hospitals, overall civic amenities in the area, etc.

However, there are several advantages of buying a resale property, such as…

  1. Immediate possession of the property
  2. Escaping the rent and EMIs simultaneously
  3. Getting to see the desired specifications completely
  4. No construction delays
  5. Time for planning your move-in
  6. Tax sops on home loan from the beginning 


In spite of the advantages at a higher price level, it is imperative to know what to expect and what you will get in a resale-apartment deal. 

  • Talk to the experts 
There’s definitely a friend or acquaintance who has invested in a resale apartment in the past, and is evidently happy with the purchase. Ask how they went about the purchase. Also try to understand the general legal procedure. Apartment specific details may not be similar to your desire, but certain basics always match. 

  • Check for clarity in the ownership context
Although one feels it’s easy to hire a lawyer or an estate agent, it’s better to be well versed in certain areas for your own understanding. Check the title of the property, as its clearance is highly essential to avoid any sort of fraudulent selling. 

  • Documents
Check for all documents available with the purchase. Some of them are project commencement certificate, completion, occupancy and sale deed. Also check for the authenticity of the same with a lawyer or an agent of your choice.

  • Clearance of loans taken 
Check whether the property is completely free of past loans taken by the builder. Check with bank personnel to conduct this verification because they have the necessary network to do so. 

  • Eligibility to apply for a new loan
Considering that you need to fund your purchase through a loan, and this would be a resale property, cross check with your bank about the amount that you are eligible to receive as a loan. Verify that you have the all-important documents to process your loan application. Sometimes it is better to fund the property partly through a loan, even if you can afford the entire payment. Outsource the due diligence to bank authorities and stay rest assured about the safety of the investment. 

  • Conduct an evaluation of the property
It is important to get your desired property evaluated for its market value. This is required firstly to ensure that the finances are planned properly. Secondly, check whether the property prices are predicted to fall, which would discourage the banks from granting you a loan amount that you are eligible for. 

  • Down-payment amount
Make prerequisite arrangements to pay an initial lump sum amount as a down payment for the purchase. The banks usually give you close to 80% of the total price on the property as a loan. 

  • Age of the property
The ratio of loan amount received and the amount of down payment varies based on the relative age of the property. Older properties tend to be valued away from your advantage because banks try to safeguard their interest. Thus, the down payment for an older property would be a larger amount with respect to the loan you can avail.

  • Maintenance fees charged by the society
This is a monthly recurring expense after you occupy the purchased apartment. Ensure that your budget can accommodate it with the EMI that you would be scheduled to pay every month to the bank for some years as well. 

  • Reason for the sale
This should have appeared much higher in the list, but you can find out the reason for sale only after you build a rapport with the owner. Try finding out the reason behind the sale. Although it is not always necessary that you get authentic information, do ask to understand the intentions.

This is a blog post by Bharath Joshi who is the Marketing Executive for Unishire Signature in Bangalore.

Friday, October 25, 2019

10 things to check when booking an apartment in a builder project

Author: Sachin Gupta | Find me on Twitter

Call it practices or malpractices; real estate in India is riddled with cases where buyers have been taken in for a ride. And in this environment, buying an apartment is not as easy as it may sound. Whether you are an end-user or an investor, you should pay attention to the following 10 items when booking a flat. These 10 items are categorized into two principal checklists namely Project details and Apartment details:

Project Details

  • Land Titles
When making real estate investments, buyers of property typically want assurance that they will become the legal owner of the property and that the seller is lawfully possessed and has the right to convey title. When a real estate developer has “Title”, he is said to have all the elements, including the documents, records, and acts, which prove ownership. Therefore, a buyer should insist on documents that clearly demonstrate Land Titles.

Some of these builder projects are approved for home loans by banks or lending institutions. These lenders are also concerned about title assurance because the quality of title affects the collateral value of the property in which they have a secured interest. Therefore, if you as a buyer lack the capacity to verify Title certificates by yourself, you should at least check and verify with the list of banks that have approved the project for home loan grant.

  • License Grant
The Town and Country Planning (TCP) Department grants license to private developers owing land for converting it into a colony or a group housing society. The license is granted upon fulfillment of parameters laid down by the TCP Department.

Ask for the License number from your developer and verify it at the TCP website.

  • Intimation of Disapproval (IOD)
Check if the builder has received the IOD from relevant authorities (Town and County Planning Department). IOD lists out the conditions based on which the building should be constructed. It is usually valid for one year and has to be re-validated thereafter.

  • Master Plan
A master plan typically demarcates city or region’s future development including residential, commercial, industrial, and recreational facilities. Visit the City Development Authority website and verify the claims made by the developer while selling the project.

