Monday, April 27, 2020

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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Monday, April 20, 2020

How can Indian Real Estate Developers reach out to NRIs and target Overseas Indians?

Author: Sachin Gupta | Find me on Twitter

Real estate is an extremely important industry in the growth of Indian economy. The sector contributes about 6% to the nations’ GDP. The sector is also the second largest employer of labor (formal and informal) behind agriculture.

Real estate developers buy land from the city authorities or directly from the farmers/landowners. Once the land acquisition process is complete and titles are transferred in the name of the developer, the construction work starts. What kind of development will take place on a given plot of land depends on the market conditions. A developer can develop commercial or residential buildings based on the market elements of demand and supply.

The next step for the developer is to sell or lease the project to investors who are willing to use it for their end-use or for investment purposes. When market conditions are not favorable; it becomes extremely difficult for the developer to clear the unsold stock of inventory and that seems to be the case today in India. About 7.6 Lacs of housing units were unsold at the end of June 2014. And new project launches have been greatly reduced.

In this scenario, what can a developer do? Wait for the economic conditions to improve? Wait for the interest rate cuts? Wait for the improvement in job market? No doubt, all of these factors will certainly help the developer in clearing off the existing inventory; however, real estate developers can still tap into the highly lucrative Overseas Indians market.

This is a massive market with a population in excess of 21 million. The market constitutes of Non Resident Indians (NRIs), Person of Indian Origin (PIO), and OCI.



In 2013 alone, Private remittances from overseas Indians into India stood at whopping 71 Billion US $, the largest for any single country in the world.

Where are they investing? A closer look at the RBI data reveals preference for NRE/NRO accounts.



What can Real estate developers do to tap into this segment of the market?

A well thought out strategy is based on 4 principals

  1. Customers
  2. Product or services
  3. Region
  4. Channels


Having identified the customers (overseas Indians), the next step for real estate developers is to pay attention to the behavioral patterns of Overseas Indians. What kind of home sizes they prefer? What are the amenities that they demand? Who will take care of their apartments in their absence? Are there professional Property Management Companies in Delhi NCR and other parts of the country to provide NRI audience with apartment management services? What kind of on-site infrastructure they desire, etc. etc. A well prepared survey can help real estate developers in decoding the behavioral patterns of NRI audience.

After studying the behavioral patterns, the product (homes) can be conceptualized and sold in chosen regions. The next challenge is the choice of channels to reach out to NRI audience?

  • Web:
Use of web to reach out to NRIs is an inexpensive approach, but it is too generic and crowded in nature. However, it helps in creating awareness about the developer and the projects. If combined with other channels such as local brokerages and property shows, significant results can be achieved.

  • Partnership with local brokerages:
NRIs still transact through Indian Channel Partners and some international channel partners (Brokers of Indian origin settled abroad). A real estate developer can tie up with a few local channel partners (brokers) in the respective countries and had them invite their customers. However, not all real estate developers can successfully do it because of limited brand exposure and competition from other reputed developers.

  • Own office:
Having an office in a country can certainly help a real estate developer in reaching out to NRIs in that particular country. However, it is an expensive approach and developers with big pockets can manage to afford it. There are some developers who have set up their own offices in Singapore, Dubai, California, London, Malaysia, etc.

  • Property Shows:
Property shows or exhibitions are country specific in nature, wherein 40-50 real estate developers participate and showcase their properties to overseas Indians in that particular country. Past Indian Property Show in Singapore, Dubai, London indicates a footfall of 2500-3000 visitors a day. Even though, a developer may or may not make on the spot bookings, the exhibition certainly helps in brand building and that helps in future sales.

Having identified the NRI audience, a real estate developer must make the optimum use of different channels to reach out to this segment. One cannot simply afford to ignore this massive and profitable market segment. And the developer must continuously invest in reaching out to Overseas Indians.

NirrtiGo works with Indian Real Estate developers in order to reach out to overseas Indian community. NirrtiGo organizes Indian Property shows in overseas markets, utilize web based platforms, and create awareness on the vast property investment opportunities in India. Real Estate developers looking to target NRI markets can contact NirrtiGo for upcoming Indian Property shows in overseas markets at nirrtigo@nirrtigo.com




Have any Questions?

Monday, April 13, 2020

Things to Avoid while Investing in Real Estate

If you were to believe the latest national news, consumer confidence is on the decline and cash deficit on builders on an incline. In Mumbai, Delhi-NCR, and other popular cities, the demand has come down to around 50% for new property launches.

But not everything in real estate is gloomy, the Reserve Bank of India has recently made a cut in policy interest rates. While this news may cause haste in investing in the sector, say in buying luxury villas in Bangalore or any other metro cities, there are some things you need to consider before making an investment. These are mentioned below for your consideration:


  • Trading in real estate properties frequently


When you trade in real estate properties more frequently – that is, buy or sell your property in shorter duration – you may incur a loss in tax benefits.

To be precise, if you sell your property within 3 years of making your real estate acquisition, such acquisition would then be called short term capital gain, which entitles you to zero tax concession or exemption.

But, if you sell your real estate property after 3 years, it entitles you to long term capital gains and the taxation for this would be at a comparatively lower rate.

Be wary that if you trade-in too many times even in long term capital gains as it could alarm your Income Tax officer, who may consider this dealing as your business income and withdraw the low rate on long term gains.


  • Investing in properties that are due completion


It’s easy for your agent or builder to make excuses for not completing their project on time and completing it at a much later date than promised. They may not have any hidden agenda behind this, except prolonging time. It means a little more number of EMIs for you than which were originally expected.

