Generally the property or properties that you own form the single largest asset of yours. You might own stocks, bonds, gold, etc besides your property. You can check the value of these assets at the click of a button on a daily basis but how do you check the value of your most valuable asset, the property, on any given day?
You can employ an assessor who would travel to your place, have a physically access the property, take a few dimensions and provide an estimated value.
The in-person assessment can be more accurate at times as it captures the exact dimensions, locations and other features of the property but it is always an expensive affair. The appraiser would have to physically travel to the location. There would be costs involved in terms of transportation and cost in terms of time that the appraiser spends there. Besides, the appraiser would have to be qualified and certified. The appraiser would pass on these costs to the clients. Therefore, depending upon the quality of the appraiser, the size of the property, location, quality of construction and the age of the property, the appraisal cost can be significant. Besides, data also shows that the generally tends to miss out sudden large changes to the value of the property.
Now, compare this with the automated valuation models. These models use mathematical formulae to generate a value of the property. These models take into account all the things that an appraiser does at the physical site except that all that could be done from the comfort of your home or office desk or through a mobile device on the go.
The system provides a value on the basis of input done and the known property costs in the surrounding areas by comparing hundreds and thousands of parameters. And all this in a matter of a few minutes and clicks. Therefore, when dealing with large number of valuations or a quick valuation, the system can be phenomenally cost and time effective. Compare this with doing all these valuations by physically sending trained manpower to each of these locations.
There are certain drawback in the model: the system cannot completely comprehend the physical condition of the property. For example, quality of paint on the walls, etc. It tends to smoothen these out. Besides, for areas, where number of data points are less or there is a shortage of historical values, the model may not show the best possible results. Besides, the users of the AVM also need to be careful while feeding in the data to capture the different attributes of the property in a proper fashion. If they come across a significant feature that is not being captured by the AVM, then they could always go in for an extra expense or a visit to the property. However, the convenience and cost effectiveness is worth the try.
The model of AVM has been known for quite some time now, especially in the developed parts of the world. The online AVM too has been around for some time now. However, in India, it is a relatively new concept. The AVMs too have evolved from simple linear models using limited data to a much more complex system involving big data and data science. The incorporation of artificial intelligence into the system has made it even better where the system automatically learns from its past mistakes and uses it to provide a more accurate value over the period of time. This practically means that the more people get hooked to the AVM and use it, the more accurate its predictions become.
This is very important question in the Indian context. The point being that the accuracy of AVM is directly linked to the accuracy of users who provide information to it. This is artificial learning. The question that it begs is: would an average Indian actually put in all the attributes of his or her property into a website? If he or she does it, it would help the user to get a more precise value and also help the AVM to refine itself but a place where wealth is a guarded secret, especially when taking about it in detail, would the people come out to help themselves and the AVM?
The original aim of the de-monetisation was supposed to be: remove black money from the system; and bring the country to cashless transactions and expose money hoarders and tax them. Besides, there are several other benefits like increase in deposit base of the government, windfall gain for the government as some of the black money would never see the banks, etc, etc.
Let us analyse the objectives here and its expected impact over real estate:
Remove black money from the system: If this happens, the property prices should come down since a significant portion of real estate transactions, especially those related to land, have a black component. Lack of cash or rather black money should reduce demand or the paying capacity and therefore negatively affect the prices.
Increase in deposit base of the banks: There is no doubt that the bank deposit base would grow exponentially. More money in the savings or current account or fixed deposits would reduce the cost of funds for the banks. If this happens, then technically, the price of real estate should go up since it would increase the demand due to lower interest rates. Some banks today reduced the rates, which isa bit too early to comprehend. However, there is very little historical evidence to back this theory.
Windfall gain for the government: Lets avoid this for now.
Therefore, since one factor reduces price and the other increases the price, the 2 factors should cancel each other out, if the degree of impact is same for both.
Look at the other side of the coin now.
More people seem now to have an opinion that the move might not curb black money menace since the under lying reasons for generation of black money remains unanswered. Corruption and tax avoidance. Besides, the introduction of Rs. 2000 currency note has just fed into this theory.
For the bank deposits to become cheaper, the funds need to be parked with the banks for some period for the cost of borrowing of the bank to come down. In the immediate aftermath of the de-monetisation, banks have been accepting cash at a much higher rate since these are almost entirely the old currency notes but giving out cash at a much lower rate since the new notes are just not available to match the demand. The question that remains to be seen is how much funds they are left with in coming months when the supply of money reaches normality.
