Cyclical nature of commercial real estate

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

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??

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Can I time the real estate market?

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

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 job creation, urbanization, and rising income levels. Were these the only reasons for sharp appreciation? No, say 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 the real estate industry resulted in a sharp appreciation of property prices from 2003 to 2008.

However, as the world financial crisis hit the world economy in September 2008, the 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 a resurgence in Keynesian thought. Interest rates were lowered and government-provided stimulus (total spending in the economy) to boost the economy. At one point in time, RBI’s repo rate came down to a low of 4.75% in April 2009.

The impact of the financial crisis was severe in the real estate market. Some of the large real estate developers started offering a discount to the tune of 20% in 2008. The sector began to recover on account of government policy initiatives and the 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 a decrease in investment by individuals and companies.

In the 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 the 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 the real estate sector

• Industry

This is a no brainer; even my grandmom 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 the road map for the 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 highlights the setting up of a particular industry in your region. For example, the driving industries in Gurgaon are Auto and IT, and setting up these industries in the 80s and 90s has resulted in a real estate boom in the city.

• Population growth

Growth in population requires the development of housing. Other societal changes such as the rise of nuclear families, the movement of skilled workers from other parts of the country again require the 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 an industry in your region would result in direct and indirect job creation which will lead to a 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 being developed under the Make in India program) where income levels are low.

3. Supply elements

Following are the supply elements that affect the real estate sector:

• Interest rates

As explained above, interest rates have a 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 lands 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 the 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 the 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?

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Reasons why NRIs prefer investment in Indian Real Estate over stock market, NRE/NRO accounts, and bonds

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

Continuing with the discussion about Non Resident Indians and their propensity for investing in various investment classes, we recently conducted a survey among NRIs and asked the following question:

“Fall of rupee opens up new vistas for NRIs to invest in India. Which asset class is more likely to see increased investment activity?”

About 43 people responded and 27 chose real estate as the preferred investment asset class, the second preferred choice was NRE/NRO account with 12 people opting for it.

What could be the possible reasons for these results?

Also, have a look at our research report showing returns on investment classes such as real estate, gold, bond, and stocks.

• Volatile stock markets

Let’s face it. For last 2 years, the stock markets have been volatile to say the least. With growth slowing down and investment climate at its low due to poor policy making on part of the government of India, investors are looking for assets that are less risky. Unless, the investment climate gradually improves, we may continue to see retail investors abandoning stock markets and invest in relatively risk free asset class such as real estate or bonds.

• Low returns on bond markets

Bonds are risk free and therefore, returns are lower. However, bonds continue to provide stable return over a period of time and many prefer stability over high returns. With volatile stock markets, Indian investors are either preferring real estate or bond market. Non Resident Indians have been no exception to this rule.

• Rupee depreciation

In last 2 years, rupee has fallen substantially. This presents NRIs with an opportunity to invest in Indian real estate. Because of falling rupee, real estate looks attractive to NRIs and they are able to get property at almost 20% discount. For example, if one were to invest rupees 1 crore in commercial real estate such as Office Space in Gurgaon or housing in Chennai, he/she would have paid about 200000 USD. And since the falling of rupee, the same real estate would cost 170000 USD to an NRI. This is a major factor why real estate prices are still not coming down in India despite the sluggish demand at home. With money flowing in from NRIs, real estate prices are stable, if not appreciating.

• Family considerations

For people living abroad, there is the comfort factor that some of their relatives either parents, siblings are in India. And this leads them to buy a piece of real estate, which can be used in times of need for parents or siblings. Many also cherish the dream of returning to India one day and investment in real estate gives them the luxury to come back without worrying about housing or relocation.

• Hedge against inflation

Real estate has always been a preferred investment destination for Indians. It not only provides them with the availability of land or housing, but at the same time hedges ones savings against inflation. With low interest rates offered in deposit accounts, many prefer locking their money in real estate in order to hedge against inflation.

Our research shows that of all the various kind of investment vehicles, returns on gold and real estate have yielded better results over a 6 year period.

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Planning to borrow home loan? Pay attention to your CIBIL Score.

