Tuesday, July 27, 2021

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

Author: Sachin Gupta | Find me on Twitter
 
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


Have any Questions?
 

Monday, July 19, 2021

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

Thursday, July 8, 2021

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

Author: Sachin Gupta | Find me on Twitter

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

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

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




Source: National Housing Bank




Have any Questions?