How will unchanged repo rate impact realty

The recently announced 'unchanged' Repo Rate garnered mixed reviews. This move comes as a cautionary measure in the very first quarter of the new fiscal year. How will this announcement impact the realty market?

We find out

Mohini Ahlawat, a prospective home buyer, has been waiting for the last six months in anticipation of an interest rate cut. She was yet again disappointed in the first quarter of this fiscal year but everyone told her that the growing GDP, lower crude prices compared to the last few years and a negative inflation, indicate that in the second monetary policy by the Reserve bank of India (RBI), a rate cut is on the cards. However, she is disappointed, yet again.

"I am not an economist, nor do I understand the financial jargon. But what I fail to understand is that if the GDP is indeed growing, oil prices are low in the global market and over and above that, the inflation too is low, then, why are the interest rates not reaching the range of 7 to 7.5 percent? This is the level at which an average home aspirant can think of buying a house," says Mohini as she shares her concerns.

However, the concerns of the RBI governor, Raghuram Rajan, are more from a macro level perspective of the Indian economy, ranging from a slight rise in retail inflation; an anticipated further rise in crude prices; a not-so-positive monsoon to the overall 'upside risk' to inflation after the implementation of the 7th pay commission recommendation.

Hence, the RBI governor kept the repo rate unchanged at 6.5 percent, the reverse repo rate stays at 6.00 percent. The Cash Reserve Ratio (CRR) also remains unchanged at 4 percent, in the recent monetary policy review. The RBI said that the April inflation reading makes its future trajectory somewhat more uncertain.

The central bank has also retained the growth projection at 7.6 percent for 2016-17 citing corporate profits and a surge in consumption. The RBI said it will soon review the implementation of marginal cost lending rate framework by banks.

The reactions

The industry is therefore as disappointed as the home-buyers. Shishir Baijal, CMD, Knight Frank India says that the sector is disappointed with no change in policy rates and it will take the real estate sector a longer time to come back on the rails.

The residential property market has not been doing well and there were expectations that the RBI would reduce the policy rates that would have given a boost to the residential property market.

"On a broader note, the RBI's stance of not reducing the policy rates could have emanated from the banking regulator's move to reduce inflation to below 5 percent by March 2017. CPI moving up to 5.39 percent and wholesale inflation turning positive, could be factors that may have prompted the banking regulator to leave the policy rates unchanged. Crude prices moving up exponentially, is expected to further add to inflationary pressures," says Baijal.

Ashwin Sheth, CMD, Sheth Corp feels that the RBI has played it safe and has been more cautious about the monsoon and its impact on inflation. A rate cut at this stage would have helped in lowering the home loan interest rates, thus making home buying a reality for most buyers who have been eagerly waiting for the rates to cut down.

"The government has taken the lead in trying to implement policies that will boost growth for the real estate sector. In the same vein, the RBI too, should have looked at the real estate sector with new optimism. The central bank has reduced its policy rate by 150 basis points until now since January 2015. But the banks have cut their rates by only about 70 bps. In short, the economy is yet to get the full benefit of the rate cut. The banks should pass on the benefit to the home-buyers as this will encourage the buyers to buy their dream home," says Sheth.

A welcome move?

Manju Yagnik, vice-chairperson, Nahar Group, on the contrary, welcomes the RBI governor, Raghuram Rajan's announcement to keep the repo rate unchanged at 6.50 percent.

She asserts that the last RBI bi-monthly announcement had reduced the interest rate, but was not passed onto the customers by the banks. Banks should take this opportunity to pass on the benefits to the customers by lowering the interest rates, which will result in the home-buyers coming forth and buying properties.

"The Indian economy grew by 7.9 percent in the March quarter and was ranked as the world's fastest growing economy. This move will create jobs and create positive sentiments within the country. Also, keeping rates unchanged will help control inflation, which presently is at 5 percent with an upward bias," says Yagnik.