It is estimated that 98% of retail transactions in India happen using currency notes. Almost the entire agricultural economy is cash based. Have a look at Surat or Ludhiana markets or the mandis.
While the government did push the Jan-Dhan accounts initially, the movement ran out of steam after a couple of months and more accounts than not appear to zero balance. There are several limitations on Jan-Dhan accounts anyways. The second argument of the government appears to be that the people should shift to mobile or internet banking and use cheques. For net banking, it is imperative to have decent internet connectivity across the country. The current state of internet connectivity is too poor to support such a move. Some figures show that internet connectivity in India stands at 250 Million users approximately with a very large skew towards mobile users. Even 2G connections with a whatsapp qualifies for internet connectivity. Such a connectivity is not sufficient for net banking. Most users appear to be in this category only.
For cheque transactions to start taking affect, you need a robust enforcement of contract rules. Negotiable instruments act is a decent step in this direction but look at the backlog of cases with the courts!! Would anyone sue a person for bouncing a Rs 500 cheque anyways?
It is also extremely unlikely that people would start to shift away from investment in gold due to cultural and societal reasons.
It is therefore very likely that the country would go back to cash transactions after the liquidity normalises in a few months. And once that starts, there is again no stopping the black money.
What then this move holds for real estate sector?
The arguments against de-monetisation appear more convincing since the country simply lacks infrastructure for a cash-less economy and it does not seem that corruption or tax evasion would end in near term.
Since there is no precedence for a de-monetisation of this scale in India, it is difficult to come out with an empirical answer. We would go with a best guess situation here and that is the number of transactions should reduce in the short run, say 6 months, especially in higher end properties.There prices could fall further.
Afterwards, looking at the historical background of “Jugaad” in our country, things should get back to where they were or very close to it, say in 1 or 2 years’ time.
I read an article at a leading real estate site over the subvention schemes. It did touch upon some of the basic aspects of subvention like what happens if the builder defaults in the payment of EMI or pre-EMI during the subvention period, and what if there is a delay in the execution of the project, the risks attached with such a lending especially since the loan is booked in the name of the home owner and not the builder, etc.
However, there is one moot point that nobody seems to have taken cognizance of, in the last 10 years or so, since the subvention scheme (No pre-EMI scheme also called) has been in existence. What surprises me is that even the RBI or NHB have not really addressed this issue, the way they should have.
For loans over 25 lacs, NHB allows 80% LTV (Loan to value. I.E., say if the house is worth 100 lacs, the loan amount should be 80 lacs (80%) maximum).
Now consider this with what happens in the subvention scheme.
A property sells at Rs. 10,000 per sq feet under normal scheme. With subvention scheme, the same property is sold at say 10,800 per sq feet. This differential is charged to the buyer upfront to pay for the interest paid by the builder. It’s not a free meal.
If the property was 1000 sq ft in size, then under normal scheme, the value of the property would come to 1CR.
If the property was bought under subvention scheme, the value of the property would now be 1.08CR.
Now, there is no way under the sun, the same property could be sold in the open market with 2 different values JUST BECAUSE THE BUYER BOUGHT THE PROPERTY UNDER SUBVENTION.
The funding in both cases would be say, 80% of the value, i.e., in the first case the borrower should get a loan of 80 lacs and in the second case, the borrower should get a loan of 86.4 lacs.
What it means:
For the buyers: They are financing the interest payable during the subvention scheme through bank loan. Rather than paying the Pre-EMIs through their pocket, they have added it to their loan amount. Not a bad idea if you are from IT background, but a very poor idea if you have a finance background.
For the lenders: They are breaching the LTV norm. Rather than restricting the funding to 80 lacs even for subvention scheme, they are funding over 86 lacs here. Their risk is higher for such funding and nobody is sure if a higher risk weightage is being assigned to such loans.
Who gains then: It is the builder. Why? There are multiple reasons:
1) Builder does not really pass on any discount for such a scheme. Only the sales go up. The cost of subvention is borne by the customer to some extent.
2) Normally, the subvention scheme would have the entire value of the property paid upfront, except for the 5-10% to paid at possession. The banks do it to ease the operational and accounting issues. For the builder, getting the money upfront is like a builder funding at home loan rates with all the risk assigned to the borrower, which in this case is the customer of the property.