  • No Objection Certificates (NOC)
In addition to the License number granted by the TCP department, a builder should also possess NOC from environment, fire fighting, electricity, water, airport departments. Check these NOCs.


Apartment Details

  • Location
First thing first, location is the key differential in selecting or rejecting a project. Make sure, you book an apartment in a project which is well connected by road to city’s CBD (Central Business District). In addition to that, look around for the presence of social infrastructure such as schools, shopping malls, college, etc.

  • Floor Plan
You are going to live in this apartment. Therefore, pay attention to the floor and unit plan. In one particular project, we noticed there were about 14 apartments on one single floor and that was a big dampener in otherwise a good project. In an under construction project, it is very difficult to assess the floor plan and unit plan. Ask for the approved floor plan and unit plan from the developer and analyze these plans for open spaces, lobbies, lifts, etc.

  • Amenities
After a long and hard day at office, one would like to relax and rejuvenate. Buy an apartment in a project which offers state of the art amenities such as park, jogging track, swimming pool, clubhouse, etc.


  • Kitchen

Many people overlook the Kitchen; however, make sure Kitchen is not only spacious but also properly planned. Many developers in Gurgaon offer the option of Modular Kitchen, however, check if the same can be developed from outside suppliers at lower prices. There are numerous vendors of Modular Kitchen in Gurgaon, visit them and inquire about the quality and total price. Thereafter, one can compare and take a final decision on the modular kitchen offered by the builder with the one offered by outside vendors.

  • Apartment specifications
Specifications comprise of kitchen fittings, bath fittings, flooring, electric work, walls, etc. Visit the sample flat prepared by the developer and assess the specifications first hand. Make sure that specifications provided in the brochure and shown in the sample flat are part of the builder buyer agreement.

  • Carpet Area/Sale-able Area Ratio
Most builders would charge you on the basis of sale-able area. Ask for the efficiency of the apartment or in other words carpet area of the apartment. In most cases, ratio of carpet area to sale-able area is 75 to 80%. If possible, get that included in the builder buyer agreement.

We are sure you will have your own stories to tell, your own issues with real estate projects, your own experiences of buying an apartment with a builder, and your own follow-ups? Share them here with the larger audience and let’s help each other.



Have any Questions?

Friday, October 18, 2019

Repo rate and its impact on bank's lending rates to home loan customers for buying property in India

Author: Sachin Gupta | Find me on Twitter

To control inflationary pressures, RBI increases repo rate. And it is quite evident from the short term and long term graphs; whenever repo rate is increased, it impacts growth of the industry. And in recent times, one can correlate the slowdown in real estate transactions with increase in repo rate.

Latest short term repo rate changes by Reserve Bank of India



History of repo rate changes by Reserve Bank of India



Whenever, repo rate is lowered it encourages individuals and companies to invest because of lower cost of borrowing.

For example, the debt on balance sheet of 11 real estate listed firms on BSE stands at Rupees 42000 Crores. Even a drop in repo rate by 1% reduces the debt servicing by Rupees 420 crores per year. That’s massive for real estate developers given that other input costs are rising.

Similarly, for a home loan seeker who has taken 50 Lacs rupees of home loan, drop in repo rate results in substantial savings on EMIs.

Loan amount – 50 lacs
Bank interest rate – 11%
Tenure – 20 years
EMI – 51609

Loan amount – 50 lacs
Bank interest rate – 10%
Tenure – 20 years
EMI – 48251

Which means, monthly savings of rupees 3358.

Therefore, just like any industry, real estate sector including the developers and customers are keeping an eye on RBI’s monetary policy and are batting for lowering of interest rates.




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Friday, October 11, 2019

A typical real estate project development process

Author: Sachin Gupta | Find me on Twitter

Once the land development process has been completed successfully, a developer will focus his/her energies on the project development process. Developing and delivering a real estate project successfully is challenging and it lasts for several years passing through various phases. Primarily any real estate project can be divided into 5 phases:


Phase I – Land acquisition
The details about land acquisition process can be found in our earlier post of land development process.


Phase II – Construction
Construction phase requires applying for license (permitting), and project development.

  • Permitting/Licensing:

The permitting process usually begins with an application which identifies the site, its location, and a preliminary design of the improvements to be constructed. This application is then used by public officials to verify compliance with its current zoning classification. If it complies, the permit is granted and the construction of the project may commence subject to building codes and inspections. If the permit is denied, the applicant will usually clarify or amend the application and will ask the city planning staff/director to review it again.

  • Preliminary checklist – Project development:

This checklist is usually the first step that a developer reviews when evaluating a site for possible development.

