Types of Real Estate Investments

30.01.07 Real Estate | Comments(0)

Real Estate Investments - A bird’s eye view

Investment properties range from apartment buildings, condos, rental houses, and even commercial or office establishments. The real estate investment sector has evolved over the years, and is no longer what it used to be 50 years ago, where  property investment just comprised of finding a suitable place to live in, an affordable home or just a piece of raw land. It has gone beyond that, making it a lucrative business. Research reveals that some of the wealthiest people in the world have chosen the real estate industry business as their calling. Investing in real estate goes beyond ownership, and here we shall discuss the different types of real estate investment, which is beyond say, just buying a home!

Basic Rental Properties
This type of property investment constitutes landownership. What is landownership? Well, a person buys a property for example a house, and rents it out to a tenant. In other words, a landlord who owns the house and takes it upon himself to maintain the property, pays the taxes and the mortgage related to it. Usually, the rent paid by the tenant covers all the above mentioned costs. However, depending upon the location of the property and other factors, the landlord may charge the tenant additional amounts as rental charge which in turn produces a monthly profit. In this type of investment, however, patience is the key while strategizing. This is because; over a period of time the property turns into an invaluable asset to the owner as the property usually appreciates in value.
However, like any other investment, it is not completely risk-free and can have downsides to it. One would be lucky to get good tenants and who would not want that? If one were to get bad tenants, who would damage property or holdup the monthly rent. That could burn a hole in the landlords pocket and prove to be a hassle. Worse still, would be having no tenant at all. This would result on losses as he would have to scramble to cover the mortgage payments.

Research is the key before making this type of an investment. The primary factors that come into play are the area and the demand for rental property. One has to exercise prudence and try to buy property where tenancy rates are high (which means more demand for rental property) and vacancy rates are low.

Real Estate Investment Groups
Okay, sounds new or sounds like jargon? What exactly are real estate investment groups? In this type of investment, the investor buys the property through a company. The company is responsible for building and buying the property which usually comprises of set of apartments or condominiums and then in turn allows the investor to buy that through them. The investor in turn becomes a part of that group of company. It is entirely up to the investor whether he wants to own a single or multiple properties within that company.  Now, it is the responsibility of the company operating the investment group to take care of the property units ranging from maintenance costs to advertising the vacant units and other minor obligations entailed within the written agreements. Now, why would the company do this? What is their share of profit? What’s in it for them? Well, in exchange of management of all the units, the company pockets a certain percentage of the monthly rent.

So basically, it saves you the hassles involved of being the landlord and let the company take care of the property units. Furthermore, it gives the investor the advantage of paying off his mortgage even if his rental unit is vacant. How is that possible? It involves a very basic strategy. All of the units pool in a certain amount of rent to guard against occasional vacancies. Here again, research is vital. One has to keep in mind the company one is investing in, based on its past records, credibility etc.

Real Estate Trading
Real Estate Trading is in no way a risk free venture. This kind of investment requires a keen acumen and good strategizing. It is also called property flipping. This is an investment strategy where the investor buys the property and waits for its appreciation and sells it on a profit and then reinvests the funds realized from the sale on another property with the same motive.

This kind of investment is usually a short term investment for the investor as he plans to dispose or sell the property at a good profit. Fair amount of evaluation goes into this kind of investment as it carries tons of risk factors. Usually, purchase is made when the property is in a hot market or is significantly depreciated.

This kind of investment can also be viewed as a long term, wherein a few property flippers add value to their property by renovating and sprucing up the purchased holding and then selling it at a profit.

REITs (Real Estate Investment Trust)
Here a corporation or trust is created with a motive to use the investors’ money for purchase of income properties. Unlike the above mentioned types of investments, REIT gives the investor the benefit of investing in non residential properties like offices, malls, etc. and hence proves to be a highly liquid asset. In order to maintain and sustain itself, REIT has to keep a momentum of paying out 90% of its taxable profits as dividends and hence save themselves from paying huge amounts of corporate income tax. So if a stock market investor is looking for a steady income, this is the type of investment to be considered.

Leverage
To many of us this again sounds as a corporate jargon. So, first let’s see what leverage is? Leverage is the use of funds borrowed from a bank or other financer with a motive of investment.