However, what can definitely be vouchsafed is that this is definitely not good news for the overall health of the housing market something that contributes substantially to the Indian GDP.

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Thane: A Realty Tale

What gives Thane an edge over its counterparts? Equipped with good commercial, residential and social infrastructure along with excellent connectivity to the rest of Mumbai, Thane and its crown jewel, Ghodbunder Road are redefining the realty scene.

The story of the destination development of Thane would be in complete without the mention of Ghodbunder Road. Commonly referred to as the GB Road, this property market runs entirely through state highway 42 and connects to the Eastern Express Highway, becoming National Highway 3. No wonder, Ghodbunder Road is not only a jewel in the crown of Thane but also the property market that helped shape Thane as a premier residential market. This location defies the conventional wisdom of a property market that claims that picturesque locations are meant for luxury housing only.

At Ghodbunder Road, the property rates are between Rs 7,500 per sq ft and Rs 11,500 per sq ft, with the average capital values standing at Rs 9,500 per sq ft. It is an equally attractive rental market where the average rental yields are about Rs 20 per sq ft. The beauty of the location is nevertheless breathtaking. It is surrounded by towering hills on one side and with a creek view on the other. The collective consciousness of the old timers, recall it as Ghodbunder village, which used to be a deserted area. But not anymore! This location has today, transformed into a property hotspot where the appreciation has been phenomenal in the last few years, despite the overall slowdown across the city. The development of Thane, as a property hotspot, actually changed the urban landscape in this part of the world and Ghodbunder Road turned out to be the best location of Thane. The urban profile and liveability index of this location has dramatically changed over the last few years. Residential projects, retail options, a cosmopolitan crowd and lifestyle options, have truly transformed this stretch of Thane.

A realty case study

With the boundaries of Thane extend ing to new locations, Ghodbunder Road highlights the growth of the real estate market in Thane. Popular residential areas along and off Ghodbunder Road include Kasarvadavli, Patlipada, Waghbil, Kapurbawdi, Manpada. Ghodbunder Road is growing faster than any other location in and around Thane because it consists of a good mix of developments like residential townships, commercial buildings, educational institutes, shopping and restaurants, etc. At a time when many other high profile locations across Mumbai are witness to a slump in the transaction rate, this area has busted several myths. Thane is today the most preferred stretch as it provides good connectivity to the MMR. This area also provides a scenic view and is thus preferred by the upper middle class segment and now is also getting the interest level of high-end customers due to its scenic view. Thane is increasingly scaling up in the value pyramid of property and some of the developers have recently launched high-end apartments where the price range starts from Rs 15,000 per sq ft. What is proving to be a boon for the location is that the infrastructure and connectivity of Ghodbunder Road has upgraded from time-to-time to keep pace with the real estate development.

With the existing and planned infrastructure development of the Eastern Express Highway and Ghodbunder Road, the connectivity of this area to all parts of Mumbai and suburban Mumbai has enhanced tremendously. The infrastructural initiatives by local authorities TMC and MMRDA (like the construction of flyovers on Ghodbunder Road at Majiwada, Waghbil Naka and near Hiranandani Estate), further add to the connectivity.

In terms of the connectivity and the attraction quotient, Ghodbunder Road connects the Eastern Express Highway as well as the Western Express Highway via Mira Road and Borivali. The developers are hence bullish of its future growth as well. Ramesh Nair, COO business and international director, JLL India maintains that this location has a lot of fresh inventory driven by several infrastructural initiatives and good connectivity in the pipeline. The development authorities have planned a monorail network to serve as a feeder system to a Metro project planned in Thane. The MMRDA has finalised a Metro corridor, extending from Wadala to Kasarvadavali on Ghodbunder Road. The road also provides quick accessibility to Mira Road from Thane, and other micro-markets such as Mulund, Bhandup and Ghatkopar.