    1. Allowable uses per zoning classification.
    2. Minimum lot size per zoning classification.
    3. Maximum floor to area ratio (FAR).
    4. Building bulk/density limits.
    5. Setback/building line.
    6. Building height limits.
    7. Building footprint/envelope.
    8. Parking ratios.

  • Important terms/project development:
    1. Setback/building line – requirement to construct building a specified number of feet (setback) from the right-of-way line or other landmark.
    2. Right-of-way line – area designated for a public street or alley that is dedicated for traffic, public use, utilities, etc.
    3. Building related terms:
          • Footprint – it is the shape or outline of the primary building slab or foundation as it will be constructed on the site.
            • Envelope – the total outside perimeter of a structure, including footprints and any exterior patios, mall ways, landscaping, etc.
              • Facade – the exterior, usually the main entrance of a structure
                • Bulk – a three dimensional space within which height, width, footprint, and number of structures/elevations/shapes are viewed in total relative to the land area upon which it will sit to determine land use intensity.
                  • Building codes – refer to required materials and methods used to construct improvements within a jurisdiction.
                    • Permit- document executed by the director of planning authorizing the construction, restoration, alteration, repair, etc., of a structure and acknowledging that it conforms to requirements under the applicable zoning ordinance.
                1. Floor to area ratio (FAR) – it is usually calculated as gross building area divided by square footage of land area.
                2. Height restrictions – used to limit the vertical height of a structure to be constructed.
                3. Allowable use – user activities permitted in a zoning classification
                4. Impact fees – charged by public entities to cover added public sector expenses expected to be caused by the development such as traffic control, drainage, etc.
                5. Incentive zoning – used by city planners to accomplish community goals simultaneously with private sector development.
                6. Inclusion zoning – part of a zoning ordinance that requires that a specified type of development be included in order to obtain permit for that site.
                7. Minimum lot size – per zoning classification
                8. Parking ratio – required number of parking spaces per sq. ft of gross building space or per number of apartment units.
                9. Site plans – drawing done to scale depicting the placement relative to other requirements
                10. Traffic counts – number of vehicle trips per hour past a specific site.
                11. Encroachment – occurs when the construction of improvements extends over a property line on to an adjacent property.
                12. Property tax abatement – forgiveness of taxes for a specified number of years.
                13. Land to value ratio – calculated as rupee value of land to total project value (including land) anticipated upon completion of project.


              Phase III – Completion and occupancy

              There are certain risks in any real estate project development. Once the construction has been completed, there is an additional risk of selling and handing over the project to clients or bringing in tenants in case of rental property. Risk begins with land acquisition and increase steadily as construction commences until cash flows from the leasing phase materialize. It should be noted that factors determining the demand for type of space (such as office, retail, warehouse) being developed are critical to project risk. These factors may manifest themselves in current market indicators, such as vacancy rate levels, rent levels, or the extent of leasing commitments from the tenants.

              A very good understanding of the underlying economic base of an urban area or region is critical when assessing the viability of real estate development.  The point is that investors must examine the demand for space in terms of the characteristics of the demand by end users (tenants) in a given market. This demand in turn depends on the type of employment in the local market and the nature of the functions tenants will perform. Only by understanding the local economy and the nature of employment can developer anticipate demand accurately and produce and supply the quantity and quality of space in the proper combination to satisfy market demand.


              Phase IV – Management

              Once the property is occupied by clients/tenants, there is need for professionally managed facility management team. This team can look into the property management tasks such as maintenance, HVAC, parking management, security, civil works, housekeeping, landscaping, etc. These tasks are equally important and ascertain the long life of property and thus ensure positive rental income as well as capital appreciation. 


              Phase V – Sale
              The developer may choose to sell the property from construction phase onward as happens in residential development in India. Or he/she may choose to hold the property in case of commercial developments provided rental income from the commercial properties is significant enough to justify retention.




              Have any Questions?

              Friday, October 4, 2019

              3BHK Available for Sale in Madhuban Bapudham, Ghaziabad
              Size - 152.62 square meter
              Price Expected - 60.89 Lacs
              Silver Oak, Madhuban Bapudham, Ghaziabad

              Fill the below form to buy this apartment at best prices.







              Monday, September 30, 2019

              How to Choose Building Materials and Estimate their Cost and Quantities for House Construction?

              Building material is any material which is used for the construction purposes. Building materials can be categorized into two sources, natural and synthetic. In order to construct a good quality house in the amount you have budgeted, a thorough understanding of the quality parameters, cost and quantities of these building materials are required.

