Tag: property market

Real Estate Myth #5: Property development is a scalable business model

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Huge profits made by developers quite often make investors and analysts conclude that real estate is a very scalable model. The fact is that real estate is very low on scalability.

Scalability for any business is high where beyond a point, incremental growth of business requires neither large capital nor specialised skills. Also, in a scalable business, every new customer adds more value to the business.

Most new users come to Facebook through references, requiring no major capital or specialised skills. And with every new user, the value of Facebook increases. But, in real estate business, every sale reduces the inventory available for sale, thus shrinking the future growth potential of the business. Replenishment of inventory takes time and requires additional capital which reduces the scalability of the business.

Secondly, real estate business comprises larger number of activities, thus the overall complexity of operations is quite high and every new project comes with different kinds of complexities. Specialised skills, therefore, remain key to growth in real estate. Hence, there is only an optimal number of projects that a real estate developer can efficiently manage.

All these factors ultimately create limitations to the growth of a developer. So, while the real estate business can give large profits, it remains low on scalability.

Deepesh Salgia is Director, Shapoorji Pallonji Real Estate.

Watch the video here.

Follow the Myth Series here.

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Myth Series: What is its purpose?

While real estate is among the fastest growing businesses in India, it rarely finds respectable space in curriculums of business schools. Also, there are hardly any case studies available to explain the intricacies of the sector.

For these reasons, many facts and theories floating about real estate follow a ‘common sense-ical logic’. Unfortunately, many of these are misconceptions, myths or even downright false.

The purpose of this series, therefore, is to take one real estate myth in each blog and provide insights on the real issues.

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Real Estate Myth #4: A firm’s turnover gives a correct measure of the size of operations

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The size of any business, in general, is measured by its turnover. Larger the turnover, larger the size of the operations. However, applying the same logic to real estate business is inappropriate.

To understand this one needs to revisit the definition of ‘turnover’. Turnover in any business is the measure of the rate at which the goods are ‘sold’ and ‘replaced’ by other goods,  i.e. the rate at which the inventory is ‘turned over’.  So, in a retail store, a garment is sold and is typically replaced by another garment resulting in turnover for the store. The rate at which it is done measures the scale of operations of the store. Essentially, turnover is not just about revenues but also about the ability of the business to replenish the sold stocks.

In real estate, it is not easy for replenishment of inventory to immediately follow the sale. Inventory is sold every month but land purchase has a very long lead time. Opportunities to buy land are not available off the shelf and the process of land buying is very time consuming.

In businesses like manufacturing, no sooner finished goods are sold, raw material is replenished to produce more goods — classifying the activity as turnover. Similar phenomenon is seen in retail business. And therefore, in these businesses, turnover (i.e. sale receipts) provides a good measure of the scale of operations. In real estate, sale figure tells only half the story about the size of operations. The unsold inventory/land bank, which is the engine for next year’s revenues, is also very critical for measuring size of operations.

Secondly, since developers generally recognise revenue when the project is complete, the turnover gives a measure of projects completed in that year and not the size of overall business. Accordingly, turnover in a particular year may have no relation to cash flow or to actual amount of business activity in that year. In most other businesses, cash flows and sales, generally have a high co-relation, hence for these businesses sales (or revenues) remain a good measure of the scale of operations as well as of cash flows.

However, in special cases, revenues of a real estate company could give a good measure of the size of operations. For example, when the company derives most of its income through rental business, the cash flows and revenues have a very high correlation. Also, inventory replenishment is hardly an issue; property once available for rent will also be available during the next month.

So those of you, who find it challenging to analyse balance sheets of real estate, should now be happy. You are not the only ones.

Deepesh Salgia is Director, Shapoorji Pallonji Real Estate.

Watch the video here.

Follow the Myth Series here.

———————————————————————————————–

Myth Series: What is its purpose?

While real estate is among the fastest growing businesses in India, it rarely finds respectable space in curriculums of business schools. Also, there are hardly any case studies available to explain the intricacies of the sector.

For these reasons, many facts and theories floating about real estate follow a ‘common sense-ical logic’. Unfortunately, many of these are misconceptions, myths or even downright false.

The purpose of this series, therefore, is to take one real estate myth in each blog and provide insights on the real issues.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Should you buy a home now?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

Listen to the Article (6 Minutes)

This is, without doubt, a very favourable market for homebuyers looking to purchase properties for their own use. One of the obvious reasons is the abundance of options in all categories of housing to pick from. Also, property rates have reduced considerably across cities. Nevertheless, many fence-sitting buyers still hope for further corrections.