By paying only a fraction of the total worth or value, the investor can control the entire property the minute the mortgage papers are signed. Certain mortgages require as little as 5%. This type of investment tool is not available to stock market investors. The real estate flippers and landlords get the advantage of taking out a second mortgage on their homes, with a chance of investing in more properties by paying only a meager part of the total value.

In the light of the above, it can safely be concluded that investment in real estate is not as simple, and requires a fair amount of research, expertise, prudence as well as experience. In fact what we see is just the tip of the iceberg. Although the industry has enormous potential, it entails its risks and not necessarily assures us gains.

Real Estate Boom in India

29.01.07 Real Estate | Comments(0)

Real Estate Boom in India - Is it over yet?

The Indian Real estate industry has not experienced a lull in a long time now. Its almost like a huge ripple effect with big metros as epicenters, the boom is consistent and the real estate market is indeed growing at a fast pace.

As opposed to the archaic regulations, that stifled the real estate industry a few years ago, all that is fast changing and hence lending a distinct irrepressible bounce to the real estate market.

Statistics reveal that at this rate the real estate market is expected to grow from US$ 12 billion to US$ 45-50 billion in the coming five years. The influx of MNCs, has spurred the income levels and the international consumer now demands value for money in terms of convenient affordable luxury. This demand in quality real estate, has in turn spurred the developers to act as catalysts for the real estate market. Moreover, with various home loan provisions, low interest rates and easy bank finance for developers, the construction business is flourishing consistently. The most significant step taken by the Indian Government was allowing 100% FDI (Foreign Direct Investment) in this sector. According to recent reports, “FDI inflows have already increased by 326 percent in January 2006 outrunning the US FDI inflows by about 6 times”. [Source: indiabooming.com}. Many foreign companies are making a beeline here and investing into funds that invest in Indian developers. The likes of J.P.Morgan are planning to invest $4 billion in the Indian real estate. Morgan Stanley and Merrill Lynch have invested $68 million in Mantri Developers and $50 million in Panchsheel Developers respectively.

The attitudinal shift among the Indian consumer coupled with growing income levels, is creating a huge demand in the residential and commercial real estate sector. The lifestyle savvy consumer is ready to shell out money, and the developers are not lagging too far behind to keep pace to this burgeoning demand. This trend is expected to spiral upwards, as it is increasingly becoming evident by the growing townships, state of the art apartments, futuristically designed buildings, shopping and entertainment complexes etc.

The demand for commercial property is steadily on the rise, especially in the retail sector. With the MNCs rapid influx into the country, a huge necessity for office space has been created. It is estimated that by the year 2010, a demand for 150 mn sq.ft. of office space will be created by the IT industry alone across the major metros of the country. So, we can envisage an exponential growth in the real estate industry in the coming years as well. In fact, according to recent reports, “the real estate industry in India has been growing at 33 per cent CAGR (compound annual growth rate) and could be a $50 billion industry in the next four years”

The retail sector is not too far behind either. With shopping malls mushrooming all over, one can envisage the real estate industry as playing a vital factor in the county’s economic growth. Bangalore will soon be boasting of its first furniture mall and Delhi will soon have an auto mall. The Indian skylines are getting more and more ornate, with stunning architectural wonders coming up, at par with international standards. Top Indian builders are vying against each other to get a share of the real estate booming pie. The Rahejas, DLF, Unitech and many others are establishing a pan-Indian presence, with launching new townships and catering to the lifestyle demands of the “cant settle for anything less” consumer.

Many international groups, the likes of American International Group Inc (AIG), High Point Rendel of the UK, Edaw-US, Japan’s Kikken Sekkel, Lee Kim Tah Holdings and Cesma International from Singapore can foresee the potential in the Indian real estate market, and have expressed interest in the Indian real estate. The retail segment plays a vital part in the Indian real estate.