              The cost of construction depends majorly on the following factors:
              1. Architectural Design opted (like Open Top, Sloped Roofs, terraces with add-on features etc.,)
              2. Structural Design (depends upon type of strata available for foundation and numbers of floors / configurations (basement, stilt,G+2 etc.)
              3. Specification of Building materials selected (Quality/Brand of materials used for painting, flooring, woodwork, Bathroom, Electrical etc.)
              4. Exterior Finish chosen (i.e. front elevation design, stone cladding, facade, etc.)
              5. Peripheral external developments (such as compound wall, driveway, landscape, hardscape, Gate etc,).

              The other minor cost head would be cost of liaison, charges for construction permits & building approvals.

              The Construction cost can be broadly split into Labor and Material Cost. The extremely increasing construction trends are considered the driving force behind this fast upraise of total building construction costs. Taking this trend, the material manufactures have raised the prices of materials considerably in last decade or so.

              Before planning for a bungalow/individual construction unit, one must be aware of the quantities and cost of building materials as they constitute around 55-60% of the total construction cost of a house. While taking a personal round of the nearby market, one should also avail services of construction turnkey solution providers and then take a judicious decision before the start of the construction.

              Refer the info graphic attached in the article to get the building material consumption and their costs for a 1000 Sqft budget house construction. The material quantities can be extrapolated based on the built up area of construction you are planning for.




              The Major raw material, intermediately and finished construction materials contributing major pie to overall material cost are:

              1. Reinforcing Bars(Rebars) / Steel:

              Reinforcement steel is the most important structural material in construction. Steel is used in RCC (Reinforcement cement concrete). Generally rebars available in the market are manufactured through Thermo mechanical treatment (TMT). Rebars comes in different grades (i.e, Fe415, Fe500, etc.,). Fe500 is generally recommended by structural designer for structural requirement fulfillment.

              The approximate Steel consumption per sq.ft built up area (BUA) is 4 kg (for low rise construction i.e., less than 4 floors of construction). Steel contributes the most among all individual materials, about 25% of total material cost. So, a price rise of Rs.5 per kg can make big difference in the total cost of construction.

              2. Cement:

              Cement is an important construction material and when mixed with materials like sand, aggregates (stone chips), and water, it binds them together. It is used in concrete, in brick masonry work, in tiling, and in plaster works.

              Good quality cement should feel smooth when rubbed between fingers. If a small quantity of cement is thrown into a bucket of water it should sink and not float. Cement should always be kept free from moisture. Its storage should have finished floor raised to at least 300mm above ground level and should have airtight storage. Use of cement older than 2 months should be avoided as cement loses strength with increase in its shelf life.

              OPC 53 grade is generally used for concrete works and blended cement (PPC & PSC) for masonry, tiling and plaster works.

              The approximate cement consumption per Sq.ft built up area (bua) is 0.4 bags. Cement as a construction material contributes about 16% of total material cost.

              3. Sand:

              Sand is used mainly in Concrete, Masonry, Plaster and Flooring. Good sand should be well graded i.e., particle size ranging from 10mm to 0.150 mm for concrete and masonry works, and 5mm to 0.150 for plaster. It should be free from slit/clay and organic matter.

              Natural Sand (also called River Sand) is obtained from River Beds. Due to environmental impacts and stringent laws by the government, Natural sand is slowly and gradually being replaced by Crushed sand (for concrete and masonry works) & Plaster sand (for plaster works). Crushed Sand and Plaster Sand are manufactured from Quarry Stone using latest production technology.

              Sand consumption per sq.ft built up area (bua) is 1.8 cft and contributes about 12% of total material cost for building construction.

              4. Aggregate:

              Crushed rocks are used as coarse aggregates and are generally used in making concrete. Coarse aggregates are normally available in two fractions 20mm and 10mm for concrete making.

              Aggregates should be clean, dense & hard. The aggregate should be neither flaky nor elongated. Flaky and Elongated aggregates decrease the strength of the concrete and demands more cement. Aggregates should be stored properly and different fractions must not be intermixed. Both these aggregate fractions should be used invariably.

              Coarse aggregate (chips/gravel) consumption per sq.ft built up area (bua) is 1.35 cft. Aggregate as a construction material contributes about 8% of total material cost.

              5. Bricks:

              Bricks, in old days, were commonly made of clay and were known as burnt clay bricks. Now a days, bricks are made of other materials such as fly ash. But clay bricks are still widely used in low rise residential constructions today. Bricks are used for masonry wall construction. Other substitute materials to bricks are Concrete solid/hollow blocks, Autoclaves Aerated Concrete (AAC) Blocks and Cellular light weight concrete CLC Blocks.