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

Ok, you have identified the residential property you wish to buy. Now comes the financing part of it. A residential property may cost you 50 Lacs or more. You may have arranged for the down payment cost of approximately 10 Lacs and are now looking to borrow the home loan for remainder of the property cost.

Borrowing home loan means you will be paying EMIs for several years. Therefore, one must be responsible and confident to service the debt over a period of time. Before sanctioning such a huge amount to an individual borrower, the banks carry out comprehensive due diligence that includes checking your credit history, bank statements, income statements, job or business continuity.

CIBIL score is one such parameter that banks and financial institutions look into before sanctioning loan. What is CIBIL score? Credit Information Bureau (India) Limited (CIBIL) is India’s first Credit Information Company (CIC) founded in August 2000. CIBIL collects and maintains records of an individual’s payments pertaining to loans and credit cards. These records are submitted to CIBIL by member banks and credit institutions, on a monthly basis. This information is then used to create Credit Information Reports (CIR) and credit scores which are provided to credit institutions in order to help evaluate and approve loan applications. (Definition Source: Wikipedia)

One can check the CIBIL score here

How can you maintain good CIBIL score?

Well, in order to maintain good CIBIL score, you must pay attention to the following factors:

• Repayment:

First thing first, what is your repayment track record? In other words, are you paying your installments on previous loans or credit cards regularly within the stipulated timeline? If yes, then your CIBIL score is going to be good. Your ability to repay previous debt has 35% weight-age in calculation of the CIBIL Score. Therefore, make sure that you stick to due dates of servicing your EMIs.

• Credit Utilization:

Credit utilization is the ratio of the

Balance amount that you owe to your lenders / Total of your credit card limits

Therefore, if your balance amount that you owe to lenders is high then it signals riskiness. The increase in balance amount indicates increase in repayment burden and may negatively impact your CIBIL score. Credit utilization has 30% weight-age in calculation your CIBIL score. Therefore to score high CIBIL score, keep your outstanding balance to banks and financial institutions as low as possible.

• History of Debt servicing capacity:

Are you paying EMIs and credit installments successfully for several years? If yes, then this will have a positive impact on your CIBIL scores. Banks and financial institutions prefer applicants who have taken loans earlier and have serviced the debt regularly. It sends the signal that the individual has a long history of securing debt and has been responsible in his/her repayments. This has a weight-age of 15% in calculation of CIBIL score.

• New Credit

If you have applied for too many loans or credit cards in recent times, then it has a negative impact on your CIBIL score. Banks and financial institutions will see this increased activity of loan applications as risky because your debt burden has increased and it may affect your repayment capacity. Therefore, be prudent with your loan applications. Unless, your income has increased substantially, do not apply for too many loans or credit cards at the same time or within a short interval of time. In other words, space out your loan applications prudently. This has a weight-age of 10% in calculation of CIBIL score.

• Credit mix

Many a times, we have noticed that people have a great propensity to apply for unsecured loans. As the name suggests, unsecured loans are not secured by any mortgage or guarantee. If you have mostly availed unsecured loans (such as personal loans) or credit cards, then it will bring down your CIBIL score. Always have a mix of both secured loans and unsecured loans. Secured loans are car loan, home loan, etc. This has a weight-age of 10% in calculation of CIBIL score.

Now that, you have a thorough understanding of CIBIL scores and its impact on your loan availing ability, we hope that you will be disciplined in your finances.

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What is the impact of Interest (Repo) rates on Housing & Housing Prices Appreciation in various cities in India? Is there any direct relationship?

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

Ok, everyone including the real estate developers, builders’ apex bodies such as CREDAI, brokerage houses, and other related industries are shouting from the roof tops for interest rate cuts to revive the demand in realty sector. Every time there is a review of monetary policy by RBI, numerous articles in leading newspapers are published on how the rate cuts can boost demand and bring back fence sitting customers in investing in real estate in India. However, RBI has resisted such calls and instead has focused on bringing down the inflation. Now that, inflation has come down, can we expect rate cuts? Mr. Raghuram Rajan knows it best. Let’s leave it to him and his team at RBI.