According to recent reports,” the global real-estate consulting group Knight Frank has ranked India 5th in the list of 30 emerging retail markets and predicted an impressive 20 per cent growth rate for the organized retail segment by 2010″. [Source: ibef.org]. The Royal Indian Raj International Corporation is investing a whopping $US 2.9 billion in a prestigious Bangalore project called Royal Garden City. The Likes Of Emmar Properties a Dubai based group, which is one of the largest real estate developer in the world, has linked with Delhi based MGF Developers. This will be India’s highest Foreign Direct Investment (FDI) in the realty sphere amounting to over US$ 50 million in various projects. This boom is expected to further momentum in the foreseeable future, primarily due to easy financing facilities. It is being estimated that by the year 2015, the investment in real estate will touch up to $90 billion. In 2005 these investments were hovering around $12 billion. Hence this would be a giant leap, and there is no looking back henceforth. The U.S. based Tishman Speyer has joined hands with ICICI bank to invest US$ 1 billion. Other companies who are venturing into investments in the real estate sector include U.S. pension fund, CalPERS, hedge fund Farallon Capital Management, US-based developer Tishman Speyer and NRI fund Trikona Capital.

However, analytics do believe that things could go out of control if urbanization would be the only focus. Since India has been a predominantly agro based economy, eating up our land resources could backfire in an irremediable way. Careful planning is required to balance the nation’s economy, especially because of the country’s overpopulation.

Rising interest rates is yet another concern. With interest on home loans increasing, retail investors are losing interest in creating mortgages. But this would not pose a big hurdle in the path of ongoing boom in the real estate and at present, the rise in incomes is much more than the rise in interest rates.

Speculations of an impending bubble are also ripe, nonetheless, the Indian real estate is expanding exponentially, and if this tempo is maintained… the boom shall continue well into the future as international investors are lining up to emblazon the Indian skylines.

Share Market

29.01.07 Stocks | Comments(0)

Fundamentals of Stock Markets for beginners

What are Shares?
As the meaning of the word denotes, Share, in the context of stock market, means a portion of the ownership of the company or in other words having invested in shares of a company means that you have brought in a part of the capital of the company and you become an owner of the company to the extent of your holding. A person holding more than 50 percent shares of a company is able to exercise control over the affairs of the company as he has the maximum proportion of shares as compared to other shareholders.

Every company has a share capital and the persons who contribute that share capital are called shareholders. Initially the company starts its operations as a closely held company with the capital contributed by its promoters and as the company progresses, it may require more funds. The available options are to raise further equity or share capital or raise debt by securing loan from various banks and financial institutions. In the case of debt the principal as well as interest is payable and the transaction may also require the company to pledge its assets. On the other side if the company decides to raise further equity, it is not required to repay the principal and no interest is payable either. But the promoters have to share their ownership and profits with the new shareholders. Now when the company decides to raise further capital, again, it has two options. One, to raise capital through private placement and two, to raise capital through an IPO (Initial Public Offer). In the former case the equity is issued to a few large investors who buy stake in the company and in the latter case the equity is issued to public at large where a number of retail investors subscribe to the issue and a small portion of capital is contributed by each of them. A company can have two types of share capital. Equity share capital and preference share capital. In case of preference share capital a fixed rate of dividend is paid on the shares every year out of the profits of the company but the preference shareholders do not have voting powers exercisable at the General Meeting of the company. Equity share holders are paid dividend out of the profit left after distributing fixed dividend to the preference shareholders but they can exercise their right to vote at the General Meeting of the company where all the important decisions are taken.

What is share market?
Putting money in an investment is useless unless it is saleable. Shares once issued remain afloat until the company is running and the life of a company is perpetual, it never dies. But a person having shares of a company might not hold them for life; he would like to sell them for profit. To provide liquidity to the investments made by retail investors in shares of companies, stock markets were evolved. Stock market is a place where buyers and sellers are provided with a platform called an exchange where they can buy and sell shares of the companies listed on that stock exchange. In India two popular stock exchanges are Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).

Trading on a stock exchange
Stock markets are organized markets controlled and regulated by various governing agencies and regulatory bodies. Trading on stock exchanges is done through stock brokers who are regulated by SEBI (Securities and Exchange Board of India). All trades on stock exchanges are done in the electronic form, the trading is completely paperless. The shares are also held in electronic form at various depository participants and deliveries are given and taken through these depository participants. Depository participants are like banks, you can hold your shares in the accounts maintained by depository participant. To put it simple let us take an example. Let’s see how a beginner can enter the stock markets.

