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?

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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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8 mistakes to avoid when buying a home

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Home buying is a long term commitment and therefore one should not rush through the things. Going through a well laid down process will eliminate following common mistakes.

Mistake 1

Buying a home in a builder project means there are additional costs to it. External/Internal development charges, Preferential location charges, club membership, fire fighting charges, one time lease rent, Maintenance charges, car parking are some of the charges that are billed on top of base selling price. These charges put together can range from 18 to 20 % of total cost of home. Once possession is given, you will have to pay stamp duty and registrations charges too.


Mistake 2

Borrowing means you will be paying EMIs. And more you borrow, higher the EMI or you pay EMI for longer time period. Do your calculations and make sure you pay as much as possible in down payment and borrow the rest. There is no point in borrowing 80% of property cost when you can arrange for more funds for down payment.


Mistake 3

Plan at least 3 years before you plan to buy a house. That way, you will have enough surplus funds to make the down payment and borrow the rest from bank.


Mistake 4

Home affordability is a key consideration and one should never lose sight of it. Home affordability means what is the value of home that you can afford given your current income levels. You can easily calculate Home affordability here.


Mistake 5

We all dream of living in a house that is big and has all the world class amenities, but can you afford it?


Mistake 6

Do not ever overlook due-diligence part. Ask for approvals, land title certificates, license number form the developer.


Mistake 7

If buying a home for investment purposes, make sure you do not lend in a soup and have enough cover to pay for home installments. When realty market was going strong, investors/speculators entered the market in the hope that they will make windfall profits, but things have become tough. Most of these investors/speculators are willing to offload their purchases at relatively very low rate of returns.


Mistake 8

Make sure your finances are in order and you have pre-approved home loan before you start your search for home. This way, you will not overshoot your budget.

Did you make any of the above mistakes???

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HRA Exemption, Rent Deduction and Tax Benefits for Home Loan in India

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Many a times, we are all confused with tax calculations on House Rent Allowance (HRA) and tax benefits on home loan, etc. Believe it or not, planning your HRA carefully can go a long way in your financial planning and therefore studying and understanding the various guidelines related to HRA is paramount for a salaried class and a business person.

• HRA Exemption:

According to section 10 (13A) of Income Tax Act, 1961 read with rule 2A of Income Tax Rules, least of following three is exempt from tax:

1. Actual HRA received 
2. Rent paid in excess of 10% of salary (Basic + DA) 
3. 40% of salary (50% if residing in a metro i.e., New Delhi, Kolkata, Chennai or Mumbai) Salary for the above purpose means BASIC + DA.

Let’s take an example. 

Suppose that you’re residing in Mumbai and paying a rent of Rs 20,000 per month and that your salary package comprises of the following: 

1. Basic — Rs. 50,000 per month
2. DA — Nil 
3. HRA — Rs. 20,000 per month (40% of basic)

Now, the exempted amount of HRA will be least of the following three figures: 

1. HRA received i.e., Rs. 20,000 
2. Rent above 10% of basic i.e., Rs. 15,000 (Rs. 20,000 – Rs. 5,000) 
3. 50% of basic i.e., Rs. 25,000

The least of the three is Rs 15,000; therefore, in this particular case you’re entitled for HRA tax exemption of Rs. 15,000 p.m. (per month) out of total HRA received of Rs. 20,000 per month.

In other words, net taxable portion of the HRA works out to be Rs 60000/- per year. 

net taxable portion of the HRA = Total HRA received per year – HRA Tax exempt per year

                                                    = (HRA received per year Rs 240000/-) - (HRA tax exempt per year Rs 180000/-)

                                                   =Rs. 60000 per year

There are four variables in HRA tax calculations namely, salary (i.e. basic pay plus DA), HRA received, rent paid and the city of residence (whether metro or non-metro). In case all of the four elements remain same throughout the year, the HRA tax exemption calculation is to be done on ‘annual’ basis. On the other hand, if there is a change in any of the variable during the year then HRA tax exemption calculation is to be done on monthly basis.

In case the place/city of residence and place/city of working is different, for the purpose of HRA calculation, place of residence will be considered and not place of working. Suppose that you’re working in a factory or a company located in Meerut (near New Delhi) while residing in New Delhi. So, for the purpose of HRA, your maximum entitlement for tax purpose will be 50% of the basic instead of 40% because for metros HRA tax entitlement is 50% and for non-metros it is 40%.

If the employer refuses to allow the HRA tax benefit, then in that case just claim it while filing your return of income and get the refund of excess TDS deducted from your salary. Further with effect from AY 2014-15 a person claiming HRA of more than INR 100000/- will have to submit the PAN of the landlord to claim the exemption. 

Both the working spouses can claim HRA tax benefit separately, if both of them are paying rent and landlord issues either two separate rent receipts or only one receipt specifying the amount or proportion paid by each, then both husband and wife are entitled for HRA exemption according to the amount of rent paid. 