              The clay bricks should have uniform size, uniform copper color, plain (without undulated surfaces), rectangular surfaces with parallel sides and sharp straight edges. Well burnt brick should give a metallic sound when struck with other brick. Good bricks should not exceed +/- 3 mm tolerances in length and +/- 1.5 mm tolerances in width and height. Water absorption should not exceed 20% by weight.

              Bricks approximately cost Rs.7000 per 1000 units (Nos). Bricks contribute to about 5% of total material cost and are consumed approximately at 1.45 brick per sqft of built up area (BUA).

              6. Tiles:

              Ceramic tiles are generally made from red or white clay fired in a kiln. They are finished with a durable glaze which carries the color and design. Ceramic tiles are manufactured for both wall and floor, having varying degrees of wear resistance and water absorption. High strength and Low water absorption ceramic floor tiles are commonly known as Vitrified tiles. Tiles prices vary according to their types and quality.

              Tile should be easy to clean, strong, sturdy and stain resistant. Tiles in wet area like bathroom should be of anti-skid floor type.

              Tiles consumption per sq.ft built up area (BUA) is 1.3 sq.ft. Tiles contribute about 8.0% of total material cost.

              7. Paints:

              Paints can be broadly classified into water based or solvent based. They come in thousands of shades and gives multiples finishes like Matt, satin and glossy finish. Certain Paints also have washables, anti-algae/fungal, crack bridging properties.

              When selecting an interior paint, try choosing water-based paint instead of oil-based gloss paint. Water-based paints have less odor than conventional oil-based paints.They are much easier to clean up and are durable.

              When selecting an external paint look for waterproofing, anti-algae, and dirt pick resistance properties.

              Paints (Internal- Emulsion and external grade) consumption per sq.ft built up area (BUA) is 0.18 liter (0.14 liter for internal painting and 0.4 for external painting).

              Paints contribute about 4.1% of total material cost.

              The Finishers (Bricks, Tiles, and Paints) collectively contribute 16.5% of total material cost.


              8. Fittings Category:

              Window, Door, CP Fittings, Sanitary wares, Plumbing and Electrical fittings when combined contribute to 23% of total material cost considering budget brands. Top brand options may increase this category cost to 30 – 35% of the total cost of construction. Fittings can be selected based on one’s requirements and choice. In branded fittings quality should not be a concern.


              Conclusion:

              Other than estimating the cost and quantities of construction materials, one should also have knowledge of current labor cost in local markets. This is because the labor component constitutes to 40-45% of the total cost of construction of a house. An unskilled labor charges Rs. 350 to 400 per day whereas skilled labor such as mason, carpenter, painter, electrician etc., charges between Rs. 800 to 1000 per day. The total cost of construction (including both design, material and labor) per square feet may vary anywhere between Rs.1250 and Rs.2500 per square feet depending on the specifications of the building materials you choose for you house.

              Now that you have the total cost of construction, you can start sourcing the funds required for the project. Your source might be personal savings or loan from banks/ friends. Although this sounds like a naive step, lack of resources during construction might sometime over shoot the budget. Contractors will charge for De / Re-Mobilization. Some of the construction materials like Cement etc., might expire/loose its strength if the project is delayed by long. So sourcing the funding before the start of the project is just as important step as any other. A detailed cash flow for purchasing construction materials has been shown in the info-graphic to ensure smooth construction flow with time.



              This is a guest post by Vinod Kumar Singh

              Monday, September 23, 2019

              Looking to construct your own house on a given piece of land? Pay attention to stages of construction and the cost part of it.

              Author: Sachin Gupta | Find me on Twitter

              Planning to build your home on a piece of plot? What are the things that one needs to keep in mind before embarking on a year long journey of construction and dealing with multiple contractors, suppliers, etc? Surely, as an owner of the plot, you would have got multiple offers from architectural firms, contractors about the cost estimate. However, before even talking to these firms, one need to do his/her cost estimation.

              Constructing one’s house is not easy because of the nature of the work. One needs to work/deal with professional firms such as architects, contractors and at the same time deal with labor. Therefore, you not only need to plan the stages of construction but also the costing part of it. Doing the cost analysis helps you in analyzing what you need to build and what you can postpone for future dates. For example, if your budget is limited, then in all likelihood, you may not go for modular kitchens, lavish bath fittings, etc.

              Here we present the quick ‘to do’ list for you to arrive at a guesstimate of cost that you may incur during the construction of your dream house. This will help you in planning your construction stages as well as cost part of it.



              Have any Questions?

              Monday, September 16, 2019

              What is the process of securing a home loan in India? What are the things I should check before opting for a home loan provider? And what are the various kinds of home loan schemes available in the Indian market?

