6 reasons why underwriting is bad for real estate sector in India

Author: Sachin Gupta | Find me on Twitter Follow @sach_gupta

What is underwriting in real estate and why do real estate developers go for it?

Sumit was looking to purchase a property in Noida and he missed out on the opportunity to book a flat with reputed developer last time because within 2 days of the launch, the project was sold out. He had made up his mind not to miss such opportunities next time. However, even after keeping an eye on new project launches, he missed out again and now the only option left was to book the apartment with channel partners, underwriters, or brokers.

Why does this happen? He questioned…and even wondered…”I read an article last time, and it said…real estate demand is dropping”. How come, these new projects are sold out within a day or two of their launch??

The reason behind the selling of these new real estate projects in a day or two is not the actual demand but artificial demand. Real estate developers use the services of their nexus of brokers and financiers who underwrite these projects.

Real Estate project underwriting in its broader term means sharing the risk of the developer. Brokers or financing houses underwrite the real estate project, which means they have taken on the risk of distributing/selling the project. Should they not be able to find enough investors or customers, they will have to hold some stock themselves. Underwriters make their income from the price difference between the price they pay to the real estate developer and what they collect from investors or from broker-dealers who buy portions of the offering.

With the help of this nexus, developers start making claims that their projects are sold out. With underwriting, developers are able to create a situation wherein they let prospective buyer believe that there is demand for the project and that they should buy the property now or else the prices will go up shortly. And this normally creates a herd mentality among end-users and they have no other option but to buy the property.


Why underwriting is not good for real estate sector in India

• Artificial demand

The demand thus created by the nexus of builders and underwriters clearly sends the signals to the market that “All is well” with realty sector and demand is robust. However, for a given city the actual demand supply equilibrium can be understood by studying and analyzing the capital value appreciation and rental yields. If demand is robust, it should reflect in the rental yields as well. However, what we see in most Indian cities is the fact that rentals have not kept pace with the capital value appreciation. The artificial demand created by the builder-underwriter nexus keeps the capital value of housing stock unjustifiably high.

• Prices keep on moving up despite the sluggish market economy and demand

We keep reading from various leading research agencies about the amount of unsold stock lying with the developers and how it has increased over the last quarter or year. There is hope that prices might come down to reasonable level. And all of us sit on the fence hoping that prices are going to come down, but what happens is actually opposite. Prices are always going up. Demand or no demand, prices in real estate sector in India move only in one direction and that is up. There is never a correction. Why? Well, coupled with the limited launch of new supply, holding up of existing inventory keep the prices firm. Finally, the buyer gives in and the cycle continues as usual.

• Seller’s market

Housing is a basic need where one dreams of having a house with certain features and specifications. In reality, buyers are forced to buy whatever is available at prevailing market prices. There seems to be no choice whatsoever for buyer to buy a piece of land and construct his own property due to high prices.

• Non preferential allotment

There might be people who might have contacted the developer early and would have thought of booking an apartment at their desired floor with best available view. However, this wishful thought may not come true due to underwriting of the project as it may be blocked by underwriters in bulk bookings.

• Housing is treated as an investment class rather than a basic need

People or businesses with deep pocket and unaccounted income invest in some of these projects to park their money. There are instances when one individual or business house owns multiple residential properties. Whereas the land allotted by civic authority to builders should have served the purpose of creating housing supply for the needy at justifiable price, what we see is the mad rush by people to own multiple properties. And this builder-underwriter nexus serves this well by allowing cash component in property dealings.

• Black money

A builder offloads its stock to underwriters and then an underwriter sells the stock to end-users or investors. Based on the artificial demand created, builder keeps on increasing the prices periodically (monthly or quarterly). The underwriter then sells the property at lower value than the current builder price. The premium charged by the underwriter is usually paid in cash by the investors. And this leads to a circle wherein an investor with unaccounted income invests in property and the cash amount received by the underwriter is again pushed back into buying of another housing stock.


Are there any solutions to this builder-underwriter problem?

Yes, there is a solution. Whenever a real estate developer sells, it should be made mandatory by law that the buyer information will be made public. By having the buyer information, not only will this lead to actual demand but may also put a curb on entering of black money into real estate sector. But, will the authorities pay any attention to this? We don’t know and this is where the Real estate regulatory bill has also failed. Read more on real estate regulatory bill in the next column.

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Urban development authorities in India

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Real estate development within a city is an organized process wherein development authorities play an important role. The authority prepares the master plan for the city keeping in mind the population growth, employment opportunities, industrial growth, and educational activities.

At the same time, development authorities provide housing for middle income and low income strata of the society. DDA has developed many housing societies in Delhi. The development authority also acquires land from land-owners for the purposes of housing, industrial set-up, recreational set-up, and educational institutes. The whole idea is to prepare the urban map of the city keeping in mind future projections.

In recent times, development authorities across India have launched various housing, plotted, industrial plot schemes. People from all walks of the society participate in these schemes for their housing or business needs. In order to make sure that you do not miss on these schemes by development authorities, we have put together a comprehensive list of development authorities across Indian cities.

Visit the websites of these development authorities to keep an eye on new schemes.

Find below.

List of urban development authorities in india from Green Realtech Projects Pvt. Ltd

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What are the various State wise rooftop rainwater harvesting legislation in various Indian states?

Author: Sachin Gupta | Find me on Twitter Follow @sach_gupta

Monsoon in India is one of the oldest weather observations which happen from June to September every year. It is a major weather phenomenon because of its influence on the lives of people and their well being.

