Tag Archives: India real estate

The upside of high residential inventory

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News Point: Supply/demand mismatch in terms of price and configurations has been the main reason for the rise in inventory levels.

realty news , india real estate , india realty news ,property news, JLL India, IPC in India, Track2RealtyFor the last 3-4 years, residential real estate market has seen sluggish demand, which has caused the unsold inventory levels to go up in some of the key Indian geographies.

From developers’ point of view, this has eventually resulted in:

1. Correction of prices in many markets in order to improve sales velocity of unsold products

2. Increased project launches with the right configurations to cater to existing demand

Interestingly, 2016 had started on a sunny note. The residential real estate market, which had witnessed a slump in project launches in 2015, showed a visible comeback in the first quarter.

There was a six-fold increase in launches of the affordable housing projects, as developers predicted greater demand in this highly price-sensitive segment.

One way or the other, factors have now transpired to make residential real estate a buyer’s market that gives buyers the upper hand. They have a lot of options to choose from, with the added benefit of flexible rates and attractive payment plans.

The advantages of a buyer’s market

Real estate prices usually drop as inventory increases – but even if they don’t, negotiation power goes up. Some realtors and refuse to understand the realities of a slow market and will not accept any offers less than what they feel they should get.

If a buyer feels that he is not getting the best possible deal, he should be confident enough to walk away and look at the next option on the list. Remember that in a buyers’ market, it is the buyer who has the power.

It pays to be aware of and confident about one’s bargaining power. If the home has been on the market for several weeks or months, has perhaps already undergone some price reductions and is still unsold, it strongly suggests that the seller is hoping to sell it as soon as possible.

In such a situation, it makes sense to ask the seller for add-ons such additional furniture or fixtures, apart from a heavy discount on the listed price.

Also, some real estate brokers may be more inclined to knock a percentage point off their commissions and pass on the benefit to the buyer to get deals done. However, the best advantage for a buyer will lie with property consultancies that do not charge any brokerage from buyers at all, but only from the sellers.

Avoiding confusion in a market saddled with heavy unsold supply

Another inevitable result of heavy housing inventory on the market is that prospective buyers are confused about which options to focus on. This ‘problem of plenty’ can be resolved by looking only at select projects by reputed developers – it is surprising how quickly the range can narrow down if one eliminates anonymous smaller players from the field of vision.

The lure of discounts and flexible payment plans that currently define the market should not obscure a developer’s track-record, on-ground construction activity on projects and the market’s response to these and previous projects. The initial choice should be made based on developer’s reputation, track record, project construction activity at site and locational advantages of the project.

Further guidelines for buyers

In the case of under-construction projects, buyers should only consider those which are likely to be completed over the next 12-18 months

Again, going with developers who have a healthy track record of delivery will mitigate the risks related to timely delivery

It is also essential to undertake good diligence in terms of the project’s market response and inventory sold, which will ensure that project is delivered

One should look only at established housing corridors where social and physical infrastructure are in place or visibly under development

Expected resurgence to benefit both developers and buyers

Both the RBI and the Central Government have taken certain key steps to revive the real estate market. Firstly, the implementation of Real Estate Regulatory Act will ensure transparency in the real estate transactions, which will help safeguard the interests of buyers.

RERA will not only help in expediting the completion of the ongoing projects but also immunize buyers from any fraudulent practices. The RBI has reduced interest rates, which will allow prospective home buyers to avail of cheaper home loans from banks.

These factors have infused renewed positive sentiment in the market, and will ultimately result in boosting demand for residential properties. An increase in demand will ultimately help developers improve sales velocity for their products, help improve cash flows to complete their ongoing projects and pay-off debts.

By: Santhosh Kumar, CEO, Operations & International Director,

Fiscal mismanagement behind realty turmoil

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News Point: It is simply fiscal mismanagement that is behind the turmoil in Indian real estate market and developers are caught in vicious cycle now.

Track2Realty, Track2Media, India Real Estate, Valuations of Real Estate, Realty News, Property News,Over leveraged balance sheets affecting the operational expenses, debt hurting the profits, liquidity crunch bringing the projects to standstill but yet funds being diverted for expansion plans…these are some of the issues that are behind the current turmoil of Indian real estate where the homebuyers are on warpath after having waited patiently for long enough. It is not that most of the developers’ facing consumer wrath don’t have execution capabilities but what has derailed their business is the lack of fiscal management.

Today, fiscal management is the key missing link in the Indian real estate and the blame must go to the developers’ pipeline visibility for the lack of fiscal discipline. The fact of the matter is that by over leveraging the balance sheets the developers have hurt their reputation, brand and execution capability. More importantly, they have come to a point where the project and the company’s financial health have gone out of their own control to stand at the mercy of the greedy lenders. How else can one justify the borrowing cost of up to 48 per cent in the North Indian markets today?

Ground reality

  • Fiscal mismanagement is behind current trumoil in real estate
  • Imbalance of debt-equity, over leveraged balance sheets & unreasonably high cost of borrowing hurting the developers
  • Land bank has turned out to be land liability as distress sale won’t fetch them over-valued cost or down payement
  • Developers’ defend debt but no developer with fiscal indiscipline has delivered project on time

The developers who have maintained fiscal discipline do not just have a better debt-equity ratio but also their borrowing cost is very low. These are the companies that are not so over leveraging where they just can not deliver. On the contrary, the over leveraged developers who relied for long on the land bank are today stuck. Some of these developers even tried to come out of the vicious circle, but found that either their land valuations are over valued or the distress sale is not commanding upfront payment in today’s market.

As PNC Menon, Chairman-Emeritus say, “I have a very simple and conservative way of looking at the business. And my philosophy is that if I have Rs. 100 with me, I will never borrow more than Rs. 50.” The question is how many developers ae maintaining this debt-equity ratio.

Most of the developers would rather justify their over leveraged balance sheets under the pretext that the Indian real estate is yet to get an industry status despite being the largest contributor to the country’s GDP. As a result, developers find it difficult to raise finance from banks and organised institutions. They have to rely on unorganised sources of funding for their projects.

Besides, delay in process of approvals and the wide gap between conceptualisation of the project and sale of flats results in the shortage of funding for projects. The developers are hence compelled to raise funds from unorganised sectors. Once the sector gets an industry status, developers will be able to raise funds from the organised sector.

Amit Oberoi, National Director – Valuation & Advisory Services and Research with Colliers International says that real estate development is a high risk business due to the lack of certainty related to the approval process, changing market dynamics and consumer taste, and the obvious associated (and many times unforeseen) challenges in the construction business. Due to these factors predicting timelines becomes difficult. However, this cannot be an excuse for fiscal indiscipline. A prudent entrepreneur should factor these while raising capital for the project. Also many have over-leveraged themselves to fund expansion or acquisition of newer land parcels.

“The Indian real estate market needs to adopt global best practices (such as selling on carpet area basis), enforce self-regulation through industry bodies and peer pressure, and also get ready for the real estate Regulator. It is also imperative that the government lays down unambiguous guidelines for development norms and ensure a transparent and timely approval process. Additionally, reputed bodies like RICS should work towards educating future generation of professionals on the practice of real estate. Most stakeholders in the industry want to run an ethical and professional practice,” says Oberoi.

Manju Yagnik, Vice Chairperson, Nahar Group has a caveat here when she insists that fiscal discipline is a case to case basis scenario. Branded developers follow fiscal discipline as they generally get their funding from organised sources. Pipeline visibility to some extent can be blamed for lack of fiscal discipline as there is a huge gap involved between conceptualisation of the project to the sale of the project.

“Over leveraging of balance sheets cannot be applicable to all the developers but to only certain set of developers, especially small time or mid size developers. Builders of repute are generally not involved in over leveraging of balance sheets. Over leveraging of balance sheets takes place when there is mismatch on the funding of ongoing projects and the actual funding reflected in the balance sheets. However, this practise is not carried out by reputed developers as it affects the reputation and brand of the developer,” says Yagnik.

A section of the developers who are in deep trouble today find it convenient to even blame the media for poor perception and projection of the business. They maintain that debt and fiscal management should not be seen as the same but the mistake that media often makes is to not differentiate between the debt and fiscal management. If a debt is earning more than the interest that it is paying then such a debt can not be termed as fiscal mismanagement. On the contrary, it is a good fiscal management.

They maintain that the major problem today is pretty slow delivery and execution which gives an impression that developers’ fiscal management is poor but the fact of the matter is that some zero debt companies have a bad track record of delivery while some of the developers with standing debt in the books are delivering quality projects on time.

The defence line even goes to the extent of justifying the fiscal mismanagement with the argument that over leveraged balance sheet does not count much if the developer is delivering quality product on time.  Those developers that have delivered as promised and on time command a premium in the market and have seen faster absorption rates. The market does factor brand when valuing a product.

However, the fact remains that over leveraged balance sheets and lack of fiscal discipline is the key reason behind the project not being delivered on time. There is hardly any case study where the developer with messy financial condition has actually delivered the project as promised. Industry bodies should also understand that there are certain best practices that need to be adopted as an industry practice for the facelift, beyond their lip service, of course.

Developers’ defence apart, the fact lies that the higher debt at unreasonable interest rates in Indian real estate today is not helping the cause of the developer in terms of taking the execution forward. Most of such debts accumulate without execution and sale of the project and hence there is a debt trap that speaks volumes about the fiscal indiscipline on the part of the developer.

They have reached to a point where it is not a choice or luxury but compulsion to really work on the fiscal management and that too with a fair degree of transparency in all the transactions and compulsory approvals before starting a project to leave the extra baggage of perception issues behind. After all, the consumers today are extremely well informed and assertive since do cross check to take cognisance of a developer’s past track record in terms of quality and timeliness of project delivery.

By: Ravi Sinha 

Altico Capital invests Rs. 575 crore in real estate

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Bottom Line: Altico entered into a multi-project financing arrangement with Marvel Developers, Midcity Group, Century, Skylark and Unishire.

Track2Realty, Track2Media, India Real Estate, Valuations of Real Estate, Realty News, Property News,Altico Capital India closed three transactions aggregating over Rs 575 crores in Mumbai, Pune and Bangalore last week. Altico lends to leading and growing developers in the real estate sector, focusing on mid-income and residential projects in Tier I cities.

Sanjay Grewal, the CEO of Altico Capital said, “Altico continues to focus on its core strategy and looks to build a stable business deploying Rs 2500 Crores in Tier I cities each year. We expect to close out similar amounts of disbursements of around 600crs in this upcoming quarter”

Altico entered into a multi-project financing arrangement with Marvel Developers, Pune. Additionally, it concluded its second transaction with Midcity Group in Mumbai. It also closed its third transaction in Bangalore following its transactions with Century and Skylark earlier this year, financing Unishire against a portfolio of 5 projects.