There may still be scope for some marginal rate corrections in certain depressed markets – but as we often say in the industry, timing the market is a game only investors should play. There are no guarantees for when, where and even if corrections will occur.

Certainly, a whole country’s real estate market does not witness synchronised corrections like on the stock market, where everyone is affected simultaneously and to the same extent. For genuine homebuyers who recognise a good thing when they see it and can call it good enough, it has certainly never been a better time.

The Government has also provided several incentives for first-time homebuyers, especially in the budget homes category, and developers are rolling out year-round attractions in their keenness to close transactions. Moreover, the plentiful supply of ready-to-move-in properties also benefits homebuyers – the instincts for instant gratification and risk aversion can be satisfied simultaneously.

Guidelines for End-users

The fact that the current market distinctly favours buyers should not result in rushed purchase decisions. Rather, buyers should:

• Identify the best options in the multitude available on the market
• Investigate their final shortlisted options for complete legal sanctity
• Exercise caution with under-construction projects and look for healthy, ongoing construction activity with considerable on-ground completion progress
• Consider only projects with RERA registration in place

The RTM Advantage – The current preference for ready-to-move options is understandable. Despite many customer-favouring court rulings on this front, the unwholesome aura of delayed, stalled and even shelved projects which had beset many cities markets continues. In fact, the recent and ongoing NBFC crisis has made the situation even worse.

Another pain-point for under-construction properties has been GST. Ready-to-move properties were cumulatively assumed to be and marketed as exempt from GST. However, a recent clarification confirmed that only ready projects with completion certificates in place enjoy this benefit.

In other words, even for RTM properties, the availability of this vital document is something that buyers need to investigate diligently.

Guidelines for Investors

Not all buyer are looking to purchase a home for their own use. The market still holds some scope for investors too. However, the dynamics have changed from earlier years and there are some new caveats over and above the previous ones:

• Capital appreciation is a reasonable expectation only in some categories, and in certain high-demand/low supply areas
• With some exceptions, luxury housing is currently not the best play – the preferred categories for investors currently are lower budget and mid-segment housing
• The project should be is in a well-connected location and have a decent saturation of amenities and facilities. Buyers and renters are spoiled for choice right now. Without public transport connectivity and sufficient social infrastructure, neither capital appreciation or rental revenue will be satisfactory regardless of other attractions a project has
• Apart from existing social and civic infrastructure, upcoming infra projects being used to promote a project must be verified with the relevant municipal authorities
• An optimal ‘entry point’ in terms of ticket size is critical for good ROI – it should be attractive to begin with and, if possible, negotiated further. Investors must also verify historic capital values and rental rates trends
• The brand value of the developer will also determine future appreciation potential, especially in under-construction projects. Stronger developers with better capitalisation have superior execution capabilities, are less likely to cut corners on construction materials, and won’t deviate from the committed specifications.

Caution on ‘Value-Adds’

Added attractions and easy financial structuring can be rewarding if the customer has picked the right developer and project, and has fully understood the value proposition. However, financial schemes can also be dangerous if a buyer has not understood exactly how they function and what kind of financial commitments they imply.

RERA requires developers to be completely transparent in their marketing outreach – including in terms of schemes and add-ons, which must all qualify as fair and transparent promotional activities. Outright misleading promotions are not allowed under the RERA regime and few players, if any, will resort to them now. (Even visuals in marketing collaterals and on hoardings meant to depict the project or its purported lifestyle quotient must be clearly mentioned as ‘representative’ and ‘artist’s impression’).

Nevertheless, many buyers tend to ignore the fine print of a seemingly attractive but inherently booby-trapped payment scheme. Ignorance in the face of information availability is not a legal recourse. If a buyer did not read the fine print and ask the right questions, a developer can technically not be held accountable. He becomes legally liable if there is no fine print available at all, but not if it exists and the buyer ignored it. Here, the guidance of a property consultant can be invaluable.

White goods should only be seen as valid attractions if the property itself is of inherent value to the buyer. If an overall desirable property comes with add-ons like furnishing, modular kitchens, essential fittings and reserved parking space, there is real value. Waived stamp duty and registration charges can obviously also have positive implications on the bottom line.

However, none of these should tip the scales towards a purchase decision if the project is in the wrong location, does not have all legal documents (such as RERA registration), or there are other inherent location-specific defects such as unreliable utilities supply and lack of sufficient social infrastructure and public transport options.

Understanding Rate Cuts

A rate cut on the stated cost of a property is the clearest and most convincing incentive that a developer can give to his buyers. However, a rate cut should not divert focus from the real value of the property. Also, rate cuts are rarely announced officially but rather earned on the negotiation table. There are good reasons for this.

