Can we afford these houses?

Last week two buyers - a couple and their friend, came to discuss their choices in a new housing project? All the three of them were senior government officers. The husband wife couple despite pooling their resources struggled to come up with the money (including loan component) to buy their choice of flat. This after 30 years of service at a senior level. The other friend, a senior officer in BSNL (A govt. telecom) was doing no better. Ultimately all three of them left my office, highly disheartened, being unable to bridge the gap in their funding. I couldn't help them immediately with alternative options either since their heart was set on the given project. With great deal of persuasion, I convinced them to open their minds to other alternatives. Along with my team now we are now embarking upon the journey to identify some affordable alternatives for such clients. The journey promises to be quite difficult though rewarding.

High Prices! This is just the tip of the iceberg. My company conducted more than 300 site-visits in several projects over the last 3 months. Our success rate is less than 5% on these visits. Most of the visitors claimed that prices quoted was out of their reach by a vast margin.

Why on earth are we flooded with multi-crore pricing? I refuse to believe that the apartments and villas upwards of Rs 1.5 Crores ($300,000) are meant for the middle-class millions. The EMI for such properties itself will be in the range of Rs. 150,000 plus ($2500) per month. Additionally of course, they need to come up with the money of food, clothing, education and medical bills.

 Like everyone else, I have related concerns.  Question that continue to be relevant, such as,

• Why are land prices allowed to climb so high? 
• Why is there a limited supply of converted land? 
• Why is the FSI limited to such ridiculous levels in the CBD (Central Business District - central part of town with most economic activities). Why can't we build more densely (vertical growth) and leave more open spaces for infrastructure and greenery ?
• Why do Builders quote such high rates? Are they victims or the cause of such prices?
• What is the role of Government and the judiciary?
• Why do amenities cost so much? ...

The surrealism that has invaded the realty space needs to be replaced with reality. There is a real need to reduce the prices of housing products across board. We need to see legislative or judicial initiative changes which might indicate that things can improve.

In the next few articles, let us see what influences real estate prices, who is responsible for that, and, what steps can you take, to take charge in this situation.

Until the next time,
Cheers!
  

Part -2 : The myth of Real Estate - you deserve to know the truth!

Let's keep digging the earth a little more (pun intended). 

·                     Why do you really need to pay more? Want to be a Rajasthani Prince?

Seems to me, everyone desires to be the guy who made it in life - Big house with a swimming pool,  two cars or maybe three (?) , LED TVs, Home theaters  etc. Or so, the advertisements put out by the builders would lead us to believe.

So whether you are struggling to live within your four figure salary, or making two-ends meet with your spouse also chipping in, or your retired father giving up his car....you must buy that "dream house" ?

Do you really play squash, badminton, practice yoga, swim, jog everyday....I don't. The Gym in my complex is about 25 meters from my apartment. So is the swimming pool. I don't use the pool for 8 months in the year and the gym probably for 20 days in a year -that too when I get nagged by my better half. Instead I walk (definitely more than I gym), on the shaded roads in my colony, enjoying the beautiful morning light, breeze and the sight of the regular morning walkers. I sometimes semi-jog...(without having to furiously punch buttons as on tread-mills) and go up the incline just round the corner.

The point being...for the majority of us, we really desire the amenities, but rarely use them....but always end up paying for them.The maintenance bills for all these large complexes is anywhere between 0.5% and 1% annually. Give or take a few. So next time you see this super-luxurious condo with amenities matching the Rajasthani palace - THINK well. You will be paying for that...Monthly...annually...along with the EMIs.

·                     Is the developer telling the truth when he says that he has no choice but to increase the prices?

To a large extent this is true. It costs money to build complexes. Funding is complicated. 

Lenders like to extract their pound of flesh. The Debt market ranges from 15% onwards generally. Equity funding demands payback (IIR) above 26% from the builder. Infrastructure funding is tough to get. 

Govt approvals are time consuming (therefore cost over-runs). Most state bodies are notorious for rampant corruption. So the builder needs to go thru' all these challenges and then deliver ensuring profits for himself and his stake-holders. Do you now wonder why projects get delayed and property costs a King's ransom? Do you? 

·                     Does the buyer have choice? How can we make a better decision?

Yes there always is a choice. Buy what you really need. Save the rest of the money. Join a plush club in the city for the rest. If you are a fitness freak join that hi-tech Gold's Gym or Fitness First which has the latest equipments and like-minded members to inspire. Much cheaper and you have multiple choices. Keep the change in your pocket. The jingle will be music to your ears over the years. 

On the other hand if you do buy that extravagant house, (seriously) you will make "nobody" envious - they either do not or will not care; or can probably buy a more expensive property than you (without denting their pockets at all); or just plain and simple - just shrug and move on with their lives. However...you guessed it now ...You, will be paying for that house... Monthly ... annually ... along with the EMIs.

Till next time....mate.

