Real Estate Prices - Chennai

The following is a piece contributed by Raheja Assoiates, one of the premier real-estate brokers in Chennai.

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The real estate market in Chennai is on the upswing thanks to the IT Boom and the number of manufacturing industries preferring Chennai as their destination point. A number of new companies such as Flextronics, Nokia, Motorola etc. have chosen Chennai to set up their factories. Along with them, a number of subsidiaries have also come into Chennai. This has helped the real estate industry to grow from within the city limits to the outskirts.

Some of the fast-growing areas where one could think of an investment are Sriperumbudur, Maraimallai Nagar and the IT Corridor (Old Mahabalipuram Road). The land prices in these areas have more than doubled in the last six months . One could also think of an investment on the East Coast Road close to the sea but beyond the 500 meters guideline.

Some of the prevailing prices for brand new apartments in the prime areas are:

• Boat Club Road: Rs.12000 to 15,000 per sq.ft.
• Poes Garden: Rs. 10000 to 12,000 per sq.ft.
• R.A.Puram: Rs. 7000 to 7500 per sq.ft.
• Harrington Road: Rs. 7500 per sq.ft.
• Adyar: Rs. 5500 per sq.ft.
• Kilpauk: Rs. 5500 per sq.ft.
• Thiruvanmiyur: Rs. 4500 to 5000 per sq.ft.
• IT Corridor: Rs. 3200 to 3400 per sq.ft.

For further information please contact Raheja Associates at www.rahejas.com.

I hope this article will help those of you seeking to make investments in property. Do you think I should make it a regular feature? Please leave your comments to let me know.

Current Trends in the Indian Residential Property Market

Found a few links to info I found interesting so I thought I'd share them with you. Enjoy!

Research Reports

1. Outlook for India's Real Estate Markets is a Deutsche Bank study that tries to arrive at a broad trend for the next few years based on demographic / lifestyle changes in India
2. A positive-sounding article talking about how Indian property prices will go up. Too generic in nature, though. Did not have the kind of facts and figures we'd all like to see
3. An exhaustive document on the prospects of the real estate market by Trammel Crow Meghraj, where I noted two main points, namely that real estate in India averages about a 12% return year on year (which is almost as good as equity) and that the Indian market has already been through a boom-bust cycle which ended in 1999. Since then prices have been on a steady upward trend, but that makes one wonder when the next 'bust' would be! The only good news here is that it looks like the downward trend generally bottoms off at a higher level than the previous downtrend, implying a general increase in prices in the long term...

Property Prices

• Market rates and prices for Bangalore, Delhi, Kochi, Mumbai and Pune
• Some really super, up-to-date info on prices in various areas of Chennai, Bangalore, Delhi and Mumbai. The prices in Delhi and Mumbai are truly eye-popping! This site seems to be worth a visit now and then...
• Some prices for Pune, but couldn't make out how recent this info is

I just realised that I've never found a site that can actually gives regularly updated info on residential property prices in a city or, even better, in a specific area in a city. Does anybody know of such a site or even a regular newsletter / report?

Real Estate - A Strategy for Apartment Purchase?

For some months now, I’ve been in the market to purchase a good apartment. Unfortunately, I find I’m not alone! Thousands of others have had the same thought – apparently at the same time – and, armed with cheap home loans, they’re driving up prices way beyond control.

Unfortunately, not only is a flat a major investment, it is illiquid and the price at any point is quite subjective. There are few, if any, guidelines to determine the value of a property accurately.

A Strategy for Purchase

Now, if you’re like me, you’d have taken a loan for the purchase, probably up to 90% of the value of the apartment. The remainder plus the registration amount would be financed through available cash and perhaps a personal loan as well.

In this scenario, there are two components to the investment we’re making – principal repayment (which is basically installment payments against the value of the apartment) and interest (which is the amount we are spending in addition to the value of the apartment). Since the principal is merely a payment for the property, we don’t have an issue with it – we got a flat and we’re paying off against it. The problem is with the interest, which is an additional, fairly substantial, amount that we will have to fork out over time. This is the part we need to take care of.