But, let’s explore, is there any merit in the builder’s argument for reducing the interest rates? Will rate cuts boost demand?

For that, we need to examine the housing price appreciation in various cities across India and the impact of repo rates on housing price appreciation.

Let’s go one by one.

• Appreciation in Housing prices across India

As can be seen from below graph, the pace of housing price appreciation has slowed down since 2010. What does it suggest? Well, it suggests, that demand has been falling gradually since 2010. End-users or investors are postponing their decision to invest in real estate. Assuming influx of new housing supply to be constant from 2010 to 2014.

• Increase in repo rates

Repo rates have increased from 5% in March 2010 to 8% now. Repo rates are rates at which RBI (central bank) lends money to banks or housing finance companies.

• Impact of increase in repo rates on housing price appreciation

This graph tells the whole story. As the repo rates started moving up from 2010 to 2014, the housing price appreciation started to come down. In 2010, most cities witnessed substantial appreciation in housing prices with Bangalore, Ahmadabad, Kolkata, Mumbai, and Chennai appreciated upwards of 30%. Whereas in 2014, the highest price appreciation was witnessed in Pune at mere 3.88%.

• Conclusion

While rate cuts will certainly bring back customers to market and we may see improved activity in real estate investment. However, just like demand waned gradually from 2010 to 2014, similarly, demand will pick up gradually and we may see the full potential somewhere in 2017.

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Tips for landowners before they enter into a joint venture agreement with real estate developers

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

Recently, our team was interacting with some of the landowners who have entered into a joint venture agreement with real estate developers in Delhi NCR region. Now, believe it or not, most of these landowners are inheritors of ancestral property and have no clue about the legalities of a joint venture. They go as per the words of their confidants and sometimes find themselves into trouble. Take this, a landowner who entered into a joint venture agreement with a real estate developer in 2006 still finds that his land has been locked by the developer and there are no signs of the proposed group housing project taking off. What can you as the owner of land do before entering into a joint venture with a property developer?

1. First of all, what is a joint venture between a landowner and a real estate developer?
Joint ventures are formed by at least two parties with the objective of achieving a specific investment return. Unlike many other business agreements, when the objective is achieved, the joint venture is usually terminated. Following are the attributes of a joint venture.

• Risk sharing: A single investor may be unwilling to undertake a real estate venture because of its size, location, capital requirements, and/or duration. However, by sharing the risk, two or more parties may be willing to undertake the venture.
• Combining expertise with capital: Joint ventures are frequently formed as a way to pool equity capital from one or more sources, as well as a means of bringing parties with different expertise to the venture. A joint venture could also involve purchasing existing properties and operating them. In this case, one of the parties may be responsible for acquisition, leasing, and management, and others may provide capital.
• Speculative objectives

2. Organizational forms

Participants in joint ventures may include any combination of individual investors, partnerships, corporations, or trusts. However, a joint venture in and of itself is not a legal form of organization. In order to specify capital contributions, rights, duties, profit sharing, and the like, a joint venture agreement or a business entity must be created. The choice of organizational form used to accommodate those various groups of investors could be a partnership, corporation, Pvt. Ltd, or trust. Partnerships are frequently the vehicle of choice in real estate joint venture.

3. Profit sharing

Because the parties to a joint venture may contribute different things, and possibly in different proportions, a partnership must be structured such that it provides economic incentives for all parties. Differences in tax status of investors also may affect the way partnerships are structured.

A joint venture can take on a number of different partnership forms. The most common is the limited partnership. As is the case with all partnerships, there must be at least one general partner and any number of limited partners. Generally, in real estate, limited partners are the investors that provide most of the equity capital, while general partners are usually responsible for managing the partnership assets and may contribute a relatively small portion of the required equity capital.

4. Following factors are considered by potential investors for structuring a joint venture.

• How much initial capital will the parties contribute and how will the parties contribute additional capital if needed in the future?
• How will the parties share in the annual cash flows to be produced from operating the property?
• How will the parties share in the cash flow received from sale of the property?
• Will some of the parties receive a preferred return? Will the preferred return be paid from annual cash flows and/or from sale?
• Will taxable income (or losses) and capital gain (or loss) be shared in the same proportion that operating cash flow to be distributed?
• Who will have control over the operation of the property and decisions involving capital improvements, approving leases to tenants, financing and possibly refinancing the property, and when to sell the property?