              Author: Sachin Gupta | Find me on Twitter 

              In the previous post, we discussed about the dilemma of renting versus owning. However, after an in depth analysis of various elements described in the post, Sumit Sharma decided to go ahead with the purchase of the apartment. Now, the next step for him was to arrange for the mortgage loan to finance his purchase. Without a doubt, there are numerous lenders (mostly banks) in the market willing to lend money at competitive prices. Which lender (bank) to choose? What type of home loan to avail? And what are the things to remember during the loan process? These are some of the serious questions Sumit Sharma was confronted with. Lets Break It Down to smaller elements (L BID) and hope Sumit Sharma makes an informed decision based on the understanding of following elements:

              Things to check during a mortgage loan process:
              Interest Rates:
              As per the RBI guidelines, home loan interest rates are linked to bank's base rate. Base rate tends to move up and down depending upon the interest rate movement in the economy. As a buyer, check the interest rates from various banks that are offering the similar mortgage loans. Usually premium charged by banks can be negotiated with the chosen bank; however, it depends on your credit history. Since, banks are in the business of lending money, therefore being a customer one must exercise the customer power and negotiate a best possible interest rate with the bank.

              Processing fee:
              Normally processing fees include statutory costs, third party charges, and additional finance charges. Because of problems involving loan fees and the potential abuse by some lenders of charging high fees to borrowers, a legislation requires lenders to show annual percentage rate (APR) being charged on the loan to the borrower. For example, if the fixed interest rate charged by a bank is 12% and processing fee is 2%, then normally APR would be 12.25%. Processing fee charges can also be negotiated with the bank.

              Prepayment penalties:
              Many borrowers mistakenly take for granted that a loan can be prepaid in part or in full anytime before the maturity date. This is not the case; if the mortgage note is silent on this matter, the borrower may have to negotiate the privilege of early repayment with the lender. However, many mortgages provide explicitly that the borrower can pay a prepayment penalty should the borrower desire to prepay the loan. Prepayment penalties are not included in APR.

              Types of mortgage loan:
              Fixed Rate Mortgages - Constant Amortization Mortgage Loan (CAM):
              In this type of loan, the interest rate remains fixed during the tenure of the loan. Here, constant principal amount is amortized (reduced) in each installment. The user has to pay the sum of constant principal amount and interest that is charged on the principal. For example, on a loan of say 12 lacs rupees for 10 years at an interest rate of 12% per year, the constant principal amount that will be reduced every month is 12000 rupees (12lacs/120). In addition, for the first month, interest will be 12000 rupees. However, the interest charge will keep on reducing as the principal is amortized every month by constant amount. Therefore, in constant amortized mortgage loan (CAM), the monthly installment keeps on reducing.

              Fixed Rate Mortgages - Constant Payment Mortgage Loan (CPM):
              In this type of loan, the interest rate remains fixed during the tenure of loan. In this type of loan, monthly installments are constant. Here, principal amount reduced (amortized) in the starting months is less as compared to the principal amount in later months. However, the interest payment is more during the starting months and then reduces in later months. For example, on a loan of say 12 lacs rupees for 10 years at an interest rate of 12% per year, the monthly constant installment will be 17216.51 rupees.

              Fixed Rate Mortgages – Graduated Payment Mortgages (GPM):
              Some individuals have less income in starting years of their careers; those individuals are not considered for loan. To overcome this effect, lenders have designed a mortgage loan that retains a fixed rate of interest but includes a series of stepped up payments that are lower in earlier years, thereby better matching borrower’s incomes, and then rising over time. These loans are known as graduated payment mortgages (GPMs)

              Adjustable (Floating) Rate Mortgages (ARM):
              These mortgages provide an alternative method of financing through which lenders and borrowers share the risk of interest rate changes. In this type of loan, since interest rates are adjustable, they are indexed to say wholesale price index (WPI) or other market interest rates. For example, someone who applied for ARM indexed to WPI in year 1 at 5% interest rate might be paying 12% interest rate in 2nd year because inflation has increased by 7%.

              Hybrid Adjustable Rate Mortgages:
              This is the most common type of mortgage loan used these days. Hybrid ARMs combines elements of fixed rate mortgages for periods of 3, 5, or 7 years, after which interest rates are reset and the loan becomes an ARM. Subsequent payments are usually reset every year for the remaining maturity period. For example, a 3/1 hybrid would mean a three year fixed rate after which the interest rate would become adjustable, tied to an index, and would be reset each year thereafter.

              So friends, before going to a bank for home loan, take a look at this blog or even take a print because even if one saves or negotiates .25% on interest rates, processing fee, or prepayment penalties, then it’s worth the effort. Don’t overlook that :)



              Have any Questions?
               