The myth of Real Estate - you deserve to know the truth!

Part- 1

It seems to me that we all fall prey to the myth of the "pot of Gold" with respect to property investments. This is largely fueled by selfish greed of individuals - Buyers, Sellers and the intermediaries. The triangular forces exert forces against each other as and when they can. The Seller wants the maximum returns for his investment, the seller wants to capitalize on his being a “genuine buyer” –as we call them in broking parlance, and of course the ubiquitous broker who tries desperately to make “the deal”.

Consider this, if you have bought a property in the last decade, most of you would have made some money. Some of you would have made a lot of money, and some of you would have made some money and some of you would have just about broken even if not lost some money.

So, to the bright guys who made money, let me ask you a question. Who would you give the credit for making that money for you? Let me guess – You?  After all, you made the call; you took the right decision at the right time for the right property, right location, right builder and right market conditions – Right?

Wrong! If you made money then it was largely due to “Lady Luck” smiling on you, and, to the economy which provided the investment cycle for entry and exit. It was also in part, due to laggards who delayed buying their piece of earth and then got “sucked” into buying from you.

Real Estate, as an asset class is highly unpredictable due to layers of misinformation and malpractices generated and transmitted by the machinery of vested interests. Let’s look at some of them,

Media: The newspapers and portals do a roaring business out of real estate – ever wondered why your newspaper looked more like a property classified or advertorial (paid advertising with the write-up being done by or on behalf of the advertiser for a fee)? They make significant money from this. Some of the established newspapers actually acquire a stake in Builder companies in return for selling ad space, Paid write-ups, interviews and focused articles on real estate and the developers (who of course are asked to pay for all this).  

Politicians – Bureaucracy- Land Aggregators nexus: Need land and willing to pay for it. Well as long as you can afford to pay for the same, land is available for any land use. If the Town planning official is honest and not obliging, then changes are made and then, “Voila! – you can get the land”.  Or else, approvals are delayed. In which case the projects get delayed and your estimates of profits (Pot of Gold) vaporize.

Lenders : Lenders often practice entrapment to get business. They introduce teaser rates (even our nationalized banks are guilty of this) and the floating rates then keep floating upwards.

Brokers: Brokers sell what they have. If you have not identified a professional broking firm, you have taken the risk of being a victim of mis-selling. So some of you would have lost money or not made enough since you took bad advice.

Friends & relatives: In my view, an ill-informed friend should be best avoided for determining the feasibility or evaluation of these big investment decisions - buying a property. This is really one category that you should consult only after seeking professional advice from people who work in the real estate for a living and someone you trust.

In the last decade, a lot of us were lucky that the math worked for us. For some it didn’t. They got trapped in projects that were delayed, had lenders who kept raising the interest rates and kept them high even when the economic cycles reversed and charged huge pre-payments when you sold your property and pocketed enough money or walled in to the frustration - to quit the property.

 

-To be continued…

With their back to the wall – Real Estate Developers

If you are one of the numerous buyers who are holding up their negotiations for finalizing property, then you may be in for some disappointment. Let me try to answer some probable questions you may have on the real-estate prices for the few months ahead.

But, before that, here is why the developers would be hard-pressed to drop rates.

Cost of Debt: Almost all realty companies are now reeling under the cost of debt. According to one report in Economic Times yesterday, the country’s top 11 listed real estate companies have a combined net debt of over Rs. 38,500 crores. The cost of debt to these real estate companies, range from 12-15% on an average. The interest rates have been revised 12 times in the last 18 months. With Interest rates again being revised by 25 bps by RBI, cash flow from operations (bookings and installments) might just be insufficient for the builders to cover interest and principal repayments.

Most of the builders have been reducing the outstanding debts in the last few months. However, any expected reductions in the interest payable have been diluted due to increase in the interest rates. Alternative sources of funding through market funding however are limited only to builders with favorable debt: equity ratio – an unlikely situation for most developers. For those who have that, the sailing is still not smooth. For instance, DLF’s net debt has not changed in the last 12 months despite having repaid higher cost debt with QIP. As per Dinesh Gupta, AVP Ansal API, at least 10-15% of their interest outgo was on account of interest rate hike (ET).

At this stage, options with builders are very limited. Sell off inventory through reduction of prices – understandably a double-edged sword and therefore will not find too many takers. The other option is to sell off their non-core assets. For those who have this option, the time-lines are stretchable in terms of disposition and returns. This will prevent any sliding of prices in the short run. Gains if any will be quickly re-absorbed by builders to meet cost over-runs in the ongoing projects, debt-repayments and acquisition of new land-banks or JVs. Very few of the builders today would have the third option of reducing their interest charges by debt repayment through internal accruals -Unitech and Sobha Developers being such exceptions. 

Is there a likelihood that prices will drop down in the following months?

Based on my discussions with a number of developers, both large and small, the prices will remain fairly range-bound with little or negligible bargaining possible.

What about festive season discounts?