The first step to buy shares is to open two accounts. One with a depository participant and one with a SEBI registered stock broker. All you need to have to open these accounts is a Permanent Account Number (PAN), a passport size color photograph, an address proof and an identity proof. After opening these accounts you can place your bids on the terminals of stock exchanges maintained at the trading premises of stock brokers. Live trading can be seen on the terminals, buy and sell bids can be put online and the trades are done on matching bids of buyers and sellers. You may buy a stock either at the prevailing market price or you may put a bid of your choice and wait for the price to come down to your target. Bids once put in the system remain valid for the whole trading session. However these can be modified or cancelled at the option of bidder. Similarly orders can be placed to sell the stocks.

Once the orders are executed, settlement is done by the exchanges and all those who have sold the shares, have to give deliveries of the shares sold and all those who have bought the shares, have to make the payments as per the price at which the shares were bought. Both NSE and BSE follow T+2 rolling settlement systems. It means that settlement of trades executed shall be made on the second day from the Trading day. For example trades executed on Monday will be settled on Wednesday. Payments and deliveries are to be given to the stock broker where the bids were executed and he will then settle the trades at the stock exchanges on behalf of all his clients on the settlement date. Payments can be made by check to the broker and deliveries can be given by issuing delivery instruction slips to the depository participant, where you have your account, in favor of the clearing member (your broker’s pool account). The depository participants would take a maximum of 24 hours to execute your delivery instructions, therefore you have only one day to give delivery instructions to your depository participant after the trading day and before the settlement day.

Now you can open an account and start trading. But be careful, stock markets are risky, be informed about the company you are going to invest in, track the progress of the companies on your portfolio, have an expert advice and remember that a stock price can come down as much as it can go up. Happy trading.

Property Prices in India: A cost estimate

26.01.07 Real Estate | Comments(0)

A cost estimate for buying a residential plot or built-up house

India is currently witnessing a real estate boom for some time now, although speculations and resulting analysis is vague, there seems to be no de-escalation either in the real estate boom or in the property prices. In fact, the property price graph just seems to be growing higher, as income levels are rising, so is the consumer demand for a better lifestyle. The Indian consumer is more aware, demands value for money as well as with MNCs hiring on a big scale, affordability is reaching a peak with a certain strata of society. Furthermore, with copious provisions of bank loans, home loans are just a phone call away. Today’s consumer looking for a fine housing does not have to look too far. Of course, with a plethora of options, one can find a fine deal that suits their budget.

Property is an investment which turns into an asset, that everyone is aware of. Now, property prices are currently on the rise especially in cities like Mumbai, New Delhi and Bangalore. In fact, in certain areas the property prices equal that of New York or London.

So, land prices are only going up primarily due to the rising building material cost. Over a course of time, the cost of constructing a house has gone up by 30-40%. Building material comes expensive at Rs2600 per thousand bricks and a packet of cement at Rs.200+. Similarly, the cost of steel has escalated to Rs2800 per ton as opposed to Rs.2200 last year.

With easy loan facilities and rising income groups, people are more than eager to move into high class state-of-the-art functional apartments, as the developers vie against one another to pace up with increasing demands. As the income brackets of Rs.20000-25000 becomes higher, so does the demand for high quality residential property. With lucrative schemes and easy installments, bulk bookings are made in advance for ready to move in flats.

Although property rates vary according to the location, city and a host of other factors determine the property value …. It seems developers are now venturing into providing affordable luxury to the lifestyle savvy consumer. In Mumbai Goregaon (West), a luxurious housing project comes at Rs.25-28 lakh. If one is looking for high-end housing, the top developers are offering this quality between Rs.60 lakh to 2.5 crore. The high cost appreciation of condos, justifies the rising demand for such properties. DLF’s premium apartment complexes have witnessed a price appreciation of 15 to 30 percent since last year.

In Bangalore, while the capital value has risen by 10-15 percent, Delhi and NCR experienced an escalation in capital value by 20 percent over the past year. This upward trend seemingly, is here to stay.

The demand for residential especially condominiums is on the rise as it proves to be quality and cost effective housing for the MNCs expatriate staff as well as corporate honchos.

In Mumbai, a quality residential property ranges between Rs.20-30 Lakh. The costs of “A” class buildings in Mumbai like ‘golden triangle’ hover at Rs 15,000-17,000 per square feet. Cuffe Parade in Mumbai comes at a price of Rs.8,000-12,000 per square feet and at Bandra it is Rs.8,000 to 13,000 per square feet. Nariman Point is supposedly the most expensive locale in India, where commercial properties command a price of Rs.8,000-12,000 per square feet. The Bandra Kurla Complex in Mumbai is again highly priced at Rs.7,000-9,000 per square feet.

Cities like Bangalore are witnessing a boom and a need for service apartments is on the rise as well. In the past year, there has been a two-fold increase in land prices in Bangalore, especially in areas like Whitefield and Sarjapur. According to statistical data, “In 1999, a premium spot fetched Rs. 2200 per sq.ft, while an average middle class space now commands Rs. 2500.” . A premium luxury apartment commands a price of over Rs.2700 per square feet. An average functional flat comes at Rs.900-1200 per square feet and a life style apartment with facilities like pool, gym, and club are priced at Rs.1500-1800 per square feet.  For ultra luxury housing, the apartments are ranged between Rs.10 million to 25 million.

The residential market in Chennai has not witnessed any dip in prices over the years, and has surprisingly remained consistent. With state of the art apartments high on the demand list; Chennai is experiencing a definitive boom in residential property, especially due to the IT industry dominating the city’s commercial activity. People are settling for areas like  Kotturpuram, Boat Club, Poes Garden and Wallace Garden, East Coast Road(ECR), Adyar, Vellacherry, Perringudi.

Kolkata on the other is gradually rising to the mark, albeit after a long lull. The residential property market is gradually and steadily evolving although not as fast as compared to Delhi, Mumbai or Bangalore. With Alipore considered one of the posh areas of Kolkata, the property prices are soaring and so is the demand for luxury abodes. To give an estimate, three to four bedroom flats and penthouses in Ashoka Complex provided by the Merlin Group are priced at Rs.74-130 lakh with the carpet area varying between 2,450 and 3,800 square feet. Likewise, four to six bedroom flats (2400-2800square feet) at the Merlin Terrace , are ranged between Rs.72 to 144 Lakh.

The residential demand is on the rise in Hyderabad and Secunderabad as well, primarily because of rising software companies. Among the most preferred and prime locations remain Banjara Hills, Jubilee Hills, Somajiguda, Panjagutta etc. which are again high priced. The epicenter of the city has become saturated and that has created a demand to develop better lifestyle structures and amenities away from the city.

Providing futuristic lifestyle remains the focus of the developers and with the income levels on the rise and easy loan provisions, people are ready to invest in an asset that delivers value for money clubbed with convenience, luxury and various options of affordable schemes.

10 things your real estate agent wouldn’t tell you

23.01.07 Real Estate | Comments(0)

10 things your Real Estate Agent wouldn’t tell you. And why?

All potential buyers are a tad skeptic about their agents initially, which is indeed natural, as buying a house is the most important decision as well a lifetime investment. First off, weigh all your options; get the facts and figures right, lap up on all the information available. There are a few things that your agent does not want to reveal to you, so get your antennae up, don’t necessarily rely on your feelings and gut, first get the facts right.

1. Whose side are they on? Who are they really representing?
Okay, let’s face it. It’s the buyer who puts the money on the table. It’s only fair for you to expect that the agent gets you a deal that would deliver your money’s worth without being too commission-hungry. Now, usually that is NOT the case. The agent in most cases is representing the seller and is not looking out for your best interests. He is in fact, representing the seller’s best interest. So, this the number one thing that the agent is not going to reveal to you, that he is in fact on the sellers side and is representing the seller.

However, you have an option of choosing an agent or broker who will represent you and your best interests. In all probability, it would not cost you much. He would charge you the commission just as he would charge the seller. Just make it very clear in the beginning, so you know that he would try and get you the best deal possible and preferably has no ties to the seller’s agents.

2. Are you paying too much for that house? Get your facts and figures together
This step is vital. You are about to zero down on the house of your dreams and now come the big decision. How much is it worth? Before you make the offer, do a thorough research of comparable sales in that area. Try to weigh the pros and cons by defining your search parameters and see if that suits your budget as well as convenience. According to real estate analyst Karl Case, “Check out comparable sales in the neighborhood, then drive by each house to make sure you’re comparing apples to apples.”

This is the one thing the agent will not tell if the house is well worth the asking price. Remember, the more you pay for the house, higher the commission the agent gets. So, he will not offer you anything lesser than the asking price. Therefore, research is the key. Reconnoiter the immediate vicinity, lap up on sale figures of houses similar to yours. So, before you make the decision, it should be based on facts and figures, not just blind trust.

3. Investment value of a house. Is your agent telling you the truth? Do not get fooled
Buying a house is a lifetime investment and the most significant one. Why? In most cases, people look at it as an asset because of property appreciation over a period of time. In other words, it is important to ascertain the investment value of the house before you close the deal. This is the other thing that the agent will not be able to explain to you, and may sound overly optimistic about the investment potential. That’s because it is not easy to predict the long term future value of a house, just as in the case of stocks. However, don’t get stumped. You could hire an expert to analyze the investment potential of your house. Although that would give you only a rough estimate. Alternatively, you could do an online research or get any real estate analysis firm to track past prices and sales. This again would only provide you sketchy details. Many factors come into play while making long term predictions like demographics, economic trends, population shifts, and crime rates.

4. A preliminary sweep of the immediate vicinity. Is the agent revealing everything about the neighborhood, location etc?
Reconnoiter the area where you are planning to buy the house. Chances are that many facts are likely to unravel that your agent might not tell you, knowingly or unknowingly. You would then want to rank the crime rate prevalent in that area as also things like whether you have a shrieking neighbor! Weigh all pros and cons. Do not rely entirely on your agent to give you all the information about the locality, neighborhood etc. Get a firsthand feel of the place.

5. Will I get my deposit back in case the deal goes bust?
Caution and awareness is the key here. Make sure that before you sign the purchase-and-sale agreement, it explicitly mentions to protect your deposit amount just in case the deal goes bust. There have been many cases in the past, wherein people have lost their deposit money due to lack of information. The real estate board issues the following warning; “Don’t sign any agreement or pay any money until you’re completely comfortable with all the terms and believe the agreement protects your interests”.

6. How old is this house? How much repair and mending does it need?
Get a thorough home inspection done; chances are many things will yet again unravel that your agent might not tell you. Check for electrical fittings, plumbing, wiring, heating systems, leaky faucets. Furthermore, ask the owner as many questions. Most importantly, make sure that the sale-purchase agreement does not prevent you from getting a home inspection done. This would save you tons of trouble and money in the long run.

7. “I am really a real estate broker with a great track record!”
Make sure not to hire an agent without a few reliable references. Make enquiries about him/her, he should be a renowned broker with credibility, lest your deposit amount should be at stake.

8. Don’t reveal too much about yourself to the agent
Don’t get schmoosing with your agent especially not if he is representing the seller. Chances are he could reveal all that to the seller. So, if you slip out your financial details or the urgency to buy the house; that could weaken your negotiating or bargaining stance.

9. You may want to check the piping, electrical connections etc. before finally closing the deal
Some sellers can be very petty and for all you know after completing all the documentation, they could shave off the house of a few essentials like the water pipes, fans, electrical gadgets, etc. So, make sure that you inspect the house thoroughly before signing the sale-purchase agreement and that you are buying the house with all accessories fitted which have been seen at the time of inspection. You could be unpleasantly surprised.

10. “My Commission is negotiable”
Most agents are not going to tell you that their commission is not necessarily fixed. So, just in case the seller and the buyer are not able to decide on the selling price, a little flexibility on the agent’s part will prove to be beneficial, as then you can make up some of the difference between the asking price and selling price. This would help you get a productive transaction, and most agents would agree for a few thousand, as even then the commission is substantial.

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