"Ghodbunder Road is approximately 20 kms long and links the two main arterial roads of Mumbai, the Eastern Express Highway that starts at Sion and terminates at Thane, while the Western Express Highway starts at Bandra (East) and becomes the National Highway leading to Gujarat. Due to the rapid development, the area has attracted many reputed developers, thus leading to a surge in the launch of many affordable and premium housing projects. Ghodbunder Road is interesting to developers due to the easy availability of large land parcels. From affordable apartments to premium properties, the area offers a wide assortment of housing options," says Nair.

Diipesh Bhagtani, executive director, Jaycee Homes believes that social infrastructure such as schools, hospitals, hotels and other amenities that are coming up in the vicinity, are adding to the charm of the location."One needs to live in a place that provides all the necessary amenities. Definitely, on this count, Thane scores over the other suburbs of Mumbai, as it is catering to the basic needs of one's habitation."

Thane is one of those rare markets where the scenic beauty of the region has been exploited for necessary urban habitation first and not luxury living .However, scaling up the luxury value chain has only been a natural evolution. The analysts hence are betting big on this market and rate it as one of the upcoming markets for the next, at least a decade, as it promises to provide an all-round living experience to a large number of people, at an affordable cost.

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Is this the right time to invest in real estate?

India’s real estate sector, especially the residential property market has probably seen its worst phase in the last three years.

India’s real estate sector, especially the residential property market has probably seen its worst phase in the last three years. Prices have also taken a beating and with slow sales, inventory levels have increased to unprecedented levels. Consequently, with diminished demand affecting the liquidity, the new launches have been impacted as well.

The numbers game

According to statistics, new launches have reduced by 6% in the first quarter of 2016 compared to the last quarter of 2015. Overall in fiscal 2015-16, there has been a drop of 16% in new launches (units) compared to fiscal 2014-15. A similar story unfolds in sales figures too, where, as per recent data there has been a drop of 2.2% in total sold units in fiscal 2015-16 from fiscal 2014-15.

Analysing the percentages

In the wake of all these statistics, it would clearly put a cloud of doubt over the average homebuyer’s decision of buying into the current housing market. However, because of the modest price appreciation in most cities in the past three years, homes have now become more affordable today. A good explanation for this conclusion would be the Affordability Ratio.

Strong demand drivers

There are strong demand drivers for the housing segment, one of them being the urbanization rate in India. Out of India’s population of 1.21 billion, 377 million people are urban dwellers and more than 10 million people being added to urban areas every year. The country’s urban population has grown at a compound annual growth rate (CAGR) of 2.8% over 2001-11.

Just look ahead

Furthermore, over 2015-31, the pace of urbanization is likely to increase at a CAGR of 2.1% - double than that of China. An interesting thing to note here is that India’s households increased by 60 million between 2001 and 2011. But during this time, the number of houses went up by almost 81 million. Despite this, according to the data from March 2015, there is a shortfall of 18.3 million homes in India.

A huge gap

One of the reasons that can be attributed to this shortfall can be the segment that the developers have got into – the luxury and ultra-luxury premium properties which would essentially target the middle income and affluent population in India. Since India does not have too many millionaires and billionaires, there has been a huge gap between demand and supply in this segment and home prices have gone beyond the reach of many.

Most lucrative segment

The most lucrative segment currently would be the affordable housing segment. According to RBI the cost of a house could be Rs 6.5 million and Rs 5 million in the metros and non-metros, respectively, to be qualified as affordable housing.
Though income levels have increased, but low sentiment on the housing market has prevented a faster flow of such income into housing. Since self-owned housing is still the number one priority for most Indian households, it is only a matter of time that this pent-up demand will eventually deploy into the market.

Several schemes launched

The government in its part has come out with many schemes to give a boost to the affordable housing segment with initiatives like ‘Housing for All by 2022’ and the ‘Smart Cities’ initiative. Besides this, another big reason for cheer would be the passing of the Real Estate Regulatory Bill by the parliament. This Bill would make the entire industry more transparent and would play a big role in protecting the interests of the home-buyer.