One can avail tax benefit of HRA if the person is living in the house of his/her parents. In such a case, one will be entitled for HRA tax exemption, but the owner of the house who may be the father/mother is assessable for the rental income derived from the house, provided such transaction should be genuine & not with an intention to evade tax. However tax benefit of HRA will not be available if one is living in the house of his/her spouse as no commercial transactions can occur between Husband & wife.

• Deduction for Rent Paid

A self-employed person can claim tax benefit for the rent paid for his residence and can claim a deduction under section 80GG of the income tax act. As the self-employed person doesn't receive any salary, so there is no HRA and consequently question of HRA exemption – under section 10 (13A) of Income Tax Act, 1961 read with rule 2A of Income Tax Rules –doesn't arise.

As far as home loans are concerned following tax benefits are available to the tax payer:

1. Tax benefit on principal repayment under Section 80C – Repayment of Housing Loan subject to maximum limit of INR 100000/-. (Maximum deduction under section 80C is INR 100000/-).
2. Tax benefit on interest payment under Section 24(a) & (b). For self occupied property INR 150000/- and for let out property or deemed to be let out property there is no monetary limit to for interest payments.

• Claiming both HRA and Home Loan Tax benefit

You can Claim both HRA and Home Loan Tax benefit provided you have a house in one city for which you have taken a home loan and you reside in another city due to work or similar reasons, then you are eligible to avail all the benefits including HRA, tax benefits on principal repayment of home loan and tax benefit on interest payments of home loan. But, if your house is vacant then you still have to pay notional rent income.

In this case the following situations will arise:

Your own house remains unoccupied while you stay in any other accommodation due to employment/business/profession reasons.  You may stay at a place – it may be a different city or a different location within the same city - different from the place where your own house is situated.  

• Rented accommodation – You are paying rent:  In this case, you can claim HRA tax exemption while your house will lose the status of self-occupied property and will be treated as deemed to be let out, and thus its notional rental income will be taxable in your hands. However you'll get all the housing loan tax benefits i.e. both interest deduction u/s 24(b) and principal repayment under section 80C.

• Non-rented accommodation i.e., you're not paying rent as the rent is not being paid, the question of HRA tax exemption does not arise. However, your house will be treated as self-occupied and you'll get the housing loan tax concessions i.e. interest deduction under section 24 and deduction for principal repayment under section 80C. 

In a nutshell, if you have a house, either stay in it or rent it out. Don't leave it vacant else notional rental income of your house (even if it is the only house you own) becomes taxable in your hands although you continue to get the interest deduction on housing loan u/s 24(b) and deduction for principal repayment of loan u/s 80C. Furthermore, as regards the HRA, you will be getting the tax exemption under section 10(13A) so long as you are staying in a rented accommodation and actually making the rent payment, irrespective of whether you are having your own house(s) or not.

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What should I do if the builder has delayed the housing project or the delivery is not as stated in the builder buyer agreement?

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

Hello, and very warm greetings for Diwali. During the past one week, our team spent time meeting with some of the customers, readers, real estate consultants. During our interaction with customers, we noticed that most of them were frustrated with the construction progress of their homes which they have booked with real estate developers. Recently, a study published by PropEquity also showed the fact that construction progress is slow and many a residential projects will be delayed considerably.

As we write this on Diwali, a festival of light and happiness, we believe, there is no point in getting frustrated with housing project delays or any other housing related issues. In fact, you should take solid steps to overcome your housing related challenges. We list few of them here:

1. Read the document carefully:
That’s right, even though you should have read the document carefully before signing the builder buyer agreement. You can still do it, read it now carefully. And look for penalty clauses which are stated in the agreement. Approach your developer and ask for the compensation as stated in the builder buyer agreement. Even though, this compensation will be pittance relative to what you would be paying to banks in form of EMIs. Still, claim it.

Also do not forget to check if there are any deviations in the project layout, project plan, size of the apartment, specifications, amenities, etc. If there are any deviations in any of these from what was stated in the builder buyer agreement then approach your builder and discuss the things in detail. Ask for compensation wherever applicable. If possible, take the help of your legal associates.

2. Form a group with other buyers:
Yes, you read it right. You are not the only one sailing in this boat. Visit the construction site on a regular basis and interact with other buyers who are visiting the site. Make a group and discuss the common issues and approach the builder. There is no better way of putting pressure on the developer than a group of buyers coming together. As a group, you can explore various options such as cancellation, shifting to other housing projects by the same developer which is nearing completion, legal action, etc.

3. Rate and review the project:
Now that you have thorough understanding of the real estate sector and ways of working of the property developers, share this with prospective buyers. You can easily rate and review your project at www.nirrtigo.com and alert the prospective buyers of the positives and negatives of a particular developer. Just like, you would like to read reviews for things such as cars, phones, etc. others are also interested in taking tips from you about the housing projects, real estate developers, etc. So, go for it.

4. Use social media:
Social media has enabled all of us in voicing our opinions and most brands whether big or small are always conscious of the fact that social media can make or break their position in the industry. Whatever you do, from forming groups to reviewing projects, keep sharing it on popular social media such as Facebook, Twitter, blog, and LinkedIn. In fact, you can always look to form groups on these social media channels as well.