The second of the two-pronged effect of the delay is this: The tax benefits that you receive on your property investment are restrained on possession, which is a direct effect of long delays.

Being alert on investing in incomplete or overdue properties is therefore very important, at least for your pockets.



  • Planning your budget before investing


We know that if a budget is unplanned or unsupervised before investing in real estate, it may deplete most of your saved resources, back-up money, or hamper your short-term investments. It may also affect your daily expenditure and can create dearth in your cherished small purchases every now and then.

Purchasing properties not just involves a down payment but also what seems like an endless array of EMIs – directly affecting your monthly salary.

Seek the professional advice of your financial consultant before buying a real estate property. A good recommendation would be saving at least 40% of your total income after you have made your investment.


  • Considering all the factors before making your investment


As again like planning your budget, it is equally important in knowing and fully understanding all factors involved with making your investment, because knowing the loan criteria, real estate details, and repaying capacity are not adequate. Consult a financial adviser for a complete financial plan on your investment.


  • Plenty of investment in properties may not result in profits always


The best idea would be to divide your finances into different types of investments, and not just stick to investing in real estate. First, because transaction costs in real estate are much higher than say investing in gold, bank deposits, bond funds, equities, etc.

The prime reason that people choose to invest in a lump sum in properties is that their prices increase at a faster rate compared to other most forms of investments. While this may not be true always, it’s wise to be aware of the current changes or trends in the market for accurate predictions.

If you are planning to make any investment such as buying villas in Bangalore or Chennai, etc., these above-mentioned points should hopefully help you in making the right investment.


This is a guest post by Dinesh Dhawde

Tuesday, April 7, 2020

Shall I invest in commercial properties with 12% assured returns scheme in India?

Author: Sachin Gupta | Find me on Twitter

Recently in the month of May 2014, the managing director of Vigneshwara Group and two of his family members were arrested for multi crore alleged fraud. What was the fraud? Well, the group is in the business of real estate. Ohhh…real estate…yea, most of the frauds happen in this sector only. In this case, the group had received money from investors (around 700 of them) for commercial office space properties in Gurgaon and Manesar. What was the selling point of this group? This group isn't a household name like DLF, or Unitech. So, what was the selling point which brought in these many investors? Well, the selling point was ‘12% assured return on investment, till the possession of the property’. So, if an investor invested about 1 crore rupees for 1000-1200 square feet of office space, then he/she will continue to get 12 Lacs rupees per year as investment returns till the property is handed over. And the builders normally in India claim to handover the property in 3 years.

However, Vigneshwara Group despite taking money from around 700 investors for properties in and around Gurgaon in 2006-07, and promising assured returns till possession, the group allegedly didn't begin construction of some projects and defaulted on payments to investors. And that was the reason "The three members were booked under sections 420 (cheating), 406 (breach of trust), 120B (criminal conspiracy) and 34 (common intent) of the IPC".



On the surface, the 12% assured return is not a bad deal. For an investment of Rupees 1 crore, one would get 36 lacs rupees back in 3 years as assured returns. And at the end of 3 year period, the property is handed over which can be leased to earn decent income. And of course, there will be capital appreciation gains as well. So, on the surface, it looks a good deal.

However, as is the case in life, one needs to scratch the surface to fully comprehend the deal. Let’s do it here:

Why do real estate developers come up with such fancy schemes?


  1. Bank money is not available or is very expensive: What do you think? The builder did not try to raise money for the project through banks or formal channels? Yes, of course, he did…but the money was expensive, i.e. @ 17 or 18%. And he found the easy goats in form of unsuspecting investors who have plenty of cash with them.
  2. These schemes ensure project is sold off at early stage: Real Estate is a risky business, but a builder is always carrying out financial engineering calculations to make sure his interests are safe. When a developer launches a new project especially in commercial category, he wants to play it safe and sell the project to investors along with the incentives of schemes like 12% assured returns. Selling a residential project is rather easy because of demand in India; however, selling a commercial project takes financial engineering skills.
  3. Lack of other funding options: Why can’t builders raise money from other sources such as Private Equity funds or other institutional funds? Well, all these funds carry out comprehensive due-diligence before investing in any project. And the due-diligence process also involves supply-demand analysis for the commercial property along with builder’s track record, etc. And based on their analysis they decide not to invest in such projects if supply of such kind of property is high or demand is low. Because at the end of the day, the commercial property will be valued on the basis of monthly income it can generate once leased.


Why do builders fail to deliver?

Well, all is not lost for investors who invest in such projects provided builder delivers on his promises. But a real estate developer seldom delivers on his promises and that’s why these issues of fraud and money laundering keep on sprouting every now and then.

Why do builders fail to deliver? ‘Greed’ is word that best describes the failure of the builder to deliver on time. Having successfully launched and sold the commercial project on the back of 12% assured returns scheme to fallible goats, he begins to start acquiring land parcels for new projects with similar schemes.  If one project can be successful, why can’t other projects be successful? And in doing so, he diverts funds received from first project to acquire land parcels. The construction progress of first project is delayed, and there is no money left to pay the assured returns as well.

If the builder has remained disciplined, the 12% assured return scheme would have worked. But that is a Utopian scenario.


Are schemes like 12% assured returns good for investors?

  1. Stay away from such schemes if you are a first time investor.
  2. If you have propensity to invest in real estate and can carry out due-diligence, then one can consider such schemes. Due diligence involves carrying out supply-demand analysis, builder’s track record, income levels of the people in the city, etc. It is a challenging task and one should look at if banks or institutional funds have invested money in the project or not? These banks or institutional funds will not invest money in any project without carrying out the due-diligence.

Good Luck with Real Estate Investment!



Have any Questions?