Ms Jayashree Kurup shares reasons for organizing the Magic Bricks Property Fair

The whole idea of organizing an interactive event evolved while launching our site, www.magicbricks.com. There were many MagicBricks users who had a range of basic questions − What are the legal implications of the property I'm buying? What are my tax liabilities? What kind of home loans should I take?

There were so many queries that people like you and me wanted to know but had no clue whom to address to. This was when we decided to bring experts on our site to help our users. We have eminent solicitors S Jalan and Co and tax expert Subhash Lakhotia answering queries on magicbricks.com regularly.

Real estate is very region−specific. This is why we have brought in experts from your city so you can get a response to queries on what's the development happening in your city, and what are the legal and financial implications for you.

Ramesh Nair, Managing Director, Chennai & Coimbatore, with real estate consultants Jones Lang LaSalle Meghraj (JLL Meghraj), a leading global real estate consultancy that offers services to all kinds of corporate houses and big users is here and will answer your queries.

Ramesh Nair

Thanks Jayashree!

I will break my talk into various parts and talk little bit about− what are the good things happening in India as well as what are the good thing happening in this region, especially, Chennai. Then, talk about what you should keep in mind when investing in real estate, irrespective of which assets class you are looking at.

Now, what has been driving this class of small users?

Driving factors for small users

First key aspect that has been driving the small user class is the overall India Demographics.
A lot of us today know that Indian population is extremely young, a lot of these people are getting into productive categories i.e. they are getting into jobs, have more savings, are craving for better lifestyle, want to buy a house, so their aspirations are definitely driving the real estate market.

Secondly, the key driver is urbanisation. Lots of cities are getting bigger and people in the urban areas are increasing day by day. This drives the small users towards purchasing real estate.

Thirdly, our growing middle class is close to 250 million. This means more houses are needed for more people.

Fourthly, nuclear structure of families is driving small users to real estate. A lot of joint families are becoming nuclear families, again, leading to increasing demands for houses in the country.

What else is driving the real estate market?

Other factors that drive real estate

Let us look at the macro−economic factors.
Our economy in the year 2007 grew close to 9.4%. The services industry contributed to 54% of the Gross Domestic Product (GDP). Foreign Direct Investment (FDI) relatively has been growing by almost 20% every year and that is huge domestic consumer demand.

Now − what is driving the India story?

Situation in real estate segment
Obviously, our global leadership in the software and the BPO market is driving the India story! Incidentally, the total FDI which came to country in real estate market last year was US$10 billion, which is 25% of overall FDI into the country. This is going to impact the real estate markets.

A lot of key cities, especially in South India are emerging as Global Tech cities. However, Chennai is scoring over lots of investments that are happening in India in the manufacturing sector, especially in industries like electronic manufacturing services, auto ancillaries, auto components, and specialty chemicals.

Currently speaking, there are two aspects that we can observe due to the FDI.
First, the quality of construction has improved over the past years.

Foreign investors are looking at quality products and not at mediocre products. Secondly, there is lot of pressure from the Foreign Institutional Investors to meet time lines. The key concerns of many home buyers have been houses not delivered on time. But with the FDI in the picture now, there will definitely be an emphasis on meeting timelines.

Nowadays, investors are looking at their promised returns. The yields are higher in Indian real estate − commercial real estate, especially office gives 10−12% yields while the Indian residential market has been offering about 4−5%. Commercial vacancy across the country is still less than 5%. Any thing which is less than 10% is considered quite healthy.

Additionally, a lot of developers have tapped the IPO. With this ready access to funds, developers who used to build, let's say, small residential units in the city today are into multi−assets. They are getting into lot of retail developments, commercial developments, hospitality developments et al.

Many local developers are becoming pan−India developers, with meticulous research by consultancies like us which translate into research−driven decisions. Lastly, if you look at financiers, there's huge amount of debt and equity available. A number of innovative, financial structuring is possible today, which is leading to a boom in the market.

Emerging Chennai real estate scenario

Various parts of Chennai fall into the income affordable middle−class housing group. Here is a huge opportunity for apartments between 15−30 lakhs category. Since this is a thrust area, as there is huge market where you will find tenants, you will have buyers.

We mentioned about 250 millions that constitute middle class. These numbers are expected to increase to 500 million by 2025. All these people are looking at buying houses so that is a huge opportunity there are other niche areas which could come up for investments. There would be the warehousing category, a senior citizens housing segment even luxury homes that are frequently coming up. There will be health−care based real estates opportunity. As a result, a new assets class is emerging in Chennai. Lot of you may not be able to directly invest in those asset classes, as they require huge investments but indirectly, you can invest in stocks of these companies.

Today, a lot of companies have their private real estate equity funds. There are going to lot of avenues for you to invest rather than just buying an apartment or just going into buying the block. There would be lots of indirect avenues also coming up in the near future.

Now what should the small real estate investor keep in mind while buying real estate?

Real estate buying tips

Real estate buying has always paid off except minor cases. Here are some tips.

1. Keep your investment strategy flexible.
2. Have a very flexible investment strategy.
3. Always keep looking out for right opportunity.
4. Look at theme based investments.
5. Do your study on the current new investments.
6. Always base your investment approach on a conservative cash flow model.

You need to look at cash flows which will add value in coming years.

Real estate investment tips in Chennai

Chennai is the city is not just depending on IT and ITES. There is lot of manufacturing investments happening. Chennai today is one of the most preferred destinations for financial back office processing. A lot of Research and Development kind of activities are happening so all this adds for starting real estate.

Any body can get into the real estate market. Very few times it has shown that real estate actually is crashed over the long run. If you look at 8−10 years perspective, obviously you end up making good returns. Let's come back to the real estate market to stock market.

If you look at 96 when the real estate market started coming down, it took 6−7 years for the market to the bottom. So we don't see that kind of volatility in the real estate market. It is not in a day or a quarter you see real estate market coming down. So, real estate market takes it own time. I personally don't see any major real estate crash happening unless there is huge drop in employment rates.

Open house on home loans and financial issues

Jayashree Kurup: On home loans and the financial issues, if you have queries, you can address them to the experts.

Ramesh Nair: So the first question that is always asked − inflation is constantly on a rise so is the housing market. In such a scenario, capital appreciation will always be expected to be higher than inflation. In seeking to invest while looking for capital appreciation, are you are going to pump in your own funds or go for home loans. There are so many fiscal incentives offered when availing of home loans. Also, the income levels have gone up considerably over the last few years. This has also been one of the driving forces behind the boom in the real estate market.

Affordability
Affordability has gone up manifold. This means, you need to know −what are the options available in home loans front? You can go in for a purchase in property whether new or old, or you can buy a plot of land and can go for construction of the property, or you can renew your existing property, you can repair your existing property or you can re−finance your existing loan by switching over to another institution so that you can save another cash flows for the existing property. So, once you decide over, what are the requirements & entitlements of the home loans?

Home Application
Now−a−days peoples are available, sales force is available and you can ask them to explain you the features. For this, you need to fill in the application which is little bit fundamental. To fill in the application − you need to fill in the full email, age, identity, address proof, income proof by way of salary statements, Bank statements attached to salary account. In case, you want to take your wife as co−applicant, she needs to give similar things.

Home Loan Eligibility
Based on this, your home loans eligibility will be calculated. Normally, loans eligibility is calculated on the basis of income pipelines of the dependent, number of dependents, educational qualifications, your continuity of service. So, if a property is worth 30 lakhs, can I get home loans of 25 lakhs? No, because you need to clear all the income proof parameters before getting home loans up to 85%.

Jayashree Kurup: What if, a person has a certain income level, how many home loans should he take?

Ramesh Nair: This depends upon profile about your company, trainee certificate with respect to registration of your company.

Next, there are two types of mortgages before you go for home loans. You need to know, whether you want go in for fixed rate or floating rate. This is very important, because due high inflation there's going to be an increase in home loans requirement in a couple of years. It's already touched 6.68% as against the stipulation of mortgage rate @ 5% now. So, you can always expect an increase in CRR (Cash Reserve Ratio).

Once this CRR increases, there would be sufficient liquidity in the system. In order to meet this, automatically there'll be an increase in Bank Rates. Once bank rates will go up, then there'll be an increase in housing rates also. But there is always a difference of 2% in fiscal and floating home loans rate. In case of fiscal, your rates remain fixed irrespective of change in the market trend. For e.g. if you are taking a home loan for 20 years @13.25% your rate of interest will remain same till the end.

But, this kind of home loans is given to very few institutions, most of the banks are not giving for such a tenure, they keep changing the fiscal once in 3−4 years or so, which, you may not be aware of. You will think − it's fiscal, but they'll change. So before entering you must think which one you want to take. Otherwise, you can take a home loan either in fixed rate or floating rate.

There are other institutions that offer you part fixed and part floating rates. So, if you are going in for home loans of 30 lakhs, 15 lakhs you can take in floating and remaining 15 lakhs you can take in fixed rate. So you are entering a risk of increase in rate by going in some part at the fiscal rate

Reduction of sales from 2004 to 2006, the scenario has changed last couple of years.
There is an increase; they will ask you to part pay some amount so that it comes down to the required comfort level.

Audience Query: Let's suppose from 11 to 10.5%, it reduces then, tomorrow the EMI is going to increase. Ramesh Nair: Going for an increase in EMI is good, but what's the need of this as there'll be people who cannot make to increase in EMI. You're already contracted to pay at one level but you cannot pay few thousand more, going forward.

Jayashree: EMI is not growing at drastic level but what has happened is, it has come down from 16% in the mid 90's to something like 10.75% now−a−days. So, what will happen is, you are given the option of commuting it and say −Do I want to take a longer tenure? Obviously, if the tenure becomes much longer than your paying capacity, the bank will obviously ask you to do something, but we have not reached that stage.

This is normally happening in the countries like US where you are seeing the supplying price because of that. They are not able to service their loans and banks are in a fix! What do they do? Indian market has not reached that stage. So, we are talking very hypothetically regarding why do we go beyond? What is happening within our market right now?

Audience Query: What about short term capital gain?

Ramesh Nair: Capital gain is basically due to the want to curb in the intra−day trading. There is erosion in the wealth of investors who are bullied by the market sentiments. This has nothing to with property market to buy/ sell property. Normally, those who buy property do not sell the property in the short span of time as they don't expect any gain or capital appreciation.

Comment from the Audience:
Let me congratulate Magic Bricks for organizing such a show which can help resolve our queries. I would request everybody to give a big hand to Magic Bricks for arranging a show like this.

Audience Query: All of you are highlighting properties of South Madras but what about properties in North Madras? I find there are so many areas in north Madras they are not getting proper attention. It makes even better for heritage homes as they are surrounded by temple like Kanchipuram, but no body is highlighting these things and secondly,

Ramesh Nair: There is definitely lot of potential in the south Madras. Some developers, like MRF, have started going there. But you will see that people are making money in a certain sector and everybody is moving there whether you have companies, investors, real estate financiers, private equity funds, so that hype around north madras needs to be created. This is point number one.

Point number two is, real estate chases infrastructural developments, real estate investments. Over the years, successive governments have not spent enough funds to improve the infrastructure in north madras. There is this part which has come but other than that getting to north and coming out as roads are still quite congested. Most of the buildings are old and they don't have modern amenities, issues like parking is big issue in north Madras.

Point number three, if you look at how the city has changed over the years, 20−25 years back the CBD (Chennai Business District) used to be not Chennai. George Tower, Barriers etc, were the main commercial district of the city. 15−20 years back, you started seeing areas like Spencer Plaza, LIC, Annasalai. Around 10 years back, you started seeing places like Gemini flyover etc. who emerging as city centres. Now definition of city centers has shifted over a period of time from north to south., over a period of time.

So, these are some of the reasons why developments have not happened in north but they have definite scope of investments in the long run.

How to deal with legal aspect?

Give utmost importance to legal notice. Question the lawyer because you have every right to do so. Please concentrate on certain critical aspects.

First, look for the original documents. In any property if the original documents are missing don't go by his paper publications that the documents have to vest for knowledge. If no body answers correctly within 10 days, it should be taken as NO only. This is a normal, legal advice by lawyer. Because no law asks you to buy a newspaper or buy reference through the newspaper, read it, or prepare answer through a news paper. If you want to gamble, please do it consciously. It is not that I say everywhere that is the original is lost, the original is missing and it may really be a case is that the original documents are mortgaged with somebody else, so this is very important aspect.

Second is that, if there is minor somebody below the age of 18 years, please be very careful and ensure that the court's permission is taken, though your lawyer will look into all this, but you can also apprise him of these things. You can ask him to see every aspect of this. So every scrutinizing is important in land acquisition proceedings. If the property is subject to land acquisition and nobody knows this. This is no excuse! The best thing is to do a check up. Right to information is made more powerful now−a−days. You don't have to be fully dependent on your lawyer. You can do your checks yourself in collaboration with your lawyer.

Of course if you leave it to your lawyer, he will know how to assess it. This speech is not to tell you that you have engage a lawyer every time but it is better that you do it. So that when you spend such an extraordinary amount, the fees spent on the lawyer is not a waste. Produce of your lawyer. The other important thing is check income tax. Don't go merely with income tax certificate because this is the only country in the world where they give you certificate and tell you don't trust me.

At the bottom they say this department has taken all the care to check income tax omissions but the department is not responsible for omissions. Here if you pay is s 100 also, your omissions are passed. This is the next aspect. So if there is income tax naturally you take it subject to only income tax. The common investor buys one or two or three properties in his life and puts it's life savings into this and should not come out of court in this case. I know several people who have run to courts, endlessly litigating because they have not done proper scrutinizing.

The other thing is that many of you get bank loans and banks do the scrutinising, but bank lawyers are also humans this does not take aways your responsibility of scrutinising. It will be always better for you to have these detail checked by your lawyers because bank lawyers have so many clients and can miss out so many things. So, this should not be an answer for you tomorrow that bank has given me loans, their lawyers have done the scrutinizing and I should not be held responsible for this. That is not how real law works.

If there is an omission, there is an omission and other man's right if it is there can not be taken away because the lawyer failed to report it. Also, check up if possession is with the person because in law we say original documents are possession of everything.

Gaurav Sinha : At Magic Bricks, one lakh properties buyers visit to site every day. There are over 40,000 brokers and 5000 developers registered with us. So it gives you an ideal platform to choose your dream home with us.

I would like to thank Mr Ramesh Nayyar, Ms Jayashree, Mr Vijay, Mr Ramesh Kumar and would like to thank the audience also. Thank you!