If some developers in a certain locality start announcing rate cuts, other developers with similar projects in the same area may have no option but to reduce their own rates to stay relevant in a competitive market. However, at the end of the day, relationships matter in the developer community and very few players will be willing to start a rate war. Therefore, announcing a hard rate cut is considered the last and least desirable option.

This does not mean that the ticket size cannot be reduced. Buyers can and should negotiate on the final asking rate, or get their property consultants to negotiate on their behalf. However, this is only an option if a developer sees serious intent – a seasoned player’s sales team can spot ‘window shoppers’ easily. Also, there is a logical limit to how far a negotiation can go.

Developers invest significant capital into land, construction and building permits and need to recover these costs with at least some profit margin. No reputable developer with a good product will sell at a loss – and just ‘breaking even’ is obviously not a desirable strategy in any business.

While even credible developers will negotiate with serious buyers to some extent, only weak players in deep financial pain (and probably wanting to exit the market altogether) will opt to sell at an outright loss. A reduction of 5-7% should be considered an acceptable knockdown on the overall ticket size. To push beyond this is inadvisable, and can be counter-productive.

In short

• There are currently very compelling reasons for end-users to buy homes
• Depending on the city and location in question, investors may see wisdom in waiting for further rate corrections
• Ready-to-move-in homes with completion certificates are the least risky and most tax-efficient bet for end-users
• Serious investors with a long-term horizon can make calculated plays in under-construction projects to lock in the lowest possible rate
• Serious buyers can look forward to at least some success with negotiation, within reasonable limits

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Should you buy a home this festive season?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

Listen to the Article (6 Minutes)

The festive season is considered auspicious for property purchase and Indians across many states prefer to make informed property buying decisions during this period. To encash on the increased demand during the festive season, builders, on their part, leave no stone unturned to lure customers with freebies and discounts. Over the last few years, mounting unsold stock across cities prompted developers to clear their stock and focus more on project completion rather than launch new ones.

Festive Season Offers

This year, launches have increased, and many builders have, in fact, been offering schemes, freebies and discounts all year long to attract home buyers. Some of the prominent offers include cash discounts, flexi-payment plans, no registration or stamp duty fees, no EMIs till possession, free home appliances or gold coins, etc. A lot is up for grabs and it is interesting to note the variations in festive discounts. Cash-starved developers are also coming up with some very innovative and attractive schemes.

If we analyse the trends during the year and previous festive season, customized payment plans and schemes assuring good rental returns were prominent among the incentives.

Positive consumer sentiments backed by various reformatory changes have kept the momentum going in Indian real estate in 2018 with a q-o-q increase in new supply and sales. Considering the growth in supply and sales, the current festive season is more positive for home purchase than the previous year.

State of the Housing Market

There is a lot of supply in the market – both in the ready-to-move-in and under-construction categories. As per ANAROCK data, the overall unsold stock across the top 7 cities as on Q2 2018 is 7,00,800 units, denoting a decline of over 10% as against the corresponding period in 2017. Likewise, the resale market is replete with options. In terms of demand, it is returning on a cautious note as buyers are focusing only on completed projects or those in advanced stages of completion, and only by RERA-listed developers in the latter category.

In the under-construction category, GST is an enduring cause for confusion and uncertainty, as is the unwholesome aura of delayed projects which has been plaguing the market in many cities. Investors have more or less evaporated, so developers are unable to offload multiple flats in a go.

End-users are back – but they’re not making impulse buys, are checking every option and negotiating hard. As a result of all these dynamics, price shave either remained stagnant or grown only minimally in some high-demand/low supply areas.

New Launches during the Festive Season

Across the country, new launches have started increasing even before the festive season. As per ANAROCK data, nearly 30,840 new units have already been added in mere 2 months (July & August 2018) across the top 7 cities in the country, led by MMR and Bengaluru with nearly 13,570 units and 6,000 new units approx. This supply in just two months is already 400 units more than the entire Q1 2018 new launches across these cities.

However, by and large, developers are also focusing more on completing their ongoing projects as the spectre of RERA with its strict guidelines on timely completion looms large over them. Only the most financially sound builders are venturing into new launches at this stage and are focusing on the budget homes segment as luxury and even semi-luxury continue to languish.

Most of the launches we have seen in recent times are in the affordable housing segment. As per ANAROCK data, out of the total launched units across the top 7 cities during January to August 2018, nearly 39% comprised of the affordable segment (<₹40 lakh), followed by 34% in the mid segment (₹40 lakh – ₹80 lakh). This is because affordable housing is the highest seller at the moment owing to the various incentives that the Government has extended to budget home developers as well as buyers.