Budget provides impetus

Also, the recent budget announcement has certain major reforms rolled out for ‘Affordable Housing’ like:

1. Profits accruing from projects with flats up to 30 square metres in four metro cities and 60 square metres in other cities approved during June 2016 to March 2019 and completed in three years will now get 100% deduction.
2. The deduction for additional interest of Rs 50,000 per year for loans up to Rs 35 lakh for first time home buyers, where house cost does not exceed Rs 50 lakh.
3. Exemption from service tax on construction of affordable houses up to 60 square meters under any scheme of the central or state government.

Multiple market forces

There are various market forces that are playing a hand in the current situation of the housing sector. With India poised to grow at a healthy rate of 7.7-7.8% and industrial growth crawling back to the positive zone in March, there is a lot of positivity in the overall Indian economy.

Add to that the ability of the government to contain the fiscal deficit to the targeted 3.9%, the lowering of crude oil prices and the fact that 2016 being declared as a ‘La Nina’ year on the back of expected favorable monsoons, everything seems to be going well as far as the Indian economy is concerned.

The RBI has cut the Repo Rate by 1.5% since January 2015, which consequently would lead to lowering of home loan rates. This has given an incentive to purchase for a buyer, hence boosting sales. There has been a 9% increase in sales of units in first quarter this year compared to the previous quarter.

To conclude, the housing market is the not out of reach for many at the current moment. It’s the sentiment which has turned negative and is preventing the buyers from buying houses. The sales uptick seen in the first quarter could be a sign of things to come and a probable revival in the housing market.

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A maturing market

Residential property prices rose by only 3.3% in Mumbai and its suburbs during the year 2015 while year 2016 is currently expected to bring a 6% increase

A sign of any residential market’s increasing maturity is evidenced by gentler price appreciation, a process which has been very much in evidence in the country’s financial capital. The average residential property prices in Mumbai and suburbs saw an appreciation of 3.3% (y-o-y) in 2015 versus 7% in 2014.

The forecasted increase in residential property prices in 2016 is expected to be 6%. While a price rise of 6-7% (y-o-y) was predicted for 2015, the actual increase should come as a pleasant surprise to home buyers.

GOOD NEWS

Unlike the pre-global financial crisis (GFC) times, when prices saw double-digit growth (y-o-y) across the city and suburbs, the market has seen a rather subdued growth in prices over the last couple of years. It demonstrates Mumbai’s maturing residential real estate market. This is definitely good news for the scores of end-users who wish to own a house in the city that has India’s priciest real estate.

MAXIMUM APPRECIATION

At the sub-market level, south-central Mumbai and the eastern suburbs saw the maximum appreciation at 4.3% and 4% respectively, followed by north Mumbai and western suburbs at 3.9% and 3.5% respectively. Outside the city and suburbs, Thane saw a 3% appreciation in capital values, while the figure for Navi Mumbai stood at 6%.

UNSOLD INVENTORY

This, however, does not mean that Navi Mumbai is doing better than Mumbai, there is a lot of unsold inventory in many of its pockets. It is only in select precincts that Navi Mumbai is witnessing good demand. A look at the respective sales rate (as of 4Q15) also reveals that Mumbai did better at 10.1% than Navi Mumbai at 5.5%.

STABLE COSTS

The 2015 figure also reflects how developers have shown unprecedented flexibility and kept costs stable by absorbing some of the increased holding costs. Some home buyers reciprocated by jumping the fence and buying houses at attractive prices. Moreover, developers started to gauge market dynamics with greater precision and adapted their product offerings as per changing demand.

SMALLER UMITS

Smaller units are in demand lately due to their relatively affordable ticket sizes, and many builders are now offering them even in premium locations. Given the rather sluggish demand for larger homes due to unaffordability, the headroom for price appreciation in this category has reduced.
A JLL study in 2Q15 had showed that 69% of the apartments in the city and suburbs were priced above Rs 1 crore. The number came down to 65% in 4Q15, showing how developers are trying to bring in affordability.