              Monday, September 9, 2019

              Using Tech in the Home - A Video Wall in your Home

              Video walls can be an amazing addition to your home decor, as those in the world of business have known for a long time. This is because video walls have been utilized by business people for a long time but they are just starting to catch on in a home setting. Below we will discuss ways in which you can use a video wall in your home.

              First, think of the game nights that you can have with a video wall in your home. You and your buddies can play video games on a screen that makes the action truly immersive and will make your game nights the most popular if not in your city then definitely in your neighborhood. Even if you are alone, your gaming experience will surely be at a higher level.

              Next, movie night. Family movie nights watching the latest Hollywood blockbusters or even a more highbrow art-house film will be an experience like going to the cinema, with crisp visuals and immersive sound if you invest in speakers and perhaps surround sound. You won’t even need popcorn, as the wow factor of the screen size and visual presence will keep you interested.

              Next, your home office. As we have said, those in the world of business have long used video walls. They can facilitate team working, as you and your team will be able to work on a project whilst tracking any changes and ideas on the screen in real time, and the interactive elements of a video can be utilized to improve your business's performance. Having one of these in your home office will also send out the right message to your business competitors.

              Of course this is not an extensive list of ways in which you can use a video wall in your home. You probably have other ideas. After all it is your home, not ours!



              What are the Real Estate and Property market Terms and Definitions in India?

              Author: Sachin Gupta | Find me on Twitter

              Looking to buy an apartment in a builder project or a piece of land, Or for that matter, looking to buy/lease office space property? We are sure you will come across many terms and definitions which are new to you and therefore comprehending them is essential to make sure that you are not overpaying.

              Take for example, the distinction between carpet area, built-up area, and super area. Most of the builders in India will charge you on the basis of super area. However, in some locations, they may charge you on the basis on carpet area. But the prices will be adjusted accordingly. For example, some builders in Mumbai charges on the basis of carpet area of the property and therefore their base selling price is higher as compared to the builder who is charging you on the basis of super area. Super area is the entire area of the building which includes carpet area, lobbies and corridors, walls, lifts, staircases basements, and other atrium and utility areas. Carpet area is the actual usable area within the walls of the floor. Since, you will using the lobbies, corridors, lifts, and other common areas, therefore, a builder will take all of these into consideration before rolling out the final base price. Whether you pay by carpet area method or by super area, all the charges will be included in the final price.

              Similarly, when you go to the local registrar office to register your property, there will be terms like circle rates or market value that will be used to arrive at stamp duty and registration charges. In the below document, one can find all the terms and definitions that are used in Indian real estate and property market.





              Have any Questions?

              Monday, September 2, 2019

              Can I time the real estate market?

              Author: Sachin Gupta | Find me on Twitter

              During the period of 2003 to 2008, property prices appreciated sharply. Land prices almost tripled in most parts of the country on account of faster jobs creation, urbanization, and rising income levels. Were these the only reasons for sharp appreciation? No, says the experts. According to them, real estate is a cyclical industry and at the beginning of the last decade, real estate prices were at their nadir. The coupling effect of sharp GDP growth and cyclical nature of real estate industry resulted in sharp appreciation of property prices from 2003 to 2008.

              However, as the world financial crisis hit the world economy in September 2008, GDP growth of most emerging economies started to dwindle. India was no exception and government & RBI brought in policy measures. In fact, the advent of the global financial crisis in 2008 caused resurgence in Keynesian thought. Interest rates were lowered and government provided stimulus (total spending in the economy) to boost the economy. At one point of time, RBI’s repo rate came down to a low of 4.75% in April 2009.

              The impact of financial crisis was severe on real estate market. Some of the large real estate developers started offering discount to the tune of 20% in 2008. The sector began to recover on account of government policy initiatives and lowering of repo rate. However, massive government spending and low interest rates during the period of 2009-2011 resulted in inflationary pressures. And the focus now shifted to tame inflation and thus interest rates started to go up and that resulted in decrease in investment by individuals and companies.

              In last 2 years, real estate transactions including office space absorption and home sales have come down. The prices have stagnated in most micro markets.



              With this in background, can you, the real estate investor really time the market? It’s highly unlikely; however, one can pay attention to the real estate investment strategies, demand drivers, and supply elements.