Which Offers Make Sense?

On the one hand, some offers can be genuinely rewarding if the customer has picked the right developer and project. On the other, offers can also be misleading – for instance, if a financial scheme is not transparent and/or the buyer does not read and understand the fine print. Also, white goodsfreebies only make sense if the property itself is of inherent value to the buyer.

RERA requires developers to be completely transparent in their offerings, including in terms of schemes and freebies which must qualify as fair and transparent promotional activities. Misleading promotions are not allowed under the RERA regime and few players, if any, will resort to them now.

Nevertheless, buyers often ignore the fine print of a superficially attractive but inherently worthless offer, or not seek to understand the exact ramifications, in which case the developer can technically not be held responsible as the information was provided but ignored.

If a buyer has selected a desirable property and is getting add-ons like free furnishing, modular kitchens, essential fittings and reserved parking space, these make sense as they are genuine value-additions. Also, waived stamp duty and registration charges result in significant savings.

However, none of these make sense if the project is in the wrong location or there are other inherent defects such as unreliable utility supply, lack of social infrastructure and insufficient public transport options.

A price discount is the clearest and most decisive incentive that a developer can offer, but a buyer should focus equally on the value obtained and the money saved. However, this brings up the historic aversion of developers to formally announce price drops.

If some developers in a certain locality start announcing rate cuts, other players have little option but to follow suit in order to stay relevant in this highly competitive market. However, this trend is more prominent if a leading developer At the end of the day, relationships matter in the developer community and few, if any, players will be willing to start a price war.

Moreover, developers invest significant capital into land, construction and building permits and need to recover these costs with at least some profit margin. No developer can afford to sell at a loss, and just breaking even is also not a desirable strategy in any business. Therefore, announcing hard discounts is considered the last and least desirable option.

Should You Buy a Home this Festive Season?

There is certainly no shortage of options on the market – but the German saying which translates to ‘with many choices comes great despair’ seems to hold true in the current market circumstances. The multitude of choices and available offers can induce what is commonly known as ‘options paralysis’ in marketing speak, even though the time is really optimal for end-users.

If one has already made a firm decision to buy a home and identified the right property, it is certainly worth shaking off this paralysis this festive season. However, it is not the offers but the property itself that should lead the decision-making process. The best offers on easy financial structuring and freebies are of no avail if the property itself does not tick all the right boxes.

Buyers should focus on their actual needs in terms of property type, size, location and price point, and avoid the temptation of over-leveraging their budget. If the property checks out on all the most important fronts, one can consider the accompanying offers – again on the basis on actual need, and only after reading the fine print.

Anuj Puri is the chairman of ANAROCK Property Consultants.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

How policy interventions helped the resale property market

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

Listen to the Article (6 Minutes)

The issue of transparency in secondary or resale real estate transactions has indeed been on everyone’s minds ever since RERA stepped in to rescue the primary or first sale-by-developer market. The question that looms large is – have the government’s moves to clean up the sector benefited the resale (or secondary sales) market as well?

Overall, the central government has put in tremendous efforts towards creating a healthier and regulated real estate market environment. Implementation of policies like DeMo, RERA, GST, REITs, the Benami Transactions (Prohibition) Amendment Act, 2016 and the Pradhan Mantri Awaas Yojana (PMAY), among others, have brought fresh hope.

At the same time, the Indian real estate market has also witnessed other interesting new trends – a prominent one being the increased demand for ready-to-move-in properties. Various factors were responsible for this rise. The chronic delays in project execution of the past have significantly boosted buyer and investor interest for ready-to-move-in properties, not least of all because ready homes decrease the combined pressure of monthly EMIs and rental outgo for the common man. Also, ready-to-move properties do not attract GST.

Eventually, the demand for properties in the secondary sales market, including ready and almost ready units – also increased. However, has this segment also benefited from the increased transparency and efficiency in the market? The answer is – yes, it has, though the reasons may not be immediately apparent.

The DeMo Effect on the Resale Market

Soon after the DeMo (demonetisation) move in November 2016, it was widely anticipated that the ‘surgical strike’ against black money would massively damage the Indian real estate sector, particularly the secondary market which was dominated by cash transactions.

Initially, DeMo did result in reduced sales in the secondary sales segment, with most investors seeking to exit. Tempered demand compelled them to reduce the prices of their second-sale properties by as much as 10-20 percent – particularly in NCR, which was largely investor-driven. Obviously, this gave an advantage to end-users, as speculative pricing had kept them away from the property market. Unlike earlier, investors have now become more ‘realistic’ in their expectations of returns on their investments.