5. Approach the relevant authority:
Once, you have a group of people who are facing the similar set of challenges as you. It makes sense to approach the relevant government authority. And recently, government of India has set up a Real Estate Regulatory Authority to protect consumer interests. Approach the authority for speedy adjudication of your disputes with the real estate developer.


Above all, be calm and keep discussing the issues within the group. With so many avenues for you to take recourse to, we are quite sure that you will be able to resolve your housing issues. Good luck!

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Lease Agreement in India

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Leasing a property is a legal process wherein both Landlord and Lessee discharge their duties in accordance with the lease agreement. Lease agreement is prepared on a stamp paper and is duly signed by landlord and lessee in presence of 2 witnesses.

Lease agreement can also be registered at the local registrar office in India. Some leases such as the one for office space properties are registered at the local registrar office.

Here is a sample lease agreement:

Lease agreement in india from Green Realtech Projects Pvt. Ltd

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Land Development Process in India

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Land development:

1. Acquisition of land with the intention of constructing utilities and surface improvements
2. Reselling some or all of the developed sites to project developers or in case of housing to home builders.

Key criteria for land development business:

Before proceeding with the development, however, there must be evidence that the project is feasible or that market acceptance of the end-product (single family houses, offices, warehouses, etc.) is highly likely. This step is important even though the land developer may or may not be the developer of the final product. In other words, in the land development phase, the developer must anticipate and understand the demand for the final product (or products in the case of a mixed-use land development). For example, the economic drivers may alter the land use for residential, industrial, or for commercial developments such as Office Space in Gurgaon.

In residential land development, it is common to find firms specializing in the acquisition of raw land in suburban fringe areas and developing sites for single family detached units or for multiple uses, such as combinations of single family units, multifamily apartments and cluster housing.

Based on the market segment in which the end use will likely sell, the land developer

1. Acquires land
2. Develops a land use and traffic circulation plan
3. Constructs streets, lighting, and subsurface improvements (utilities, drainage, sewage)
4. The developer then subdivides individual sites, and sells smaller sites to builders and project developers.
5. The developer may also retain some retail sites for later sale if the site has suitable highway frontage.
6. The land developers usually stand ready to sell sites to other project developers as long as those project developers abide by the required development controls. These controls usually include construction of buildings of adequate quality, maintenance, landscaping, and so on. These controls are usually specified in deed restrictions and/or provisions in an agreement governing the operation of a business park owner’s association.

Important note: Land developers and builders or project developers may or may not be the same entities.

Feasibility study:

Many land development firms usually exist in a given urban market.

1. They enter the market for raw land by contacting landowners or land brokers and obtaining information on tracts of land available for sale.
2. These developers then engage consultants to conduct market studies to assess the demand for end use that would ultimately be developed and price ranges for each use.
3. The developer then completes a preliminary land plan, estimates the land development cost, and analyzes whether the tract can be purchased and developed profitably.

General observation:

In many cases the developer is more of a facilitator of the development process than a firm that undertakes all necessary functions in the land development process. Many functions may be done by consulting firms (land planners, civil engineers, and landscape architects) and contractors (roads and utility construction companies). In these instances, the developer owns the land, obtains the necessary financing, and implements the overall development plan, but may not employ a staff that is directly involved in construction or design. The developer must also interact with public sector officials in obtaining various project approvals and changes in zoning when necessary, and then market sites to project developers and/or builders.

The land development process:

• Acquisition of land – use of the option contract

The developer usually negotiates an option contract because it takes time to accomplish various tasks and activities prior to the decision to actually purchase the land. Some of these activities are:

Site inspection, preliminary market study, preliminary cost estimates, soil studies, engineering, feasibility, appraisal, and design strategy, bidding and/or negotiating with contractors, plan for public approvals, plan for financing.

Option periods can be very short (one month for small residential land development) or as long as 3 years or more (regional shopping centers)

• Financing and development

When financing the land acquisition and development process, a number of structures may be available to the developer.

1. The developer may purchase the land for cash. The developer may then obtain a loan for the cost of improvements and interest carry.
2. The developer may purchase the land by making a down payment only. The seller finances all or a portion of the land sale by taking back a purchase-money mortgage from the developer. The developer then acquires a loan for improvements only. The seller of the land (mortgagee) agrees to subordinate the lien represented by the purchase-money mortgage to the development loan, and the developer repays the sellers’ mortgage from funds as parcels are sold and after payments on the development loan are made.
3. The developer purchases the land by making a down payment and obtaining one loan based on a percentage of the appraised value of land plus improvements. The funds pay off the seller and construction improvements. 

An example showing the possible land development process in Haryana, India:

Land Development process in Haryana

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

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

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

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

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

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

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

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

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

A well thought out strategy is based on 4 principals

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

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

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

• Web:

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

• Partnership with local brokerages:

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

• Own office:

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

• Property Shows:

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

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

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

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

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

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

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

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

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

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

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

Why do builders fail to deliver?

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

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

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

Are schemes like 12% assured returns good for investors?

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

Good Luck with Real Estate Investment!

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