5. Points you as the owner of the land must keep in mind:

• Check the credentials of the developer. His past record and success in achieving targets.
• Before entering into a joint venture agreement with a builder, register your company and transfer the land on the book of this new entity. You can hold 100% of shares of this new entity or shares can be held by various promoters depending on their claim in the land. The new entity formed should ideally be registered as private limited company under the company’s law act of India.
• Now, enter a joint venture agreement with a builder’s company. Therefore, the agreement is between two companies. One providing land for the development of the project and other providing capital and expertise to develop the project.
• How do you decide on profit sharing? Well, we have defined it above. However, Recent trends in India indicates a 1/3rd – 2/3rd rule. 1/3rd of the project outflows going to the landowner and 2/3rd of the project outflows going to the real estate developer.
• As a landowner, make sure that the number of housing units or the developed area of the project is assigned to you and is clearly mentioned in the joint venture agreement. For example, in case of housing project, you should have the housing unit number, size, and floor in the joint venture agreement.
• As an example, a landowner enters into a joint venture agreement with a ABC real estate developer Pvt. Ltd. The plot of land measures 20 acres and about 600 housing units would be developed. As a thumb of rule, 200 units should be assigned to landowner and remaining 400 to the builder. For a landowner, this kind of agreement is safe and can result better returns for his/her land as opposed to the agreement wherein builder pays the 1/3rd of the cash inflows to the landowner on the sale of housing units.
• Hire a professional legal company with expertise in real estate joint agreements, and due-diligence.

Find the sample Joint Venture agreement between a landowner and the real estate developer.

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A typical real estate project development process

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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.
4. Floor to area ratio (FAR) – it is usually calculated as gross building area divided by square footage of land area.
5. Height restrictions – used to limit the vertical height of a structure to be constructed.
6. Allowable use – user activities permitted in a zoning classification
7. 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.
8. Incentive zoning – used by city planners to accomplish community goals simultaneously with private sector development.
9. 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.
10. Minimum lot size – per zoning classification
11. Parking ratio – required number of parking spaces per sq. ft of gross building space or per number of apartment units.
12. Site plans – drawing done to scale depicting the placement relative to other requirements
13. Traffic counts – number of vehicle trips per hour past a specific site.
14. Encroachment – occurs when the construction of improvements extends over a property line on to an adjacent property.
15. Property tax abatement – forgiveness of taxes for a specified number of years.
16. 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.

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5 Investment Tips for Commercial Real Estate

An investment in commercial real estate is a great way of increasing your market worth. Also, by acquiring the asset you add a steady source of earnings to your portfolio. Commercial property that is strategically located can appreciate dramatically over a period of time, while rented commercial properties can procure a regular cash flow for other financial pursuits like investment or for comfortable retirement. The following are five useful tips that will help you while purchasing a commercial property.

• Learn from experiences 

It is always good to go with your instincts. Make use of personal knowledge as the best ideas for investment come from the investor's prior investment experiences and know-how. You should search for real estate in an area located close to your home or some place that is known to you. Investing in familiar markets is always a safer option and you can trust your instincts about what to buy where. Start going through blueprints and get a potential property evaluated. Remember to park your hard-earned money in a well-established locality, rather than an upcoming one even though it would cost more. It is going to be a more profitable investment eventually.

• Wait for the right opportunity 

If you have just seen the property once and have decided to seal the deal, probably you are rushing in a bit too soon. Do not make such a blunder just because you have the purchasing power or like the look of the place. That does not mean the property is ready to be acquired. You should be comfortable with the area and the property. Visit the real estate during all times of the day to see the amount of lighting and the noise in the vicinity. Recce of the real estate may probably even bring out a few flaws in the property that can later be used to negotiate the price.