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Avoid Energy Wastage

Monitoring wires and appliances is essential to prevent leakages or fires

It’s not just the nation’s power grid that’s antiquated. The wiring inside many houses is also out of date, straining to supply our ever-growing collection of electricity-hungry appliances, lighting, and electronics.

INDICATORS OF ELECTRICAL HAZARDS

• Circuit breakers that frequently trip.
• Repeated replacement of electrical fuse.
• Odd sound from the electrical systems.
• Flickering of the household lights.
• Strange Odor from excessive heating of electrical wirings and switch plates.
• Shock or even a mild tingle is a warning of electrical danger.

CHECKLIST

Make sure that all electrical appliance purchased are approved by reputed consumer laboratory For example always use ISI marked wiring or appliances.

• Unplug appliances that are not used on regular basis.
• Conduct regular maintenance/ repairs for all your electrical appliances.
• Appliances such as televisions, air conditioners, microwaves and computer monitors generate a lot of heat, hence one must make sure they are not covered with cloth and have enough clearance for air circulation and cooling.
• All electrical appliances must be placed away from water such as sinks, bathtubs or overhead vents that may drip.
• Avoid operating electrical appliance with wet hands.

THINGS TO CONSIDER

• Regularly check the power cords for cracks or twists. If the power tool draws more current than your cord can handle, this could start a fire.
• Always use a suitable power cord as per the work environment, whether indoor or outdoor. Outdoor-rated cords have durable covers to protect from weather and damage.
• Use tapes and twist ties to place a cord in a permanent position.
• Extension cords are a temporary solution, their use should be minimized.
• Do not make modifications to the cord to make it fit in a different outlet. Get a cord that meets the amperage requirements of the tool you’re using.

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Property Insurance Demystified

Our society has done insurance for the building for a certain amount. What are the aspects that the insurance of a building typically covers and why?

Typically, a society takes the insurance of building for standard fire and special perils, which covers perils such as fire, lightning, explosion, aircraft damage, riot, strike, malicious damage, storm, tempest, flood and inundation, impact damage, subsidence and landslide/rockslide, bursting and/or overflowing of water tanks, apparatus and pipes, missile testing, leakage from automatic sprinkler installations and bush fire. Earthquake and terrorism are add-on covers, which can be opted for by paying an additional premium.

As cooperative housing societies are entrusted with managing administration as per guidelines of cooperative housing societies act and insurance is part of society administration, the societies have to take insurance.

What would normally not be covered?
The policy does not cover consequential losses, losses on account of delay, warlike perils etc., losses caused by pollution or contamination, bullion or unset precious stones, any curios or works of art for an amount exceeding Rs.10000 or currency unless expressly stated in the policy.

Is a comprehensive policy available that covers the structure as well as contents of individual flats?
Yes, individual flat owner can opt for comprehensive policy such as the home package policy, which includes the coverage for building and contents against the risks of fire and other allied perils as detailed above. Home insurance policy also offers other covers as burglary for contents, electronic equipment insurance for electronic items, machinery breakdown insurance for household electrical / mechanical items such as air conditioner, washing machine, refrigerator etc., personal accident insurance, workman insurance for domestic servants, all risk insurance of jewellery and valuables and laptop etc.

In case of a calamity, what happens if individuals have insured their flats but the building itself is not insured?
Claim will be payable to individual owners only for the assessed loss not exceeding the sum insured under the policy.

What type of insurance policy should housing societies and their members ideally opt for?
Housing societies can opt for fire insurance including flood and earthquake for the building. They may also take insurance covering their other exposures. Burglary, money insurance, workmen insurance, public liability, machinery breakdown for DG set/ pump house etc., are some of the other policies, which they can consider taking. Individual flat owners can opt for fire insurance including flood and earthquake for contents, burglary for contents, electronic equipment insurance for electronic items, machinery breakdown insurance for household electrical/ mechanical items such as air conditioner, washing machine, refrigerator etc., personal accident insurance, worksman insurance for domestic servants, all risk insurance of jewellery and valuables and laptop etc.