Average rainfall across various Indian states is as follows:

Sl. No.	State	Meteorological Divisions	Average annual rainfall (mm)	Average annual rainfall (ft)
1	Andaman and Nicobar Islands	Andaman and Nicobar Islands	2967	9.73
2	Arunachal Pradesh	Arunachal Pradesh	2782	9.13
3	Assam	Assam and Meghalaya	2818	9.25
4	Meghalaya	Assam and Meghalaya	2818	9.25
5	Nagaland	Nagaland, Manipur, Mizoram and Tripura	1881	6.17
6	Manipur	Nagaland, Manipur, Mizoram and Tripura	1881	6.17
7	Mizoram	Nagaland, Manipur, Mizoram and Tripura	1881	6.17
8	Tripura	Nagaland, Manipur, Mizoram and Tripura	1881	6.17
9	West Bengal	Sub-Himalayan West Bengal and Sikkim	2739	8.99
10	West Bengal	Gangetic West Bengal	1439	4.72
11	Sikkim	Sub-Himalayan West Bengal and Sikkim	2739	8.99
12	Orissa	Orissa	1489	4.89
13	Bihar	Bihar Plateau	1326	4.35
14	Bihar	Bihar Plains	1186	3.89
15	Uttar Pradesh	Uttar Pradesh	1025	3.36
16	Uttar Pradesh	Plain of West Uttar Pradesh	896	2.94
17	Uttar Pradesh	Hills of West Uttar Pradesh	1667	5.47
18	Haryana	Haryana, Chandigarh and Delhi	617	2.02
19	Delhi	Haryana, Chandigarh and Delhi	617	2.02
20	Chandigarh	Haryana, Chandigarh and Delhi	617	2.02
21	Punjab	Punjab	649	2.13
22	Himachal Pradesh	Himachal Pradesh	1251	4.10
23	Jammu and Kashmir	Jammu and Kashmir	1011	3.32
24	Rajasthan	West Rajasthan	313	1.03
25	Rajasthan	East Rajasthan	675	2.21
26	Madhya Pradesh	Madhya Pradesh	1017	3.34
27	Madhya Pradesh	East Madhya Pradesh	1338	4.39
28	Gujarat	Gujarat region	1107	3.63
29	Gujarat	Saurashtra and Kachchh	578	1.90
30	Goa	Konkan and Goa	3005	9.86
31	Maharashtra	Konkan and Goa	3005	9.86
32	Maharashtra	Madhya Maharashtra	901	2.96
33	Maharashtra	Marathwada	882	2.89
34	Maharashtra	Vidarbha	1034	3.39
35	Andhra Pradesh	Coastal Andhra Pradesh	1094	3.59
36	Andhra Pradesh	Telengana	961	3.15
37	Andhra Pradesh	Rayalaseema	680	2.23
38	Tamil Nadu	Tamil Nadu and Pondicherry	998	3.27
39	Pondicherry	Tamil Nadu and Pondicherry	998	3.27
40	Karnataka	Coastal Karnataka	3456	11.34
41	Karnataka	North Interior Karnataka	731	2.40
42	Karnataka	South Interior Karnataka	1126	3.69
43	Kerala	Kerala	3055	10.02
44	Lakshadweep	Lakshadweep	1515	4.97

As we all know, rain is the primary source of water while rivers, lakes and ground water are the secondary sources. Our daily consumption of water is fulfilled by secondary sources of water. However, these secondary sources of water are replenished by primary source of water (rainfall). Therefore, it becomes imperative for all of us to harvest this rain water in order to refill rivers, lakes, ground water.

Advantages of Water harvesting

1. Provides drinking and irrigation water.
2. Increases groundwater recharge.
3. Reduces storm water discharge, urban floods and overloading of sewage treatment plants.
4. Reduces seawater ingress in coastal areas.

An example,

Let’s take the case of Delhi; the average annual rainfall is 617 mm or 2.02 Ft. In a given area of 1 Ft by 1 Ft, the rain water that can be harvested every year will be 2.02 Cubic Feet or 57.21 liters. In other words, every household can harvest 57.21 liters of water in an area of 1 ft by 1 ft. If you have a roof of 50 ft by 20 ft, the water harvested would be 57206.4 liters.

Now, is this water harvested properly? Households, residential complexes, commercial complexes can harvest rain water by capturing runoffs from rooftops. The water thus captured can either be stored in a community water tank or allowed to go to the ground via a pipe which helps in refilling or increasing the ground water levels of a given region, thus, reducing the scarcity of water.

ACTION TAKEN BY VARIOUS STATEs / UTs / MUNICIPAL CORPORATIONS TO MAKE RAIN WATER HARVESTING (RWH)/ROOF TOP RAIN WATER HARVESTING (RWH) MANDATORY

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As a prospective borrower, what are the terms you should be generally aware about in the housing finance field in India?

Author: Sachin Gupta | Find me on Twitter Follow @sach_gupta

Continuing in our series of home finance, in previous article, we noticed the shortage of housing in India and the role that Home finance companies can play to plug this housing shortage gap. In this article, we will explore the various terminologies used in home finance such as types of home loans, pre-payment charges, processing fee, secured/unsecured loan, rate of interest, insurance, pre-approved loans, etc. The idea is to equip you with basic yet important terms used in home loan process. Therefore, whenever, you decide to go for the home loan to purchase property, it is advisable to quickly go through the following document.

Not only will this hold you in good position to bargain for lower interest rates with the bank but it will also help you to understand various charges that are incurred while procuring home loans. Home loans as described in the document below can be availed for purposes such as buying a property, construction, land purchase, etc. Irrespective of the type of home loan one is going for, it make sense to compare the various loan options from different banks.

Understanding home loans and their terminologies in india from Green Realtech Projects Pvt. Ltd

Having understood the various terminologies used in the home loan process, we hope that you will make an informed decision.

Thanks

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