• Build a real estate circle

An investor seeking to buy a commercial property cannot strike the best deal without a few suggestions and strategies from friends or experts from the real estate network. If you have a business associate from the legal, banking, contracting or property sales profession whose opinion you can trust, you should probably get some professional advice before taking the plunge. The person may also help you find a better deal.

• Plan for both short and long term prospects

As an investor of commercial property, you should be able to gauge the immediate outcome from your investment, while also understanding its long term effects. Cities and their suburbs consist of several run down properties that were once buzzing. Draw your plans and cross-check what you want with what is available. Sometimes, changes in infrastructure, transportation routes and arrival of big organizations in the vicinity can instantly boost the worth of real estate. If something like that is on the cards for the property you are considering, you may be in for success in the near future.

• Diversify your portfolio

Do not risk your money by parking all your funds at one place. You may be taking a huge risk by putting all your investment into a single commercial property. While buying commercial real estate and renting it out will ensure decent cash flow at a later stage, a market slowdown during retirement would be ruinous. Commercial property must not be the only one holding for an investor. To avoid getting stuck with a fruitless investment, it is advisable that you diversify by purchasing residential real estate or stock. If you are only inclined towards venturing into the realty sector, you can branch out by acquiring space in retail or office buildings, apartment buildings, condominiums, studio flats or by buying raw land.


This is a guest post by Devika Arora. The above piece of work talks about commercial properties in India.

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

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

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

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

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

• Background checks

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

• Police verification

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

• Solid Lease agreement

Prepare a lease agreement which safeguards your interests and you should have the following in a typical lease agreement:

• Basic clauses

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

• Security deposit clause

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

• Maintenance of the property

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

• Concealed defects and responsibility for fixing it

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

• Sub-leasing clause

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

• Termination notice

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

• Registering the lease agreement

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

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

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

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

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.

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Why Home insurance is extremely important in India?

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

Jammu and Kashmir floods have been devastating to say the least. Many people have lost their lives. Businesses including restaurants, Shikaras, tourism, small workshops have been razed. Agricultural land has been eroded. Houses including the contents of a household have been damaged. The floods in Jammu and Kashmir have been the worst in over half a century.

Well, there could be man-made reasons such as aggressive construction, & lax regulations for this great disaster, however, one cannot take away the fact that it was a horrendous natural disaster partly assisted by man-made actions.

The focus of the state and central government is to rescue the people and then focus on relief work. We must congratulate Armed forces for their stupendous work for saving Thousands of lives. Food is being provided to the flood victims, Medicare facilities have been augmented.

However, to bring back the normalcy would take months, maybe year or two. The government has announced relief packages including financial assistance. However, one wonders, what will happen to the damaged houses and the contents of the houses? Will these be recovered? In such a scenario, home insurance would have been of great help. We are not sure, if home insurance was a common practice in Jammu and Kashmir.

Home insurance is extremely useful for people living in areas that are prone to the risks of floods, earthquakes or burglaries?

Home insurance can cover losses to the structure and contents of one’s home from any natural or man-made calamity. The disasters that can be insured against are fire, earthquakes, storms, cyclones, tempests, tornadoes, hurricanes, floods or inundation, lightning strike, explosion, landslides, impact by vehicles or aircraft, and bursting or overflowing of water tanks and pipes. However, care needs to be taken that only the cost of structure is insured and not the cost of land.

Mainly two types of home insurance policies are available in India:

• Buildings Insurance

Insuring the building or building structure is important since it protects the policy holder against inevitable losses in case the insured building is destroyed or debilitated in any natural or man-made calamities.

• Content Insurance

Contents insurance under home insurance plans includes protection to movable goods, possessions or contents in the house; anything that is not a fixed part of the home, for example appliances, electronic goods, furniture and clothing etc.


Home Insurance can be extremely useful for an NRI who is living far away from his/her property. In case of an NRI, his/her property is usually managed by a Property Management Company who specializes in NRI Property Management Services and such companies can advise an NRI to opt for home insurance.

Find below the detailed info about Home insurance in India including the claim process, benefits of home insurance, and companies that offer home insurance in India.