Festive discounts are generally open with a small window and limited range of discount. If you are in the market, you might want to explore the possibility of beating the crowd, and talk to the builder ahead of the people lining up outside his office. If the developer’s discount scheme is successful, he is unlikely to accommodate any requests / negotiations for further discounts.  

Seven Tips for investing in Real Estate

While there are numerous tips, seasoned brokers will have for you, I have found these seven to be extremely useful in evaluating properties to be bought.

1. Invest in affordable housing 

• No matter what your budget, you will find that smaller budget properties generally appreciate better than high value trophy houses. Look out for rentable property which will give you a fair return and is resalable. Beware of properties located in far off suburbs with low connectivity that limit the rental value, as well as, resale value.

2. Diversify your pool 

• Do not invest your entire surplus in that one “golden” opportunity. Instead start a small chain of investments, gradually, into a small number of properties as well as property types. This will also allow you to divest as you require rather than getting stuck with a high value property (relatively speaking). Differential appreciation of the properties will make it a lesser risky portfolio to manage.

3. Invest in commercial space 

• Most of us naturally go in for residential properties rather than commercial properties. Apple for apple commercial properties will give you a higher return. Returns on residential properties range from 2.5% to 4% as compared to commercial which ranges from 7% to 9.5%. However, do your home-work well on total costs of ownership and check for ownership details.

4. Invest in parking lots. 

• The mayhem created by vehicles of the owners and their visitors has created a unique opportunity to invest in parking lots. Keep aside a good budget for parking lots. Negotiate hard with the builder or seller for buying extra lots. You can then rent these out for generating a good rate of return (8-10%), besides being highly saleable with good appreciation.Compare that with the rate of returns mentioned above.

5. Location is the most important criterion for selecting a property for investment. 

Invest in properties which are well-located.

• Evaluate Infrastructure surrounding the project –Roads , bottle-necks, one-way access, shopping centers, hospitals, parks, connectivity, Distance from commercial centers and your work.

• If you are an investor, stay away from properties in “future growth areas” read that as "Located in remote areas". Most projects suffer from delays in approval, delays in implementation and cost over-runs which may delay them as much as by 2-4 years. 
• You will need to hard-sell such a property to dispose it and appreciation will be minimal. If at all, you are attracted to these properties, look out for existing socio-economic benefits. A 5-10 year growth story will benefit only someone, coming years later, or, someone who does not need to count his returns till the next few years. My view is that all projections for future economic growth in a location need to be accepted with a large pinch of salt.

6. Invest in old but well-maintained properties.

• Try and buy an old property which is well-maintained located in a good and efficient society. Do it up and sell or lease. Your initial outlay for acquisition could well me much lower, and therefore, returns effectively higher.

7. Invest in properties with amenities 

• Times have changed. Everyone I know and their families like to have a gym , swimming pool and a walking track in the complex they buy. Similarly, in a commercial complex, people look for parking, lobby, centralized air-conditioning, Building Management Systems (BMS), security and back-up generators. Your property value will grow in these properties. So use this yard-stick for comparing the properties.

Regulating the Real Estate Business

Ever wonder why the real-estate market is not regulated in India. Simply put, there's too much money in this sector not to regulate this market. Real-estate directly and indirectly contributes to more than 40% of most wealth sharing.

Yet micro interests dictate the industry to the disadvantage of the vast majority. I do hear voices from mature Developers, Brokers, Regulators asking for some sort of regulation however, no credible regulatory framework has been assigned.

Code of conduct drawn up by wise participants are all shared on superficial basis as a marketing tool. Code of conduct needs to be adopted for fair practices comprising of fair pricing, fair compensation, fair negotiations, fair adjudications and fair justice for all stake-holders.

Are there any real benefits for the industry if this gets regulated or should they fight for self-regulation? To my mind, self-regulation is only possible in an advanced society which is aware and has ways to enforce their rights in a timely manner within a judicial frame-work for timely justice. That kind of brings a Utopian picture to mind. Therefore, in my limited perspective we need to be governed by the law of the land enforced through a Regulator who is well-versed with the issues and has powers to enforce.

The service providers of the Industry, the army of Developers, Brokers, Contractors, workers will benefit from an image make-over brought about by transparency and demonstration of right conduct. This will get easier and cheaper funding from Banks who will be able to trust the industry, better valuations in the stock market for the industry who provide high level of services in a transparent manner.

That said, self regulation will still remain important for Companies and Individuals who value their name and enjoy the trust of their customers thereby bringing more loyalty and referral business.

Let's try that for now. Having a Statutory Regulator is now a question of "when" and not "If".

Take care..until the next time, Anjan

Rising Activity Levels Across Asia Pacific

Hey there, Its been a long time since I delved back into writing. However to set off this season, I am sharing this interesting video on the real estate forecast by JLL. Especially note the prospects for Office space. Therein lies an investment opportunity.

Cheers,