The plan I have is to ensure that the rent for the apartment takes care of the interest component (home loan + personal loan if any) at least. This way, I’m merely paying for the value of the property, which is not an issue.

The other problem is the down payment that we’ve made from our own cash resources. Given a choice we would like the cash to earn interest. Let’s assume that for a low-risk investment similar to property, we would want returns of 10-12%. The expectation would then be that the apartment being purchased must has enough scope to appreciate by an amount that would make such returns possible.

Thus, in summary:

• Principal payment (home loan + personal loan) gets set off against value of the house
• Interest component (home loan + personal loan) should be matched by the rent
• Capital appreciation in the value of the property should be at least enough to translate into 10-12% returns from the down payment made with our own cash

An an example, let's take an apartment of value 50 lakhs, of which the home loan is for 45 lakhs. Let's assume registration amount is 5 lakhs. The down payment required is therefore 10 lakhs, of which the buyer intends to take a personal loan of 5 lakhs and fund the rest himself. The interest component of all the loans works out to about Rs. 25,000-27,000, which needs to be covered by the rent. Further, the apartment must appreciate by at least Rs. 50,000 per annum to generate returns of 10% on the 5 lakhs paid by the buyer. This implies that the apartment should show capital appreciation of 1% per annum at a minimum.

If the buyer had been able to fund the entire down payment himself, the rent requirement would have been lower at about Rs. 18,000 and the capital appreciation required would have been 1 lakh per annum, or about 2%.

Real Estate - Investing in Property

The first (and last) bit of investing advice most of our parents gave us – save, save, save and buy a house as soon as you can. You can never go wrong in real estate!

And it does seem like a good proposition. Just ask the people who’ve made millions from their ancestral properties or those who’ve recently made a killing in Bangalore or Gurgaon!

For many of us, buying a flat or a property is a big deal in every way. It is likely to be one of the biggest investments we ever make, it has a lot of sentiment attached to it and it does give a sense of fulfillment - I have a house, ergo I’ve arrived in life! Plus there’s the expectation of the property appreciating many times in value over time.

But is this expectation justified? Is real estate really an investment that defies the basic risk-return principle, yielding high returns for relatively low risk?

Consider This

Property purchases are fraught with uncertainty. For one, we never know what the ‘fair’ value of a property is. There are all kinds of intangibles determining the price, there is little or no flow of information and of course there are the buyer’s own biases involved as well. Further, during times of rapid expansion, ‘hot’ areas tend to appreciate to stratospheric levels (like parts of Gurgaon today) and there is rather inevitably a correction. Property prices, contrary to popular opinion, do not always tend northwards.

Further, as with any investment, one should consider the cost of funds and ongoing maintenance. In this context, we have tax breaks to consider, differing interest rates for loans, different payment schemes, stamp duties, property taxes, ongoing maintenance costs, brokerage…

In the following discussion, I propose to treat real estate as just another asset class in my portfolio and hence determine whether it compares favorably with other instruments. Of course, an underlying assumption here is that the purchase is purely for investment and not for personal use. In the latter case, just buy the best location you can afford - preferably in an area you’re comfortable with - and then forget it. Who cares what happens to the price? Your kids maybe, not you!

Some Basic Assumptions

In this discussion, I’ll focus on purchasing a house / apartment, not land. Land purchases, by their very nature, are speculative and the returns indeterminate. One buys land in the hope that it will appreciate in value but there’s no indication of what the appreciation might be.

In the case of an apartment, however, there is a clearly defined rental income that one can expect and I hope to use this as the primary basis for evaluating whether a property is a worthwhile investment or not.