Home insurance in india from Green Realtech Projects Pvt. Ltd

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Is it worthwhile to invest in Commercial real estate as compared to Residential Real Estate in India?

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

People invest their money to achieve targeted rate of returns. Returns vary depending on the investment asset class such as stocks, gold, real estate, mutual funds, fixed deposits, etc. However, in India, majority of people invest their savings primarily into real estate and gold. There are two reasons for it, one – financial markets are complicated to understand and second – they invest in real estate and gold to hedge against inflation (knowingly or unknowingly).

Within real estate, there are various asset classes such as commercial office space, retail spaces, residential, warehouse, institutional, etc. However, about 80% of investment in real estate goes to residential asset class owning to its safe nature and demand from rising middle class.

However commercial real estate or income properties can yield better returns provided one has sufficient knowledge of the city, its expansion plans, industry base, and income levels of the people living in the city. The investor must consider many variables when acquiring income properties:

1. Market Factors (Demand & Supply)
2. Occupancy Rates
3. Tax influences
4. Level of risk
5. Amount of debt financing
6. Proper framework to measure return on investment

Motivations for investment:

1. Rental income
2. Capital appreciation
3. Portfolio diversification
4. Tax benefits

Understand before investing:

Because of highly competitive nature of the industry and its difficulty in forecasting demand, there are certain times when excess supply is unintentionally produced, thereby increasing vacancy rates, reducing rents, and causing volatility in property values. As an example, even though there may be a definite need for additional Office Space in Gurgaon, the potential for over-development will exist as each developer rushes to deliver additional space to the market before competitors. This phenomenon creates a cyclical pattern in real estate industry.

For example, if the demand for particular property type is less and supply is in excess, then occupancy level and rents will be lower. However, as the demand picks up, the property type will start recovering and occupancy levels and rents will move up.

On the contrary, if demand for particular property type is more and supply is less, then occupancy level and rents will be higher. However, as more space is developed, the property type will come into the balanced stage and occupancy level and rents will come down to optimum/normal stage.

The idea is to understand, what the demand for particular property type is and how much space is already available. As an example, the demand for IT Office Space in Gurgaon is high; however we need to measure the current available space and future developments.

Investment analysis:

In general, when we refer to investment analysis in real estate we are referring to analyzing a particular property to evaluate its investment potential. This analysis should also help answer other important questions: 

1. Should the property be purchased? 
2. How long should it be held? 
3. How should it be financed? 
4. What are the tax implications of owning the investment? 
5. How risky is the investment? 
6. Two key terms: Internal rate of return (IRR), Present value should be calculated

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

Building material is any material that is used for 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 the 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 (i.e. front elevation design, stone cladding, facade, etc.)
5. Peripheral external developments (such as a compound wall, driveway, landscape, hardscape, Gate, etc,).

The other minor cost head would be the 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 the 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 to the infographic 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, intermediate, 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 Thermomechanical treatment (TMT). Rebars comes in different grades (i.e, Fe415, Fe500, etc.,). Fe500 is generally recommended by the 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 a 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. The use of cement older than 2 months should be avoided as cement loses strength with an 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. Since steel and cement constitute a major proportion of the total construction material cost, therefore, there is a strong focus on buying these 2 ingredients from the Indian companies thereby giving a big boost to the Make in India program.

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 silt/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 the 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 demand 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 the old days, were commonly made of clay and were known as burnt clay bricks. Nowadays, 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 lightweight 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 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.

The tile should be easy to clean, strong, sturdy and stain-resistant. Tiles in a wet area like the 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 the 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 the 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 costs in local markets. This is because the labor component constitutes to 40-45% of the total cost of construction of a house. 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 your 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 loans from banks/ friends. Although this sounds like a naive step, lack of resources during construction might sometime overshoot the budget. Contractors will charge for De / Re-Mobilization. Some of the construction materials like Cement etc. might expire/lose its strength if the project is delayed by long. So sourcing the funding before the start of the project is just as important a step as any other. 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

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

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

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.

Sample of development joint venture agreement between owner of land and developer from Green Realtech Projects Pvt. Ltd

Source: National Housing Bank

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