3) To some extent that the builder does bear the cost of subvention. But the upside is huge. The cost for subvention for 86 lacs spread roughly spread over 3 years at 11% or so would come to 28 lacs at best. Since the builder has hiked the price by 8 lacs already, net payable from builder side is 20 lacs or so.This is the downside. But the upside is: If the builder had raised 86 lacs through construction finance for 3 years, he or she would be charged between 14-20% by the banking channel. This would mean approximately 39 lacs of interest payment at 16% rate of interest. If they had borrowed from the unorganized market, the rate of interest charged would be upwards of 25%. This is besides the 2-3 times the collateral that the financier would lien mark on builder properties. Do the math yourself, even if the builder were to pay the cost of the entire subvention. Practically for a builder, running a subvention scheme means raising funds at 7% or so, if the property is in early stage of construction. The benefits are similar to Down Payment Schemes for a builder.
Forget the customers, how is it that the regulators are not questioning this, at least the LTV piece. We have a downturn in the real estate market already. People who bought under-construction properties directly from the developers till the mid of 2013, should already have seen a reduction in value of their properties between 5-25% in most places in India. If your property was bought under subvention scheme, which was 10% higher than the builder price also, image what equity you have left in property now.
It could be way into negative…and what if the builder defaults over Pre EMI payment somewhere along the line.
On top of this, if the builder defaults, the credit score of the customer would get affected, not the builders’.
Why would anybody want to continue with such schemes??
I wanted to write a cover over Gurgaon but realized that it would not convey the idea with clarity. There are too many areas and too many factors to cover for a place as large as Gurgaon.
I restricted myself to one area: Golf Course Extension Road.
Now; in the medical field,diagnosis relates to identifying and understanding the nature of a disease or disorder, while a prognosis is a prediction of the probable outcome of a disease or disorder. This is straight out of Wikipedia and this is what I wanted to do for the Golf Course Extension Road.
To get the facts straight first: Golf Course Extension Road is not a postal address like sector 31 in Gurgaon. It is a road. It means that it is a subjective matter when you define properties around that area. What I considered, in my article, were some 47 group housing projects close to the road. To know exactly what a group housing is and what a co-operative group housing society or CGHS is, you would have to wait for my next article.
Of the 47 odd projects, half a dozen ones have either not started or have barely launched.
Hence, you close in on 41 remaining ones. They have 15,000 plus units with approximately 45% in the 3BHK configuration. This configuration of 3BHK is an important point that I will cover later. Of the 41 projects in question, only 12 were launched after 2012. It means that 29 were launched at least 4 years or more back.
Of the 15,000 odd units here, some 7500 have been completed and of the completed ones, only about 1500 are occupied. This is an even more important point that I shall cover here.
The diagnosis is: There is a perceptible delay in execution since 50% of the units are yet to come up after 4+ years or so. And secondly, there is very low occupancy as you have just 20% occupied units for the 7500 completed units.
This brings me to the prognosis: If more than 7500 existing units come up for delivery in the next 3-5 years and if there are more launches, there would continue to be a glut of under-construction units in the market in the medium run, at least 3 years to come. This coupled with lack of salability of under-construction units means that the builder defaults (meaning that people who have booked property would neither be able to pay the dues to the builder, nor sell the units in a hurry) would continue and would put pressure on the builder’s finances. That coupled with the state of NPAs of the banks, would make it even more difficult for the builders to raise funds in the medium term. The only option would be very high cost debt. This can further delay the execution exacerbating the under-construction glut.
The aspect of low occupancy is more interesting. If the people bought these units, paid the money, the units are ready, why are they not moving in. OK, they have better houses already. But then, why not rent it out?
Probably because there are cheaper units available at Sohna Road (Built-ups ones) which are closer to the heart of the city and the location is better inhabited. Besides that, there is a perceptible reduction in demand for rented accommodation as well, especially when you have to pay more than Rs.2 per sq ft for maintenance, leave alone the rent.
Then why not sell these units at a lower price, since by all means these owners are investors. Again, you shall have to wait for my upcoming stories.
Did I tell you to relate all this with the current state of under-construction units in terms of their prices and salability….. Please do so.
In a nut shell, the location should not move up in the coming 3 years. In case you wish to buy something there, wait for a year or two till a few of the investors lose their patience. They should be able to sell it in the range of Rs.7500-7800 (all inclusive) as compared to the current range of 8250 at this place. Or better still, rent a house at 1.5% annual rent (which is very good) and wait till you get a deal at around 7500 range.A 1.5% annual rent is way better than 10% interest on loan per annum.