Interestingly, if we look at the more developed nations, a price appreciation to the tune of 8-10 percent y-o-y is considered a realistic expectation for a property investment. In India, it was as high as 200 percent in certain markets. This expectation simply had to deflate – and it certainly has deflated.

Cut to July 2018

Almost 20 months after the almost complete standstill triggered by DeMo, its negative effects on the resale market have tapered considerably. The data coming in has debunked the general misconception that DeMo has terminally ruined the real estate sector. Even more importantly, sales in the secondary real estate market have picked up post DeMo.

DeMo has resulted in increased transparency even in the secondary real estate transactions, even if RERA did not help it as much as it did the primary sales segment. Cash transactions, which formed almost 30-50 percent of the total payments earlier, have been seriously curtailed and investors no longer see any point in hoarding properties to use up their black money. The gradual reduction of the price gap between the primary and the secondary markets was another visible positive impact.

Very importantly, DeMo has created actual fear among buyers who might have thought of cash deals previously. While doing transactions in the secondary market post DeMo, most buyers are ready to pay more capital gains tax – in stark contrast to earlier times when they would try to shrink their exposure to this tax. (Of course, this surge in capital gains tax revenue has added handsomely to the government coffers).

Contrary to all doom-and-gloom predictions, DeMo has had a very positive effect on the secondary sales market. Moreover, even RERA has had helped this segment, albeit more indirectly.

After RERA was unleashed, developers in the markets under its purview rushed to register their projects or obtain completion certificates for projects that were nearing completion. Resale market buyers benefitted as there was a surge in ready-to-move-in properties both for sale and rent in this segment. In NCR, this was especially evident in markets such as New Gurugram, Noida Expressway and Dwarka Expressway, where investors were holding on to a massive share of the existing housing inventory in anticipation of a profit windfall.

Also, the Goods and Services Tax (GST) implemented in July 2017 only applies to under-construction properties. Ready-to-move-in homes and land are exempt from it. This considerably reduced the demand for under-construction properties by buyers, and increased demand for ready-to-move properties – in both the primary and the secondary sales markets.

There has been almost 10-12 percent increase in the number of buyers in the secondary real estate since DeMo – more so with increased demand for ready-to-move-in properties. Genuine end-users now prefer to buy what they see.

The confusion under the new regulatory environment in the Indian real estate kept a large number of buyers away from investing in the property market. In order to swiftly exit from the property market, most investors reduced the prices of their properties over the last few years. This, in fact, resulted in lower property values in the secondary market by as much as 5-10 percent from the primary market in many projects.

Not surprising, since in the past, a comparison of unit prices within a particular project showed that the developer’s price for ready-to-move-in options was lower than those quoted by investors looking to re-sell their units. Re-sellers looking to offload their holdings had no option but to relent to the pricing pressures.

In the current scenario, buyers are at a major advantage in the secondary market – firstly because they can see the product and its quality first-hand, and secondly because they get better pricing option. For developers, on the other hand, finding buyers for their ready-to-move-in properties in the primary market has become a major challenge as their prices are slightly higher than those quoted by investors looking to sell their properties within the same project. Most buyers are tempted to buy in the resale market as re-sellers, in a hurry to exit, are willing to reduce their prices.

The Bigger Picture

The secondary real estate market will gain more momentum as and when the RERA attains complete implementation coverage across all states. However, even now RERA and other pertinent policy reforms have opened several new avenues for growth in the Indian real estate sector, not least of all by boosting the confidence of institutional private equity investors. In fact, Indian real estate’s attractiveness to institutional investors is growing multi-fold – private equity inflows into Indian real estate just rose by almost 15 percent over last year’s $2.5 billion in the first quarter of 2018 itself.

As capital allocations to real estate grow, investors will demand further improvements in transparency, and technology must enable far more granular assessment of the country’s real estate market patterns. Encouragingly, there is visible progress on this front.

Under the government’s Digital India programme, databases which track buildings at every stage of construction and after completion will grow. Likewise, digital records of real estate occupiers, investment flows, property values and yields will expand rapidly. Every industry stakeholder will have access to increasingly granular and pertinent information.

In other words, the country’s real estate market is maturing – and it’s not just primary sales which are becoming more transparent as a result. The secondary sales market is a direct and indirect beneficiary of all these measures to make India’s property industry a more wholesome, transparent and unilaterally beneficial one.

Santhosh Kumar is vice chairman, ANAROCK Property Consultants.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow