Why can’t you buy a flat in Mumbai?

Buying a house in a city like Mumbai or Delhi is becoming a very costly affair. While one can argue that income levels have gone up accordingly, the fact still remains that rising interest rates have taken a toll on the buyers EMI and the developers cost of construction making real estate costly.

But the global financial crisis of 2008 affected the Indian housing story. Corporate earnings were affected and many saw their jobs being threatened. Again, on the domestic side inflation became a big problem to manage and interest rates started to go up. This affected the ability of the home buyer to pay higher EMI and on the other side the construction cost went up by almost 40%. Again we were back into the gloomy days of unaffordable housing prices and low salary growth. Real estate consultants are abuzz with data about unsold housing stock that has kept on increasing in Delhi and Mumbai and if interest rates don’t come down the investors in these housing units will be in trouble.

Interestingly, the average income of a house buyer has crossed Rs 10 lakh as compared to Rs 2 lakh a decade ago so with a five times increase in salary, housing prices have kept in tune with this ratio. Over the last decade real estate prices have also gone up by five times.

Even if these numbers are satisfactory, there are a lot of questions that remain unanswered when it comes to affordable housing.

Pranay Vakil, Chairman of Knight Frank, a real estate consulting company answers some of the issues that ail affordable housing. Do listen to him.

Source: forbesindia.com

Real estate Buyers Can't Accept That Prices May Fall

Pranay Vakil
Age: 65
Profile: Chairman at Knight Frank Private Limited in Mumbai, India. He co-founded this joint venture company in 1995 with Knight Frank, UK.
Career: Has provided consultancy services to corporations on mergers and takeovers in the real estate market for 18 years. Co-Chairman of the Federation of Indian Chambers of Commerce and Industry and Member of the Urban Development Committee of Confederation of Indian Industry
Education: BCom, LLB and Chartered Accountancy
Interests: Music, travelling, contributing to old age homes

Q. Why is it that real estate prices are not going down at a time when the demand for property is slowing?
Sometimes developers don’t pay at all for the land that they are exploiting.

They might be a joint owner with the land owner and there is a sharing ratio that has been worked out between the landowner and the developer. Let’s take a simple case where land accounts for 50 percent of the selling price. Every sale that is made at a gross level, 50 percent each will go to the land owner and developer. The developer, out of his 50 percent will fund the construction cost and keep the balance money for himself as profit.

Q. How does this work for large complexes?
If you have a complex of 10 buildings, no developer is going to start all 10 buildings together.

In general, the developer has only committed the cost for two buildings at the most. Most developers open up booking at the time his plans are sanctioned. The building is still under construction but he opens up for sale and starts collecting money. So again his construction is being funded out of collections through the sale of flats.

Q. How do existing buyers react to price drops?
After having bought the property a buyer is not mentally reconciled to the fact that prices can go down.

Take the case of a developer who has opened up a building for sale and completed 25 percent of sales at say Rs 10,000 per square feet. The developer later on finds that there is a lot of resistance at this price so he wants to reduce the price to Rs 9,000 per square feet for the new buyers.

The first 25 percent of the buyers are paying at Rs 10,000 per square feet over the construction of the project and they will all come back to the developer and tell him to reduce their rates.

Q. Is this the same with real estate investors who collaborate with the developer?
Investors typically are known to underwrite projects for developers. These investors make money through leverage. If he has money to buy one flat, he will book five flats with a 20 percent down payment.

Sometimes he doesn’t have the intention of completing the payment because he wants the price to go up.

Source: forbesindia.com

Slowdown hits Mumbai’s real estate market, 80,000 units unsold

While the unsold residential stock in Mumbai has jumped dramatically, developers have stayed away from cutting prices in the low and medium housing segments. The slowdown has largely hit the luxury segment.

A micro-market breakup of real estate consulting firm Knight Frank’s estimated 80,000 unsold houses under construction in the Mumbai Metropolitan Region reveals South and Central Mumbai are the worst hit. “Most projects in South Mumbai cost at least Rs 3.5 crore. People buying flats here don’t normally take home loans. Since their ability to raise money has been hit, so has the sales of super-luxury houses,” said Pranay Vakil, chairman of Knight Frank (India).

Vakil said in a slowdown-hit market, there are takers for units in the Rs 25 lakh to Rs 50 lakh price range. For instance, Navi Mumbai and Thane have less percentage of unsold stock. The unsold inventory of 80,000 units forms 37 per cent of the total residential supply under construction in MMR. A survey by real estate research agency Liases Foras puts the number of unsold houses at 1.13 lakh.

Pankaj Kapoor, CEO of Liases Foras, pointed out that developers can afford to hold on to their unrealistic rates as not much of their own equity is involved in the project. “Developers make most of their money during pre-launches when 20-30 per cent of the project is sold to private and institutional investors. At this rate, what we will have is an inefficient market that remains in hibernation for three years with no change in prices. While developers have nothing to lose, they will eventually frustrate the investors and it is the capital that will lose,” he said.

To compound the mess, the Brihanmumbai Municipal Corporation’s new Development Control Rules (DCRs) have upset the excess profit calculation of developers. Vakil said 3,000 projects have been asked to re-submit their plans. “Developers have pre-sold their projects. Now, they won’t be able to deliver on the promised large balconies,” said Kapoor.

Source:www.indianexpress.com

Real estate funds clock high returns

Real estate funds have been investing in India for more than six years. They started investing into the Indian markets after the release of Press note 2 in 2005 which opened up construction and development for FDI. Institutional investment into the real estate was on a roll. Many of these funds who invested at that point in time are now heading for maturity and are exiting their prime investments. Foreign funds who invested into the Indian markets found it much tougher to operate as compared to their Indian counterparts.

Pranay Vakil of Knight Frank in a podcast has an interesting take on the hurdles that foreign funds faced while investing in the Indian real estate market and how some of them managed to survive.

According to a report by Jones Lang Lasale, out of the $13 billion invested in the real estate sector, about $3.2 billion of exit has been recorded through 80 transactions. In general, the returns to investors have been satisfactory. Indian real estate (RE) investors have returned around 24% of the capital invested. This performance, considering the global investment scenario looks satisfactory as the global average for RE investors in terms of returns works out to around 4.5%.

Real Estate has the highest share in terms of value

The majority of exits have happened in the residential segment followed by commercial office segment. Here it must be noted that post the financial crisis investors have mainly concentrated on the residential space as compared to office space and this call has reaped higher returns. Institutional Investors have realized that residential space is not much affected by global factors. Residential segment has remained resilient through out the financial crisis in most of the tier I and tier II cities resulting into good returns. Thus, 46% of the exit for RE investors has taken place in through the residential space. These investors also made heavy exit through land parcels which accounted to 22% in terms of asset class.

It is interesting to note that land is the only asset class that has given the highest return to investors. The exit multiple for land is around 4.75x. Mumbai and NCR-Delhi together account for nearly 72% of the total value of PE exits. These are areas that are on the radar for all the new funds because of the predictability of demand and ease of exits.

Land has turned out to be the best form of investment

Typically, for any PE fund manager the biggest parameter for any investment happens to be exit. More than 69% of the total exits have happened through promoter buybacks both in value as well as the number of transactions which are more prevalent in the commercial spaces.

Wachovia, HDFC, Kotak Realty, ICICI ventures and Indiareit are some of the funds that have managed to give above average returns while offshore funds were the biggest losers.


Source:forbesindia.com