Is any tax deduction or rebate available?
As of now, there is no such provision available for any tax savings.

How can one make an 'apples to apples' comparison of property insurance options?
All insurers use the same wording for standard fire and special perils policies and add on covers like earthquake, terrorism thereof. However, companies have customised home insurance covers. Even here, the wording for fire insurance cover conforms to the standard fire and special perils policies wording.

Generally, the additional covers like burglary for contents, all risks for valuables, breakdown cover for gadgets etc., are comparable across products sold by various companies.

Ideally, the customer should take an insurance policy which adequately covers his requirements. All that the insured has to do is to prepare a list of assets he has at home and map them against the various insurance covers available under the home insurance policy.

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A Cautionary Tale

Poor structural audits are resulting in building collapses and mishaps. Experts discuss key reasons...

For the last five years, there have been nearly fifteen building collapses in Mumbai and the suburbs, which have proven fatal for hundreds of people. The recent building collapse at Kamathipura was a subject of much discussion. The concern of the residents and civic activists of the area is that the structural audit done in 2015 showed that the building was not declared 'dilapidated' and it was only marked for repairs.

A resident of the area says, “For the last ten years, I have been monitoring the buildings in the area and have been following up with officials about the action to be taken for the buildings, which are not listed as `dangerous'. But there is no answer. Also, we are not aware of the norms, which they follow for audits as many buildings, which are in a bad condition, are not in the list.“ At present, the Brihanmumbai Municipal Corporation (BMC) conducts a survey of the civic buildings and gives a notice for either repairs or evacuation. Every ward officer has been instructed to carry out the procedure and submit the report. Rajkumar Sharma, a civic activist informs, “In 2007, the civic body had made structural audit compulsory for owners, developers and residents of the buildings and housing societies. In case of a failure to carry out a structural audit, it had also imposed a fine of Rs 25,000. But till date, no strict action has been taken.“

Officials in MHADA informed that the Mumbai Building Repairs and Reconstruction Board, every year, comes out with a list of buildings, which are in a dangerous condition. According to the recent report released by MHADA, there are nearly 14,000 cessed buildings only in the island city, which were constructed before 1969.

Chief officer of MHADA's Mumbai Building Repairs and Reconstruction Board says, “Every year, the MHADA carries out a survey of dangerous buildings. Also, the tenantslandlords of private and MHADA acquired buildings have been told to compulsorily carry out structural audits if the building is more than 30 years old and even if there are visible problems occurring due to monsoon vagaries.“

Pavan Nishad, a civil engineer and structural consultant says, “During the audits, emphasis should be laid on electrical, plumbing or other mechanical systems, which have become dangerous or inoperable. If the foundation has settled or is damaged, the building should be vacated immediately. Earlier, the BMC had no standardised format but now, a checklist has been prepared.“

The other concerns of the experts are that even in the newly constructed and under-construction buildings, there have been mishaps due to the use of poor construction material.

In light of several building collapses in densely-populated areas of our cities, the need for quality construction materials and techniques, has once again been brought to the forefront.Many of the older buildings in the cities like Mumbai and its surroundings, were constructed taking into consideration inadequate quality parameters and should have been redeveloped long ago.However, it is not only old buildings, which are in danger of a collapse but also newer constructions have been built on a cookie-cutter basis with a view to maximise profitability.

The other issue is about the illegal buildings, which come up in the area without proper permissions. The developers don't abide by the mandatory norms necessary for construction. Experts have welcomed the decision where the High Court has given a decision for not regularising the illegal buildings.

This is a good judgment as it sends out the right signal to the industry and the end-consumer. If illegal buildings get regularised, then it will set a wrong precedent going forward, especially for Mumbai where large-scale development is underway.Most of these buildings are a deterrent to progress.

Structural audits need to be performed on older buildings too, if Mumbai is to develop into an international city.

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