FDI in Indian Real Estate - Boon or Bane?

Real Estate market in India is one such asset that people would want to have in their portfolios. And not just as an investment but also as a necessity. In my article Is Price Correction Imminent in Indian Real Estate I had discussed that prices in real estate have stagnated and this should benefit the home buyers. Well that was 6 months back. It now seems that government is determined to not let this happen. The new government has shown a clear intent to boost this sector by easing the FDI norms in Real estate, saying that the move would benefit the cash-starved developers raise investments from foreign funds to take up new projects and also to successfully complete the stuck projects. Now we all are aware that real estate developers tend to divert the money of one project to kick-start a new project thereby keeping the previous one hanging in the air. Instead of penalizing such acts, government is boosting this kind of practice by creating more avenues to raise funds from the market. 

                   FDI Equity Inflows in India (Source: DIPP.nic.in)

First the introduction of REIT and now the easing of FDI norms, this will lead to huge amount of FDI inflow in the sector. The changes in FDI norms include:

• The company investing the fund can now bring minimum FDI of $5 million only within 6 months of start of the project. Previously the constraint was for $10 million. Any additional investment can be brought in within 10 years or before completion of the project , whichever is earlier
• Also the minimum area required to bring in FDI investment has been reduced from 50,000 sqm to 20,000 sqm

Though thanks to the little discretion on the part of the present government, the norms for 3 year lock in period has been kept intact. Else what would be the difference between FII investment and FDI investments.

One good change though is that there is further relaxation in FDI norms when it comes to affordable housing. In fact, the government has removed the restriction with respect to minimum area as well as capitalization if 30% of the project cost is kept for affordable housing.     

You pick up any report published by real estate stalwarts such as JLL and KnightFrank and you are sure to find some mention of huge inventories that exist in every city. In cities such as Mumbai and Gurgaon, the number is so huge that with current rate of absorption it would take more than 5 years to sell all the existing flats. The prices of apartments are at its peak as well as for Land that has been rising crazily over the years based on speculation. This was probably one of the reason why in my article Is Price Correction imminent in Indian Real Estate I had mentioned that developers would be forced to sell their flats at a discount. Who knew that our government had a different plan altogether.  

Not just huge inventory piling up, but with change in Land acquisition norms the land availability has gone even scarce and it has turned these asset owners even more demanding thereby further boosting the already existing speculative price. In addition, cost of raw materials is on the rise more than ever. Higher cost and low sales due to high prices has created an impasse in this industry.

I personally felt that now would be the right time for the developers to reduce the price to lighten the burden of increased inventories from their shoulders. After all, this is what every end user wanted. Please note that I have used the word end-user and not investor! Who knew that our dreams would be shattered by the new policies of the Government! After all, our salaries are not increasing at the same rate as FDI in the market. 

SMART CITIES OF INDIA

India is on its way to surpass China to becoming the most crowded city in the world. Prime Minister Narendra Modi has been far sighted in his vision when he announced allocation of 7000 Cr in FY 15 towards creation of 100 new smart cities. 

What exactly is meant by a smart city has not been clarified. At this stage we can only assume that a smart city would comprise of a sound urban planning (probably not to repeat “the Gurgaon disaster”), better drainage and sewerage system with application of sensors and other technologies to detect real time damage as well as a better public transport system catering to less pollution. A city where commuters would love to use a public transport instead of their cars, a place where traffic rules would be followed not out of fear but out of self-concerns, a city where number of cyclists on the road would surpass the number of cars. And all this is possible with application of advanced technologies.

When we look at the 7600 Cr figure, we know it won’t be sufficient even for 1 city. But I guess the idea right now is to kick-start the idea. Rome was not built in a day. Smart city projects will require not only contribution from Central and State Governments, but also through private investments. Ministry of Urban Development has plans to develop 2 smart cities in each of India’s 29 States.

There definitely exists couple of serious challenges which might come in way of achieving this dream.

• Investment and
• Land acquisition

PPP projects will bring in collaboration between Government and private companies. It will also bring in the much needed investment.   It might be difficult to develop a greenfield city. Existing metros themselves sets a very poor example when it comes to their own infrastructure. It seems that people of India are doomed to stay in a mediocre environment. With ever increasing population and migration to cities having reached an alarming rate, currently it makes more logical sense to develop new areas to accommodate them. Indians will still have to do with low standard of living! 

Rules for foreign funds in Construction to be relaxed

Close on the heels of liberalising foreign direct investment (FDI) norms in the defence sector and the Railways, the Government is now trying to fast-track a decision on easing rules for foreign investments in the construction development sector.

The Department of Industrial Policy & Promotion (DIPP) has floated a Cabinet note proposing to bring down the minimum built-up area requirement for FDI in construction projects from 50,000 sq metres to 20,000 sq metres. It has also proposed reducing the minimum capital requirement for such projects from $10 million to $5 million.

The existing policy allows 100 per cent FDI in the construction sector subject to minimum built-up area and minimum capitalisation requirements.

The draft Cabinet note also suggested that projects which commit at least 30 per cent of the total project cost for low cost affordable housing will be exempted from minimum built-up area and capitalisation requirements.

“As these proposals are in line with the announcements made in the Union Budget, we do not expect major opposition from other Ministries and Department. We hope to finalise our note for Cabinet’s approval soon,” a DIPP official told BusinessLine.

With the Government eager to attract investments in the 100 smart cities proposed in the Budget, easing rules for FDI in construction is very important.

“Countries such as the US, Japan and UK have all expressed interest in investing in smart cities. The more liberal norms will ease the flow of such investments,” the official added.

The existing post completion lock-in period of three years for investors, however, will not be relaxed to avoid early exits.

The Union Cabinet recently relaxed FDI rules for the defence sector, increasing the FDI cap from 26 per cent to 49 per cent. It also allowed 100 per cent foreign investments through the automatic route in a number of areas in the railways including high-speed trains, railway line, passenger terminals and coaches manufacturing and maintenance facilities.

The new rules in both sectors have been notified.

The BJP Government, however, is reluctant to allow FDI in multi-brand retail as it believes that it could hurt small retailers.

It is also not willing to open up the e-commerce sector to foreign investments for now.

Source: http://www.thehindubusinessline.com

AIR INDIA mulls REIT IPO to raise funds

Air India Ltd, India’s state-owned airline, is considering spinning off its real estate assets into a real estate investment trust (REIT) and list it on the stock exchanges in a move that could give the company significant tax breaks and also improve its finances. 

Air India has 800 properties at prime locations around the world; it ended 2013-14 with Rs.19,300 crore in revenue and a loss of Rs.5,388.82 crore; the airline had debt of Rs.40,000 crore on its books as of 31 March. 

Air India’s 800 properties at prime locations include several acres of land, office buildings, sports stadiums and residential colonies. 

The airline’s Mumbai headquarters on the high street of Marine Drive alone is estimated be worth Rs.2,250 crore, according to airline official who declined to be named. 

Mint is not aware of any valuation exercise undertaken by the airline. 

“We have a lot of land assets and this is one of the routes of monetization. We are considering the option, but a lot of work has to go in,” said an Air India executive who asked not to be identified. 

This person added that consultants had already made a presentation to Air India on the merits of the REIT route and that the airline’s finance team plans to move forward with this. 

“If it works out, we will hold 51% in the REIT; the properties will remain ours but be leased out at the best prices,” added the airline executive, who cautioned that a final decision is yet to be taken. 

A second Air India executive confirmed that the airline is considering a REIT and that work has started on it. 

REITs, which first made an appearance in the US around 50 years ago, are listed on exchanges and use money raised from the public to buy real estate. 

A REIT can be set up by a developer or any independent fund manager. The minimum investment to be made is Rs.2 lakh, said Hemal Mehta, senior director, Deloitte Touche Tohmatsu India. And if the REIT pays out 90% of its distributable income to investors, it gets a tax exemption. 

The civil aviation ministry has asked Air India to consider this option to pare its debt. The airline has an 18% share of the domestic market and a 17% share of the international one, and is in the midst of a Rs.30,000 crore equity infusion by the government that is expected to turn around its fortunes by 2021. 

There is no clarity on how much the airline plans to raise through its REIT. If Air India goes ahead with its plans, it will create among the first REITs in India, after the new government allowed the creation of such entities in July. 

India’s capital market regulator, the Securities and Exchange Board of India (Sebi), in a 10 August board meeting, approved final regulations for REITs, although these are yet to be notified. 

REITs may provide a new source of funds to Indian firms with large land banks, helping them reduce debt, and by 2020, some $20 billion worth of property and land could be held through REITs, according to an estimate by property broker Cushman and Wakefield reported by Bloomberg. 

“A REIT offers a regular return on investment and it also captures upside on the appreciation in the value of underlying property. Most of the other instruments either offer regular return (debt securities) or only upside (equity/equity-linked securities),” said Bhairav Dalal, associate director, PwC India. Mint reported in 2012 that Air India plans to raise money by developing and selling some of its real estate holdings, but nothing much came of that plan. 

Read more at: http://www.livemint.com/Companies/hn4q9Hyha7ggXvz3NG1IEO/Air-India-mulls-REIT-IPO-to-raise-funds.html?utm_source=copy

Leveraging in Real Estate and knowing when to Exit

LEVERAGING IN REAL ESTATE

When the cost of borrowing money is cheap you can get a better price for your real estate because the leverage is better. Leverage is the difference between the rate of return on a “free and clear” basis and the rate of return on invested capital. For example, suppose you are buying a small office building for $10 million and the annual cash flow is $1 million. That’s a 10 percent return on a free and clear basis. Now instead of buying the property for all cash, assume you take out a mortgage of $8 million (80 percent of the purchase price) at an annual interest rate of 7 percent. The annual cost of the mortgage portion of the investment is $560,000. The annual return on your $2 million investment is $440,000 or 22 percent on your cash. That’s how fortunes are built.

EFFECT OF STOCK MARKET & INFLATION

There is usually a high demand for real estate when the stock market and the bond market show low returns. It is also true when the rate of exchange of the dollar for foreign currencies is low because foreign investors see bargains in the making. When the rate of inflation starts to rise dramatically buyers will often flock to real estate because increase in real estate prices and rents seem to rise in line with the rate of inflation. Effect of Inflation on Real Estate - Bullzbearz  

WHEN TO EXIT

If you have a piece of property in an area that is deteriorating as indicated by “for sale” or “for rent” signs or by increased boarded up or vacant stores or buildings and you have no solid information as to when this cycle will change—get out! Take a loss, if you have to, but get out! If interest rates are rising and you have a mortgage, which will be coming due shortly, sell, preferably to an investor that has lots of ready cash, but sell!

If you own a building which is going to be adversely affected by a change in traffic patterns or new interstates or highways, sell as soon as you have reason to believe that any of those items will become a reality.

If you have a building that you believe will be adversely affected by some new construction in the area, that’s also a time to sell. This is especially true if you have a property with retail stores and new, larger or serious competition is on the way.

You should consider selling real estate when you encounter obstacles to the project, such as denial of zoning or approvals and the projected critical path of your project is no longer feasible. You should also consider selling if key relationships or people you rely on drastically change or leave the picture.

Source: "Trump Strategies for Real Estate"  21 things to learn from Donald Trump Strategies - Bullzbearz 

How to avoid Campa Cola Fiasco? Documents you need to check before buying a house...

Only a fool learns from his own mistakes. The wise man learns from the mistakes of others. In the city of dreams, where space is a crunch, Campa-Cola fiasco should not be allowed to repeat. Just because you are getting to buy an apartment in the most coveted location at a cheaper price, let’s not fall prey to it. It doesn’t cost you much to be prudent and take a well-researched decision to save yourself from investing your lifetime savings to buy your dream home. Some important steps that you need to take to make a well informed decision are:

1. Title Deed: This is the first document that you need to check before buying any property. The title deed is the legal document which authenticates the ownership of the property. Ensure that the document is original one and not a photocopy because owner can take loan against the said property. To go one step beyond, you should also ask for the previous deeds of the land which the seller possesses. Title deed would also include the sale deed and Conveyance deed. To understand these terms in detail, refer to Important Real Estate Terms.
2. Encumbrance certificate: The land that your property is built on should be free from any legal suits. Encumbrance certificate can be obtained from the sub-registrar office where the title of the land has been registered. The certificate ensures that the title of the land is clear from any liabilities or charges on the property.
3. Tax receipts and Bills: You should duly check whether taxes on property have all been made to the government and municipal offices. The owner should have no trouble to show the receipts of recent taxes paid.
4. Intimation of Disapproval (IOD): IOD should be obtained from respective authorities before they can start construction or sell the property. Normally, IOD’s are valid for a certain period of time and if the construction has not started within a year’s time, the same has to be obtained again. Make sure that the builder has obtained IOD before making a purchase.
5. Sales Deed: Buyer should always get a sales certificate from the builder. If the builder has obtained loan against the property it should be duly mentioned in the certificate that payback of loan is sole responsibility of the builder. Sale deed also contains the detailed information of the flat you purchase.
6. Completion Certificate / Occupation Certificate: Builder obtains completion certificate from the local government body once the construction is complete and the building adheres to the set rules and regulations pertaining to the design plans. Occupation certificate is obtained once adequate provisions for water, sewage and electricity has been made.    

Real Estate Investment Strategies - Buy and Hold, Buy and Flip

I feel that people these days are more and more interested in investing in Real estate especially because people are confused over other investment options such as stocks and bonds and mutual funds because they don’t know where their money is put or things go a little bit over their head because it seems all too confusing. More so, when the returns are good and demand is high. After all, all of us need a home. So let's discuss some of the prevailing Real Estate investment options here. 

Some of the Investment options are:

• Buy and Hold
• Buy and Flip
• Lease to Own
• Construction / Development
• Buying Land and Rezoning it
• Unique Property

These are the active strategies where people actually deal in physical possession of land and houses.

The Passive strategies include:

• REIT’s
• Real Estate Investor
• Private Lender

Out of these, let's discuss on Buy and Hold and Buy and Flip strategies.

Buy and Hold

This involves buying a property to basically hold onto it. You rent it out to a tenant and collect monthly rent cheque from him. This leads to a positive cash-flow for you which also help you pay for your monthly installments on the mortgage. You can finally either lease the property in the long run or you can sell it.

Drawbacks

• There is a risk of negative cash-flow risk which might arise when the rent that you collect is lower than your EMI that you pay towards your mortgage. This is a general scenario observed in all major cities of India. For example, in Mumbai a 1 BHK flat would cost somewhere around Rs. 1 crore which would entail an EMI of approx. Rs. 1 lac. Whereas the rent that you get would be somewhere around Rs. 20,000 on the same in case you have a tenant. This leads to a negative cash-flow situation.
• Another risk might be decrease in Property value in which case you would be losing that equity you put away every month.
• More often than not you are also afraid that the renters might not be taking good care of your property leading to a faster depreciation of your property value. I am surprised that in India no facility management service exists that would take care of your rented property. This seems to be a good business opportunity.
• In addition you also have to shed extra money for property maintenance which is another form of cash-outflow for you as a owner. Since this is your property, it is your responsibility to fix any plumbing or electrical problems.

Buy and Flip  

This is an investment strategy that involves buying a home below or at market value, renovating it and reselling the same at soon as possible. You need a strong market understanding so that you know the prevailing market price in the locality, understanding what renovation would bring in greater value to the property and knowing at what price you will be able to sell it.

Benefits:

Of course you use this strategy for making quick capital gains. You want to get out quickly as your money is locked in with the property. The only exit strategy that you have is to sell the property and sell it soon.

Downfalls

• Cost of entry is very high as you pay hell lot of money to buy the property and then renovate it. 
• It involves high risk of investment as a lot of your money is locked into it
• You are also dependent contractors who would help you renovate the property unless you have these facilities in-house.
• You always need to be on your toes as this strategy needs a quick turn-around time

These are just two of the many strategies used by people in the Real Estate Investment world. And I am still to find out which is the best one for Indian subcontinent. I will discuss other investment options in blogs to come. 

Pune or Gurgaon - Which city should I live in?

Either you are fresh out of college or you are about to get married. The question that often boggles you is which city to settle down finally. Especially when you already do not have a home in one of the metros. More often than not you succumb to opt for a place which fate has decided for you in the name of the company that you work with. Average take home salary for an undergraduate would be somewhere around Rs. 25,000 to 40,000. The same for someone unmarried and having worked for 3-5 years would make around Rs. 50,000 to 60,000. If you are forced to work at this salary in a city such as Mumbai or Gurgaon, you can barely afford to live an average life where the cost of living is too high.

I have a few friends who live in Gurgaon. And they are not happy as most of the people staying in Gurgaon. High cost of living is not the only issue. Other issues include high realty prices. I mean in order to survive in places like Gurgaon or Mumbai, one has to shed almost 30 to 35% of their income either on house rent or EMIs. Or else you stay 3-4 friends in one flat just to save on your living cost. Other major negatives include high school fees for children with poor quality. No proper public transport in a city like  Gurgaon makes life worse. One either has to own a vehicle or spend hefty amounts on auto wallahs, and everyone living in Gurgaon would agree that dealing with Auto wallahs of Gurgaon is a pain in itself. And the worst of all, safety! Open any newspaper and there will be at least one article that would testify to this issue of NCR.

So what do you do? Which city do you think is a coveted destination to live in. I myself have lived in Gurgaon and Mumbai and Pune. And there is no denying the fact that Pune is the most preferred of all. Pune has its problem too with ever increasing traffic in the city. But Pune has the best of educational Institutions, quantum of IT and Manufacturing industries and ample job opportunities. Ask anyone about the weather in Pune and you wouldn’t get to hear any complaints, especially when compared to the weather of NCR, Kolkata or Chennai.

Real Estate prices in Pune is still cheaper than Gurgaon and far cheaper than that prevailing in Mumbai. There is a clear shift in the demographics of Pune with students and youngsters coming in the city either for higher studies or for their first jobs.

All in all, Pune looks an attractive option when compared to Gurgaon. But this is just a view of few people I came across. I am sure there are positives about Gurgaon too, else why would so many people still stay there and why would so many companies still have their headquarters in Gurgaon. 

Note: All the assumptions made in this article are just through observations. That is why I am not citing any reference of source. If you have a different observation, please feel free to post your comment for discussion. 

Pune Infrastructure Development

Pune City Map

Population of Pune city has risen from ~2.5 million in 1991 to ~3.5 million in 2001 and currently stands at ~5 million as per 2011 census, an increase of 43% population at a CAGR of 3.6% since 2001. Migratory population in the city is on the rise. The city's basic infrastructure needs to be revamped considering the rapid increase in population of the city.   

PROPOSED PUNE METRO CORRIDOR

Pune Metro Corridor

Corridor I

Phase 1: Pimpri Chinchwad to SwarGate (17 kms)

Phase 2: Swargate to Katraj (4 kms) / Deccan to Bund Garden (11 kms) / Pataleshwar to Hinjewadi (18 kms)

Corridor II

Vanaz to Ramwadi (15 kms)  

OUTER RING ROAD - PUNE

Pune Outer Ring Road

Outer Ring Road I Pune	Connecting  Theur to Chimbali (via Kesnand, Wagholi, Bhavdi, Tulapur, Alandi, Kelgaon)	40 kms Expected completion year 2017
Outer Ring Road II Pune	Connecting Chimbali to Pirangut (via Shelarwadi, Shirgaon, Chandkhed, Rihe, Ghotawde)	46 kms Expected Completion year 2017
Outer Ring Road III Pune	Connecting Pune Bangalore Highway to Pirangut (via Urwade, Mutha Bahuli, Khamgaon, Ghera Sinhgad, Kalyan, Kondanpur, Shriramnagar)	51 kms Expected Completion year Post-2018
Outer Ring road IV Pune	Connecting Katraj to Theur (via Gogalwadi, Patharwadi, Bhivri, Kanifnath)	32 kms Expected completion year Post-2018