              1. Real estate investment strategies




              2. Demand drivers
              Following are demand drivers for real estate sector
              • Industry
              This is a no brainer; even my grand mom would say prices would appreciate more in cities/markets where there is all the likelihood of work or jobs creation or setting up of industries. Therefore, as an investor one should regularly visit the city development authority’s website and analyze the city’s master plan. A master plan would ideally comprise of the road map for city's development including the setting up of industries, educational institutes, recreational zones, and residential development. At the same time, pay attention to the news which highlight setting up of a particular industry in your region. For example, the driving industries in Gurgaon are Auto and IT and setting up of these industries in 80s and 90s have resulted in real estate boom in the city.
              • Population growth
              Growth in population requires development of housing. Other societal changes such as rise in formation of nuclear families, movement of skilled workers from other parts of the country again require development of housing. Analyze the population growth in your city by following census reports along with indicators for urbanization.
              • Income levels
              It’s true that setting up of an industry in your region would result in direct and indirect jobs creation which will lead to variety of real estate development. However, pay attention to what kind of industry is this? And what are the income levels of people in your region? For example, real estate prices in Gurgaon have appreciated more because of high income levels of people in the city as opposed to say Bhiwadi (primarily a manufacturing town) where income levels are low.


              3. Supply elements
              Following are supply elements that affect real estate sector:
              • Interest rates
              As explained above, interest rates have direct impact on the supply of real estate. High interest rates bring down the overall supply. On the other hand, low interest rates encourage investment by both individuals and companies.
              • Land availability
              Again one should look at the city’s master plan for availability of land. If land supply is limited, it is a good indicator that real estate prices will shoot up faster than expected. And if there is plenty of land available with the city development authority; it will mean price appreciation will be linear. For example, in Delhi, due to limited land parcels, property prices appreciated sharply. However, now, DDA has initiated the land pooling policy and has demarcated new land parcels. It is now expected that availability of this new land will put pressure on existing property prices in the city and city outskirts. Raising the FSI/FAR can also result in softening of property prices. Track those developments.
              • Physical and social infrastructure
              One should also pay attention to the existing supply of physical and social infrastructure in the city. In certain cities such as Greater Noida, physical infrastructure is in excellent shape. But property prices have not appreciated sharply. This is because social infrastructure which includes industrial development is minimal.


              Equilibrium
              As long as supply and demand are in equilibrium, the returns from real estate investment will be linear. Therefore, as an investor, one should look for distortion in demand and supply curves. If demand is expected to be higher than the supply, it calls for investment in real estate to make windfall profits. If supply outdoes demand then it will yield low returns on your investment. 


              Can I time the real estate market?
              No, it’s not possible to gather data to time the real estate market. Instead, one should solely focus on 3 broad ideas as explained above and only then one should make a bet on real estate investment.

              Did you follow these 3 principle ideas for real estate investment?




              Have any Questions?

              Monday, August 26, 2019

              What are the parameters that I should pay attention to in order to maximize my returns on Property Investment?

              Author: Sachin Gupta | Find me on Twitter

              Real estate is a complex business to be in. Not only one needs to understand the market (supply and demand element), but at the same time, one should be aware of tax laws, registration processes, title conveyance, planning the development of project, rent laws, and state government’s land policies. Therefore, as an individual investor, what is it that one should take primary note of in order to maximize his/her returns on investment made? Let’s explore below:


              • Micro market trends
              Although not foolproof, the market trends with respect to movement of property prices present an insight into the gains and losses of micro markets within a city. If a micro market or locality is showing downward trend for 3-4 consecutive quarters, then it is a clear signal that there is something wrong with the locality that investors are wary of. However, if whole city is showing downward trend because of slow down of economic growth or political instability, then, one needs to be patient before investing in any locality within that city.

              There are 3 to 4 major property indices in Indian real estate market. Analyze them in detail before investing in a property. The most talked about property index in India is released on a quarterly basis by National Housing Bank. One should definitely pay attention to this residential index.


              • Master plan of a city
              Master plan of a city is another key indicator as far as maximizing returns on your property investment. Master Plan is developed by town planning authorities or city civic bodies. It is a plan that takes into consideration city’s existing population, future expansion in population, need for infrastructure, and industrial development within a city. To accommodate population growth and facilitate industrial development, civic authorities earmark or zone the city. Certain pockets or sectors are demarcated for residential development, and some other for industrial or commercial development. Therefore, what master plan tells you is that how the city’s development would pan out for coming 10-20 years. Pay considerable attention to this aspect before investing in a property. Here are the links of civic bodies across India that deal with master planning.


              • Where are builders building the new projects?
              Once master plan is prepared, civic bodies then invite applications from private developers to develop the land. Therefore, it is no surprise that builders are allotted land in one cluster or certain specific clusters of the city. Which are these clusters? In addition to finding it out in master plan, one can simply analyze the market and see the launch of new real estate projects.

              In addition, one can find below the detailed document comprising the Guidelines for achieving maximum returns on real estate investment in India.






              Have any Questions?

              Monday, August 19, 2019

              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.


              Have any Questions?