Other assumptions (I’ve tried to take the worst case scenario) -

• The apartment costs Rs 10 lakhs, inclusive of stamp duty
• The property is bought on a 20-year loan @ 8.5% fixed interest rate working out to an EMI of Rs 900 per lakh or Rs 9,000 for the whole. I assume there’s no initial down payment required
• Inflation over 20 years will average at about 5% per annum. A higher inflation will be more beneficial by reducing the real interest rate on the loan
• The tax benefit on interest paid for housing loans does not exist.
• The rental yield on the property is about 4% per annum (about average for most cities in India, except Gurgaon, where the yield is higher), which works out to about Rs. 3,300 per month. This increases at par with inflation (usually the rental increases are higher)
• Ongoing maintenance costs plus applicable taxes are about Rs. 12,000 per annum (or about Rs. 1,000 per month), appreciating in line with inflation
• Tax on rental income is at 30%
• Post-tax returns on a low-risk bond are 6% per annum

For the above scenario, one could consider the property investment in two ways:

• As a pure investment: In this case, the buyer’s mindset would be of an investor looking to allocate his capital between various assets. The purchase of an apartment is incidental and the focus is on return on total investment
• As a mandatory purchase: In this case, the apartment price itself is above scrutiny and the focus is on determining whether the additional costs (interest, maintenance etc) are worthwhile in terms of returns.

Real Estate as a Pure Investment

The investor would only purchase an apartment if the returns (capital appreciation + post-tax rental income are comparable with other low-risk assets like bonds. Hence, the investor would consider the total cost to be the sum of the NPV of the total repayment over 20 years and the NPV of maintenance costs. This would be compared with the NPV of the rental income and the returns expected from a bond of similar cost in order to determine the capital appreciation required from the apartment.

In our example:

• NPV of loan repayment over 20 years = Rs. 13,45,920 (Rs. 1,08,000 per annum discounted at 5% rate of inflation)
• NPV of maintenance costs over 20 years = Rs. 2,40,000 (Rs. 12,000 per annum, rising in line with inflation)
• NPV of post-tax rental income over 20 years = Rs. 4,80,000 (Rs. 24,000 per annum post-tax over 20 years, rising in line with inflation)

Total investment in today’s prices = Rs. 13,45,920 + Rs. 2,40,000 = Rs. 15,85,920

Value of similarly-priced 6% bond over the same 20-year period = Rs. 50,86,250

In order to be an equally good investment, the ten lakh rupee property must appreciate to Rs. 46,06,250 (since the rental income is about Rs. 4,80,000) i.e. it must grow at a cumulative rate of 8.37% per annum.

One should purchase the apartment only if the expectation is for the property to grow at this aggressive rate year after year.

Real Estate as a Mandatory Purchase

The mandatory purchaser would not focus on the cost of the property, assuming that the price is a fair one. The only concern here would be to ensure that the extra cost of maintenance and interest is met by the rental income and the gain in apartment value so that the there is no loss incurred in the purchase.

In our example:

• NPV of interest repayment over 20 years = Rs. 7,47,730 (Rs. 60,000 interest payment per annum discounted at 5% rate of inflation)
• NPV of maintenance costs over 20 years = Rs. 2,40,000 (Rs. 12,000 per annum, rising in line with inflation)
• NPV of post-tax rental income over 20 years = Rs. 4,80,000 (Rs. 24,000 per annum post-tax over 20 years, rising in line with inflation)

Total investment in today’s prices = Rs. 9,87,730
Value of similarly-priced 6% bond over the same 20-year period = Rs. 31,67,790

In order to be an equally good investment, the ten lakh rupee property must appreciate to Rs. 26,87,790 (since the rental income is about Rs. 4,80,000) i.e. it must grow at a cumulative rate of 5.34% per annum.

One should purchase the apartment only if the expectation is for the property to keep pace with inflation year after year, a not unreasonable requirement.

Final Thoughts

The above analysis does not really throw up anything new other than the idea that real estate, as a pure investment, seems to be rather speculative. It’s not the sure-fire winner that people would have one believe. The best bet is probably to purchase apartments on the outskirts of growing metro cities or in B-category towns with the potential to scale up fast. It might even be a better idea to just buy land.

Buying an apartment for security and the feel-good factor seems to be a better motive. It’s also probably a good idea for people who currently stay in rented accommodation. Even apartments in mature parts of large cities should at the very least keep pace with inflation.

Returns could be juiced up a bit by holding for short period of time and selling out on substantial jumps in value, obtaining tax benefits on interest repayment, finding an apartment with a high and growing rental yield and perhaps reinvesting the rental income into interest-bearing investments.