“These transactions appealed to us from the standpoint of product offering, promoter comfort, project stage and multiple cash flow streams. They have been structured to provide a win-win solution to the developer and us by aligning project execution with the prevailing market scenario,” said Amit Pachisia, Chief Credit Officer at Altico.

“While some locations are resilient, some locations are slow at present. With medium to long term fundamentals of the sector intact, these are preferable market conditions for us to underwrite senior secured loans instead of markets in upswing,” Sanjay Grewal added.

Altico have a net worth exceeding Rs 2000 and the company claims to have zero NPAs and zero restructured assets. Going forward, Altico plans to gradually expand within its areas of expertise. This year the company has expanded footprint from Mumbai, NCR and Chennai to Bangalore and Pune.

Outside of the core strategy, Altico plans to deploy incremental capital in the commercial real estate and infrastructure sector. The Altico Capital Board has approved raising of funds up to Rs. 2,000 crores through a mix of instruments and funding sources including bank lines, commercial paper and NCDs in order to support the asset growth plans.

Altico Capital has recently roped in banking veteran Naina Lal Kidwai as an independent non-executive Director on its board. Kidwai stepped down as Chairperson of British lender HSBC India last year after serving the bank for 13 years. Before joining HSBC, Kidwai was Vice-Chairperson and Head, Investment Banking, at JPMorgan Stanley. She would be working closely with the Management and the Shareholders on Altico’s growth and diversification strategies.

Altico Capital India is a non-banking financial company (NBFC) backed by Clearwater Capital Partners, Varde Partners and Abu Dhabi Investment Council. Altico has completed 11 transactions in the past 9 months, including some sizeable transactions such as with Mumbai-based Radius Developers, promoted by Sanjay Chhabria and the co-invest facility to Century Developers along with Piramal.

Regulator catalyst to revaluation of prices in India

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Bottom Line: There will be property revaluation in India post the regulatory regime where supply will also be constrained in the short term.

Track2Realty, Track2Media, India Real Estate, Valuations of Real Estate, Realty News, Property News,Immediately after the Rajya Sabha passed the Real Estate Regulator Bill and the stocks of most of the leading developers started showing instant upward movement, Akshat Soni, a retired bank employee, was smiling. For nearly four years he lived with the pain of this realization that he wasted his lifetime savings in the real estate stocks. He finally had his reasons to smile now. There would be many like him who would have sighed a relief that now with a regulator there would be some revaluation, leading to better returns over either with the property or the real estate stocks.

The homebuyers had their own query as to whether the home would be cheaper if there is a level playing field that checks the artificial price hike. There were more questions than answers vis-à-vis the probability of the realty stocks paying the investors back for having been invested with reputed builders. Soni nevertheless has a query – will the revaluation of real estate stocks post the regulatory regime be realistic and not temporary hype?

“As I understand as a layman we are entering into a regulatory regime where the serious players will be differentiated from the non-serious builders. It simply means that there should be revaluation of the stock portfolios of listed real estate developers. Already the stock movement immediately after the Bill was passed shows what the trust factor alone can do. It was the same lack of trust that was the primary cause of these stocks nose diving,” Soni maintains.

 Akanksha Sharma, another homebuyer in Mumbai, has an altogether different query. She wants to know that to what extent this revaluation will be confined to stocks and to what extent the reputed developers will gain or lose with brand premium since a level playing field is being created. In other words, will the regulator create a level playing field to the extent that the revaluation would bring every developer at par? Will there be no biggies and no pushovers in the business?

“We pay a very high premium to the reputed developers only because they deliver on time and commitments are fulfilled. If the regulator ensures that every one maintains transparency and fair trade practices and delivers on time, then I think brand premium should not be high with the bigger players. At the end of it, cost of their transparency and fair practices is borne by common homebuyers like us,” she observes.

Quick bytes

  • Apprehension in the market about real estate revaluation
  • Realty stocks may gain in revaluation
  • Revaluation because it will be easy to identify clean and clear projects
  • Property prices may go up with revaluation in the secondary market

Developers’ take

Devang Trivedi, Managing Director, Progressive Group agrees that there are significant changes on the cards and revaluation is inevitable. But he maintains that the stock market movement has nothing to do with the revaluation. Eventually the regulator will work good for organized players in the market and vice versa against the non-organized ones.

“In the final analysis, there will be good for customers as there will be more transparency and justice for them. As far as revaluation is concerned, I feel the prices will increase in short term but it will work better for all parties concerned in the long term prospects,” says Trivedi.

JC Sharma, Vice Chairman & Managing Director of Sobha Limited believes the companies having good financial capabilities, good delivery track record and greater level of transparency will gain brand premium vis-à-vis those who do not have these positive attributes. According to him, the investors will be able to differentiate the stocks based on these attributes. Needless to stress that the provisions of RERA will force realty players to come out clean on their act. It will prove good for the overall health of the sector and will help infuse the much needed trust and respectability into it.

“I tend to look at the positives. In the backdrop of the Bill, I do agree that with increased disclosures, higher transparencies, the companies having corporate structures and better disclosure norms in place will definitely attract more attention from buyers. Such companies are already placed beneficially in comparison to those real estate players with lesser level of competencies,” says Sharma.

Cost & benefit

Devina Ghildial, Managing Director of RICS South Asia, believes that in near term, despite some stocks rallying on the announcement of the bill being passed, there may not be a significant impact. Developers will have to set aside funds; comply with registrations before sale; pay penalties on account of delays; provide project disclosures and adhere to strict delivery schedules, which will result in a higher regulatory cost for them initially. Sound corporate governance in realty businesses is more than just simple compliance with ‘universal standards’. Businesses that implement and advocate good business practice will continue to enjoy stronger brand equity, as they do even today.

“Regulation will mean more businesses following high levels of disclosure. This will boost investor confidence and enhance credibility of the developers, leading to lower capital costs and increased investment. This will impact not just stock performance but overall business across all categories of developers. Therefore, the more established developers might have to fight just a little bit harder than before in order to continue to remain front runners. At the end of the day, it is those developers who are able to draw on the strength of their brand positioning and attract customers, on the premise that ‘quality’ is never a compromise that will perform better,” says Devina.

Analysts agree with the fact that revaluation is on the cards since the sector for the first time in the history is entering into organized phase of development. The revaluation, or its impact, may not be immediate but there are certain mid to long term implications of the regulator where the property prices as well as the realty stocks maybe witness to upward bias.

What is more important is that while there will be higher revaluation of properties with clear titles and clean track record of the developers, in some of the markets and with some of the developers it might work the other way round and they may be left with lesser revaluation. Certainly, there is a premium for right property in the right market and at the right price point.

In conclusion

The revaluation of properties will be more significantly visible in the secondary market in the immediate future because the supply might be constrained for the time being. There might be lesser new launches till the time clarity comes in the market about the disclosure norms and mandatory compliances.

They nevertheless do not agree that the revaluation would lead to losing the brand premium. There is a general feeling that the regulator will only ensure the fair practices, exit fly-by-night operators and adjudicate the conflict between the builder and the buyer.

However, beyond the timelines and the promises that are forced to fulfill, there are many other areas like design, aesthetics, amenities, construction quality and users’ experience that form the basis of brand premium. Even today, among the developers who are maintaining the transparency and fair trade practices, the brand premium is different depending upon their level of aspiration in the eyes of the homebuyers.

But property revaluation as an industry trend is definitely on the cards in the short to medium term. And so will be the realty stocks that will gain quite a bit after having lost the sheen in the last few years.

By: Ravi Sinha 

Kotak Realty Fund closes US$ 250 million equity fund


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This investment will address the growing equity needs of the real estate industry in India.

Track2Realty, Track2Media, India Real Estate, Valuations of Real Estate, Realty News, Property News,The Kotak Mahindra Group closed a fresh commitment of Rs 1600 crore (US$ 250 million) for equity investments in realty projects in India from institutional investors.

S. Sriniwasan, CEO, Kotak Realty Fund said, “With this fund raise, we are delighted to receive a further vote of confidence from our investors. This is the result of our consistent and disciplined investment management strategy for over 10 years, ever since we started asset management in this class. The recent clarifications by the Government have also enabled us to structure this as an Alternative Investment Fund (AIF) and we are thankful to the Government for being responsive to the demands of the AIF Industry.”

Vikas Chimakurthy, Chief Investment Officer, Kotak Realty Fund said, “We have sufficient dry powder from our previous pool of capital to address the structured debt requirements of the real estate industry. This new pool of capital will address the equity requirements of the sector. We anticipate that the correction in the residential market will reflect in land values over the next few quarters which will make the equity investment argument attractive.”

CREDAI patronises Mercy Kuttan Athletic Academy on Women’s Day

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CREDAI to support the academy by providing high quality training infrastructure.

CREDAI, India Realty News, India Property news, Real Estate India, Track2Media, Track2Realty, Track2Infra, India real estate, property marketProviding the much-needed push for Mercy Kuttan’s dream, Confederation of Real Estate Developers’ Associations of India (CREDAI) has adopted the Mercy Kuttan Athletic Academy to encourage sports and train talented young women athletes of International calibre.

This gesture would decrease the stress on the financial worries and thus channelize all the academy’s energy to create world-class athletes. The academy would be renamed as CREDAI Mercy Kuttan National Academy for Excellence in Sports.

The Mercy Kuttan Athletic Academy is a non-profit Charitable Trust founded in June, 2009 with 11 students. The Academy has produced several athletes who have attained State, National and International level achievements in a span of six years since its inception.

On the association, Irfan Razack, Chairman, CREDAI-National said “CREDAI is delighted to be instrumental in bringing about this fortunate turn of events for such a noble project which has a long standing return on investments in terms of grooming Athletes of International Standards, generating employment opportunities for these women Athletes and thus eradicating poverty and empowering women to explore their potentialities.”

Indian athletes, especially women athletes from Kerala, have an amazing track record in athletics. The achievements made by yesteryear athletes in Kerala, such as P. T. Usha, Mercykuttan, Shiny Wilson etc. and current stars like Preeja Sreedharan, Tintu Luka have enhanced the awareness and interest of athletes and their parents, to aspire for a career in athletics.

Some genetic factors combined with physical stamina due to growing up in hilly terrains and the passion of creating international athletes have all culminated in the formation.

Alongside its commitment for Housing for All, CREDAI is now also focusing on build the country’s sports talent. India is known to produce high quality underlying potential, which can only be tapped to the fullest by providing them with world-class training facilities and also by giving them the opportunity to train with best-in-class trainers.

This is also a step closer to empowering women of the country and encouraging them to achieve what they desire.

Significant investor interest and likely policy reforms spell positive in 2016: CBRE Report

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The year 2016 is expected to present several opportunities and challenges for the business and investment community in the region, says a report by CBRE.

Track2Realty, Track2Media, India Real Estate, Valuations of Real Estate, Realty News, Property News,The report “India’s Real Estate Market Outlook 2016″ is part of CBRE’s Asia Pacific Markets Outlook Report series. CBRE forecasts that Asia Pacific’s steady economic growth will continue to outpace the rest of the world in 2016.

On the domestic economy front, meanwhile, India’s growth is also expected to surge forward and will continue to remain as one of the fastest growing economies in the world.

While the year 2015 had ushered in numerous reforms across sectors, high hopes are also riding on the Union Budget 2016 with respect to key policies and reforms. This translates into a positive outlook for the real estate sector with opportunities for landlords, tenants and investors alike.

The Government of India’s monetary policy is expected to remain accommodative. India’s economy in 2016 will be among the fastest growing in the world, generating significant interest from investors and corporates. The Government is expected to focus on instigating structural reforms in the year ahead; and with inflation being broadly under control, its monetary policy is expected to remain accommodative.

Suburban and/or peripheral micro-markets of leading cities preferred by corporate real estate occupiers. Corporate office occupier leasing remained strong in the suburban / peripheral micro-markets of the leading seven cities, with office space occupiers continuing to focus on pre-leasing spaces in under-construction projects amid a lack of available quality space.

Anshuman Magazine, Chairman and Managing Director of CBRE South Asia says, “India’s real estate investment market witnessed a bullish run with increased interest from institutional investors in 2015, with the inclination of investors remaining focused on well-organized and well leased assets. Going forward, the realty market in India expects to see a positive year ahead.”

The industrial and logistics real estate space is expected to attract healthy demand. Healthy leasing activity is expected in the logistics and warehousing sector from traditional demand drivers such as Third Party Logistics (3PL) players, engineering and manufacturing firms, renewable energy players and Fast Moving Consumer Goods (FMCG) companies, along with large sized space take-ups from e-Commerce players.

India likely to remain among the most favored marketplaces for international retailers in 2016. In the retail real estate space, F&B, fast fashion and entertainment segments are expected to drive demand for store space. With more than 22 global players having launched their retail operations in India in 2015, the country will continue to remain high on the radar of global retailers in 2016 as well.

Hanging sword of approvals behind project delays

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Developers’ counter view on project delays

CREDAI, India Realty News, India Property news, Real Estate India, Track2Media, Track2Realty, Track2Infra, India real estate, property marketGaurav Kapoor booked a flat in one of the newly launched projects of Delhi-NCR in early 2007. He was promised the flat would be ready for possession within three years with a grace period of six months. To play safe Gaurav even opted for a construction linked payment plan to the developer but six years have gone and he is yet to get his flat and every time he has approached the developer, various reasons for delay have been cited from macro economic conditions to funding woes and approval delays on part of the government agencies.

When Track2Realty approached the developer, he had his own share of woes and list of approval processes being delayed which would have been a matter of few weeks in normal course of time.

The policy makers seem to be determined, at least on the face value, to reform the real estate sector and create a level playing field for the buyers. The intent no doubt is good with the Real Estate Regulator Bill but in this reforms process certain grey zones have not been addressed that could have a far reaching implication on the timely completion of the project.

Developers maintain obtaining approvals is quite a tedious and cumbersome process and they are required to obtain more than 50 approvals to build a project. The process usually starts with Ownership Certificate, which should ideally take 15 days to acquire. However, this ends up taking few months.

The EIA clearance, Aviation and Archaeological Clearance may take 1 to 3 years. Then comes approval for building layout, which again takes an inordinately long time. The process of getting building permit from the Building Proposal Office should ideally take 30 to 45 days, but it sometimes extends up to six to 12months.

Afterwards, it is Non Agriculture permission, followed by “N” number of NOCs from Tree Authority, Storm Water and Drain Department, Sewerage Department, Electric Department, Traffic and Coordination Department, NOC from Chief Fire Officer, etc. Another important step is obtaining Environment Clearances. Delay in obtaining Environment Clearance has become a major deterrent for developers.

Although the government has issued a circular to clear such projects in a time bound manner, it takes more than 17-18 months to obtain environmental approvals. Apart from this, a developer has to obtain approvals for Water Connection, Permanent Sewerage Connection, etc.

Lalit Kumar Jain, Chairman of Kumar Urban Development feels it is often not even discussed that the developers reel under the ‘NOC regime’ and not ‘Approvals’ that can be revoked at the will of authorities. Revocation of stopping development at the behest of some local bodies is a reality. But currently, developers are more concerned about the unduly long approval process as the entire real estate spectrum, from developers to end-consumers, is suffering major losses from it.

“Yes, we are at mercy of authorities as far as NOCs are concerned. These officials have the power to revoke NOCs at will. And, in a way, this is also breeding corruption in the system. We need to root out all the irregularities that plague the real estate sector from flourishing. Obtaining the innumerable clearances is an issue which has been festering since a long time. It is high time we take appropriate measures to speed up the process of obtaining approvals,” says Jain.

Mohit Goel, CEO of Omaxe blames delay in project execution is substantially and mostly on account of frequent external factors that has its repercussion on delays perceived to be due to internal factors. Internal factors per se may be sporadic and very few during a project cycle. For instance, delay in getting approval leads to unintentional straying from planned project development cycle. Interrupted external factors lead to discontinuity in planned production cycle, fund blockage and cost escalation.

“Before launching a project, builders are supposed to take various approvals. While on one hand, a major chunk of the developers’ money is blocked in the land cost incurred by him, any delay would result in cost escalation to the end-user. Further, various approvals have different validity. By the time one approval comes, the other NOC/approval expires; the renewal of which further adds to the delay for developers and buyers,” says Goel.

Diipesh Bhagtani, Executive Director, Jaycee Homes also asserts no developer likes to delay the project purposely. The cost of construction escalates in terms of inflation, increased labour cost, interest on loan, maintenance of the structure or land if the project is delayed. Biggest of all the brand equity and trust of the developer is affected. There is great amount of monetary and nonmonetary losses incurred by the developer if the project is delayed for whatever reason. Hence the delay in project is seldom due to internal dynamics.

“The entire process of getting permission is tedious and complicated. A developer has a separate team of people working on procuring permission from various departments. The toughest is the permission to start work. Single window clearance is a distant dream and running from pillar to post for approvals takes away most of the time of the developer,” says Bhagtani.

Developers have been pitching for a single window clearance from a long time. They maintain if the government really wishes to reduce cost of housing then the only solution is single window clearance for all real estate Projects. They believe single window clearance is the only solution to this mess of obtaining multiple of approvals that too from different government departments.

Online approvals and single window clearances are the need of the hour as this will significantly reduce time taken to complete projects. It will also reduce red-tapism, which has been a huge obstacle to clear approvals on time.

The developers believe this system will see a rise in consumer satisfaction and speedy approvals, resulting in sale price reduction of about 10-25 per cent as it has the potential to not only speed up the time taken to complete projects, but also reduce project costs, thereby bringing in some sanity in these times of uncertainties in the market.

Right answer to funding missing

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Track2Realty, Track2Media, India Real Estate, Valuations of Real Estate, Realty News, Property News,“How long can a sector survive which is borrowing at 48 per cent from private lenders to serve the interest of previous debt raised at much lower rate,” asks a banker. His concern is not without valid reasons. Developers experimented with all funding options but still many of them are now being forced to seek other sources of funding which not only comes at a significantly higher cost but also where the source of fund is unregulated.

Probably the last visible nail in the coffin has been the Reserve Bank of India (RBI) asking banks to link the disbursal of home loans to stages of construction to protect the interests of buyers and contain the fallout of ‘innovative’ housing finance schemes.

While developers of some repute are able to raise money at 2-3 per cent a month, the smaller ones are even paying close to 4 per cent a month with greater collateral. The desperation level, of course, varies from developer to developer which is being seen as an opportunity by several HNIs, exporters and even diamond merchants. Developers who have not been able to maintain a good and well balanced book have no other option than to fall in row to private lenders at ineffable interest rates.

Borrowing at rates as high as 48 per cent is not sustainable in any business and the sector had in the past made use of such options, if urgently required, to use for very short term periods. This situation is, however, not confined today to few developers who had over stretched themselves in good times, forgetting that real estate does not operate always in boom.

Requesting anonymity a private lender tells Track2Realty that rates are relatively higher to those developers with whom risk is equally higher. According to him, there are very few risk free developers today and everyone is looking for money. So, the sector has been exposed to the greedy HNIs, exporters and even diamond merchants looking for high risk and high returns.

“When lender is suspicious with the reputation of the developer, obviously he puts it in high risk zone to extract higher interest rate. Those with the ability to actually complete the project and the quality of the security on offer are still raising money at around 20-25 per cent interest rate,” says the lender.

Question over sustainability

Analysts maintain things can sustain as long as there is serviceability of the interest cost which looks unlikely in the near future. For example, top 20 listed companies hold inventory as of March 2013 of Rs.67,096 crore and the ratio of inventory to sales on an average, based on FY13 sales stands at more than 2x. This is really an alarming state for the sector, still the developers are not focussed towards clearing existing inventory rather than adding to it.

As a result, the sector is sitting over inventory that is neither sustaining prices for developers nor help in deleveraging of balance sheet which would lead to increased profitability and sustainability. Better option is to liquidate surplus land or non-core assets or reduce the price of inventory to come out of the liquidity crunch.

However, living on a wing and prayer the developers seem to be in no mood to reduce prices. “Raising money even at exorbitant rates, developers hope, will help them fend off this crisis situation and keep prices steady till the economy picks up,” says Ambar Maheshwari, Managing Director of Corporate Finance at Jones Lang LaSalle India.

Siddharth Rajpurohit, AVP, The Market Financial Intelligence says the sector is currently under significant cash crunch where the commercial real estate is facing maximum pressure. As per CREDAI, the total housing target in the 12th Five year plan is 37 million and developers would face a funding gap of USD 70 billion for the same over next five years.

“The current situation of the major developers, where they are unable to pour in the required equity, banks would definitely be reluctant to provide the additional funding. With RBI sucking out liquidity to control inflation, the situation of cash crunch would worsen. This would lead to increase in cost of fund which is already very high. With huge inventory we may witness a fall in real estate prices (particularly in commercial real estate) and on this a rise in cost of fund would dip the already crumbled margins making the projects unviable,” says Rajpurohit.

Viable funding solutions & blockades

Some believe construction Linked payment is the oldest plan in which the customer has been paying to the developer. This not only put pressure on developer to expedite the construction in order to get the payment but also acts as a safeguard for the customer since his outflow is linked with the completion of his dream home.

However, Gaurav Gupta, Director, SG Estates, has a caveat here. According to him, the problem has started now where in land component in total project cost is as high as 40-60 per cent. It means developer has already incurred more than 50 per cent to start with the project and getting payment in small trenches related to construction becomes totally unviable.

“The best solution to the problem is flexi payment plans where in 40 per cent payment is released till excavation and balance is linked with the construction. This addresses the concerns of both the buyer and developer. However in flexi plans, it is to be ensured that the land is fully paid up. If any new curbs on construction loans are put in, then real estate industry is bound to die its natural death. Current market scenario is not very encouraging due to negative economic sentiment, global factors and falling domestic economy. In this situation of low sales and resultant liquidity woes, developers have been relying heavily on construction loans to ensure fast completion of projects and timely delivery,” says Gupta.

What has pinched the developers’ most this year is the RBI’s new guidelines asking banks to link the disbursal of home loans to stages of construction to protect the interests of buyers and contain the fallout of ‘innovative’ housing finance schemes. “In view of the higher risks associated with such lump-sum disbursal of sanctioned housing loans and customer suitability issues, banks are advised that disbursal of housing loans sanctioned to individuals should be closely linked to the stages of construction of the housing project/houses…,” an RBI notification said. Upfront disbursal “should not be made in cases of incomplete/under-construction/green field housing projects,” it said.

With effect from June 21, 2013, the RBI has also revised the loan-to-value (LTV) ratio, which determines how much the banks can finance. For loans of up to Rs 20 lakh, banks can lend up to 90 per cent, while the borrower has to pay 10 per cent. For home loans between Rs 20 lakh and Rs 75 lakh, the LTV ratio is 80:20 while for loans above Rs 75 lakh, it is 75:25. The LTV ratio should not exceed the prescribed ceiling in all fresh cases of sanction.

Criticising the Reserve Bank’s decision to link disbursal of home loans to stages of construction, CREDAI says the move will harm developer sentiment and disturb business plans. CREDAI Chairman Lalit Jain says, “Housing finance institutions or banks normally safeguard their interest while devising such instruments. Abruptly issuing such circulars, advising bank against established practices only harm the sentiment and disrupts business plans. This will create setback for projects, affecting the end consumers.”

Method in RBI’s madness

Some analysts tracking the sector say RBI though has done a wonderful job in protecting the interest of the customers and has ensured safe landing but it is also expected that real estate be given the due hand holding that is required. The sector supports more than 100 ancillary industries and if real estate grows, so does economy. And hence, real estate should be treated at par with other industries and working capital needs of the industry should be addressed like any other industry.

However, liberal funding has often meant funds been routed for fresh land acquisitions than project completion. Critics have it that the developers have hurt their own cause. Not only the lending institutions but many developers have also burnt their fingers in the wake of 2008-09 slowdown. Buyers, of course, have been the first to suffer if liberal loans are not put into project execution. A check on fund flow is a must; otherwise opportunities often pull the profit centric developer towards unethical measures.

The current scenario of cities where availability of land becomes a major issue, it becomes obvious that funds via any route may be used to tap on any available opportunity to win on the cut throat competition. Hence, this is somewhat the nature of the business that has led to not only a highly leveraged book for developers but also an opaque industry.

Rising defaults add to developers’ woes

Rising defaults by short-term realty investors further add to developers’ woes. They were a source of quick funds for housing projects till recently, but in the wake of slowdown they are increasingly defaulting on payment to developers. Since exit routes for speculators are closing a large number of such investors, who generally buy multiple properties and sell them in six to eight months for quick gains, are approaching developers for refunds, and in some cases even taking them to court.

On the basis of brokers’ inputs, Track2Realty assessed that such short-term investors have cornered even 50-60 per cent of newly built homes in the Delhi-NCR region, though they are not even half in number active in Mumbai market. While some speculators managed to exit these properties before the slowdown set in, a large number of them are still stuck for want of buyers. So, they maintain, artificial appreciation of property is not helping the cause of the developer either. Rather the developers are being arm twisted by greedy short-term investors to be a party in speculation of the property.

Real estate speculators generally pay 20-30 per cent of an apartment’s value over about six months. When the housing project developer increases prices, these short-term investors sell their apartments to either other investors or end-users at a profit. These were the investors who would bring in the much needed liquidity for the developer at the beginning of a project. Such has been the boom phase of property market that even some of the end-users got into the game of booking 3-4 flats, thus ensuring that the cost of one will be recovered by speculating the rest in the market.

Requesting anonymity a broker admits developers generally use such investors to increase prices. Many developers would offer special rates to them for coming in early, sometimes even before all approvals for a project are in place. The investor was happy because he entered the project at a much lower price than a regular buyer and exited with a good profit.

Emerging reality painful

But the new realities have forced the developers to be apprehensive of short-term investors. They, however, can not keep them out of their newly launched projects for want of funds. Analysts maintain they can not weed out such investors with possible options of running personal wealth checks on potential investor and asking them for their bank statements before selling homes. The desperation level for funds is so high that the developers are falling for any funding options which is actually creating a vicious cycle of fund mismanagement.

There seem to be no rational or acceptable funding formula that can pull the sector out of the financial mess. Some of the developers, after waking up with the reality of short-term investors, are now introducing a clause in the buyer agreement that they can not sell the project before the date of possession. But that again is proving to be a blockade for the developers who need to sell the project in order to get the desired construction funding. If they fail to continue the construction, the existing buyers would stop paying further. So, they are caught between the devil and the deep sea.

Developers meanwhile crib over the absence of proper financial modelling of the business. The prime grouse is the policy of non-funding for buying land, but the way sector operates it looks somewhat prudent as it filters out a lot of not so economically strong and serious developers.

Some independent financial analysts maintain that though the developers have hurt their own cause and self-inflicted poor perception and projection can not be over-looked, a curb on construction funding would not be prudent. In current scenario the cost associated with a construction project has increased by around 25 per cent Y-o-Y and pure equity funding would not be able to bring in any growth for the sector. Hence, a curb on construction funding would definitely increase the issue for the already cash crunched sector.

Having said this, to maintain discipline in this opaque sector the funding mode of construction linked seems to be the most prudent. Projects which have construction loans will do no harm to their cause if they follow escrow account system to avoid fund diversion. Also banks and financial institutions have tightened their mechanisms to check on the fund diversion and reputed players are focusing more on project completion than new acquisitions.

The developers demand there should not be any embargo with regards to funding to any particular sector. The credit assessment structure of the financial institution in India is competent enough to judge the viability of the project. The absence of financial modelling may be the right answer to address the issue of a seamless funding formula. Till that happens and a regulatory mechanism is evolved, funding will continue to be a debatable issue.

 

Guidelines to investing in a luxury apartment

Posted on by Track2Realty

By: Santhosh Kumar, CEO – Operations & International Director, JLL India

realty news , india real estate , india realty news ,property newsWith the reviving economy having infused a renewed sense of confidence among HNI home buyers, there has been a significant surge in demand for luxury homes asset class in the metropolitan cities of India. Many more developers are now venturing into the premium segment, which has resulted in a massive spurt of luxury projects. In fact, many of these properties are being touted as so exclusive that sales are by invitations only.

Those projects aside, there is no shortage of builders who are marketing their projects as ‘luxurious’ without any real justification for the term. Driven by the rising demand for luxury apartments, many investors (and end-users) are actually buying sub-standard properties which have been tagged as luxurious but do not actually meet the accepted norms of luxury properties.

Such developers highlight and promote certain specifications and amenities in their marketing collaterals, but invariably remain silent on much more important aspects. Luxury home buyers should not be led astray by the perplexing parameters that such developers mention to qualify their projects for the ‘luxury’ label.

So, what kinds of apartments really qualify as luxury homes? 

  • Great location

 A convenient location is one of the most important aspects that must be considered while choosing a luxury apartment. A centrally-located apartment is preferable for HNIs who want to stay in close proximity to important places like airports, business districts, railway stations, etc. At the same time, such a location could also be marred by issues such as traffic congestion, noise and pollution. True luxury is defined by a careful balance of connectivity and general ambience.

  • Perfect view

The window view available from an apartment is also an important aspect. A project may be genuinely luxurious in its specifications and amenities. However, if it overlooks a hyper-busy highway or anything else that is not soothing to the eyes and sensibilities of the occupants (such as a slum, graveyard or even a hospital) then both habitation value and rental/resale potential of the apartment may take a beating. The availability of super-rich amenities such as a rooftop swimming pool and Jacuzzi in every bathroom will not make a difference when the very basic ingredient of a luxurious living experience is absent.

  • Ultra-modern amenities

 HNIs investing in a luxury apartment want the best that money can buy. Luxury homes are meticulously designed to offer maximum comfort, with attractive interiors and cutting-edge facilities. Premium residential projects must offer state-of-the-art facilities such as landscaped gardens, stylish living rooms with LED televisions, sleek and fully-equipped kitchen, Wi-Fi, multiple parking, fast elevators, 24-hour security and gymnasiums.

  • Top-of-the-line quality

HNIs investing in luxury homes should ensure that the project is built with high-quality construction materials and that it incorporates standards such as earthquake resistance, RCC frame structure, fire-resistant aluminium sliding windows, imported or high-quality domestic modular kitchens, vitrified tiling and floors, etc. Living in such homes must equal a high quality of life and a consistently joyful experience.

  •  100% safety and security

Luxury homes are not only about living in comfort but also living in total security. When living in a luxury home, the inhabitants should be safe from any kind of criminal intrusion. Simultaneously, they do not expect to have to install security grilles over their windows or front door as these completely ruin the aesthetics of their homes. The occupants expect to have the assurance that their families and property are safe in all respects. A genuine luxury project has the best of security, both in terms of actual personnel and also the latest electronic monitoring and surveillance. All conceivable safety measures should be firmly in place.

  • Low saturation of neighbours

The exclusiveness of a luxury home also depends on the number of people residing in the building or society. In an overpopulated building or complex, the amenities will be shared among a large number of people and this compromise the overall luxury factor for every individual apartment. When investing in a luxury home, buyers should expect –and get – exclusivity and privacy in every sense.

In short…

When identifying a luxury home for self-use or investment, one should not be influenced by the story a developer is telling about his project, but by true and verifiable parameters which define luxury in every sense.

Source: Track2Realty

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