Time to strike a good bargain
Real estate
By Vasu

YET another coalition government has taken the reins at the Centre, the Kargil factor is just a bad memory, and the stock market is zooming as in every stockbroker's dream. So, what is happening in the real estate sector. Corporate India is telling the multinationals, ‘I told you so.’ A sentiment echoed by brokers across the metros as they finally prepare to emerge from the longest slump ever.

Once the new government takes over and the signal goes out that India is the correct destination for overseas funds and in the scenario of the new government allowing Foreign Direct Investment in real estate, the bad times may be over for property in the metros, says Arun Grover, a real estate consultant for multinationals and diplomats.

India is an attractive destination especially with the financial strengthening of the South Asian economy and will become the ideal multinational destination. Already Moody Investor Service has upgrade India’s rating outlook from Ba2 stable to Ba2 positive, based on the assumption that a government with a longer lease of life gets to do some aggressive economic restructuring. The multinationals had gone slow on investing in chief business districts (CBDs) which had harmed the market immensely, says Sudhanshu Banerjee, who deals in prime office space in the capital’s CBDs. However, Indian corporates had gone ahead with planned purchases and have emerged winners today, he adds.

With the added advantage of an English-speaking workforce and low labour costs, dealers expect an increase in demand for office space soon. The trend has already reversed, Sudhanshu maintains. Demand for commercial space did not lag behind as it did in the residential sector, says Sudhanshu though owners will now have to wake up to the fact that hi-tech and high-paying companies demand intelligent buildings. It is inevitable that existing structures in central business districts will have to be extensively remodelled or demolished to make space for better structures for the new industry.

However an area where safeguards will be required is the residential sector, where the entry of FDI should be restricted to specific locations and segments to prevent large strategic tracts from coming under their control.

Real estate prices will spurt around November, according to Rajeev Dayal, a securities analyst, who feels that today the prime shares are being traded in demat form and the Y2K bug is sure to frighten some investors away from the stock market. The major securities firms and brokering houses which are Y2K compliant take care of only about 60 per cent of the stockbrokering business. The rest have been given a deadline up to November to comply with Y2K norms. Lack of investor confidence on account of the uncertainty is sure to pull out money from the stocks which will be put into more tangible upwardly mobile assets like real estate, he adds.

Today several options exist for those looking for either a home or property purely for investment. With low property prices, tax sops, all-time low interest rates and several special services being offered by housing finance companies, the property scene cannot get better than this. However even after identifying the locale, other details require extensive surveys. The first tough job is to pick up the right financial institution and arrive at a loan amount.

Usually the amount of loan available would depend on your potential to make monthly repayments. Repayment is through equated monthly instalments which carry an interest and principal component. Normally most housing finance companies fix this to about 50 per cent of the net monthly income of the customer. Thus a loan of around Rs 5 lakh needs an income of around Rs 16,000 per month. And this loan for a 15-year period at an interest rate of 13.5 per cent will have to be returned with an instalment of Rs. 6,600 per month. Firms mostly allow the clubbing of the spouse’s salary to arrive at a more realistic monthly earning.

The highest amount one can borrow is around Rs 20 lakh if one goes to the nationalised banks and the housing finance companies. However, the HDFC and foreign banks can lend RS 50 lakh and beyond, to certain customers.

Though the tendency is to go for a long tenure, the longer the period you take to return the loan the higher the interest you end up paying though the EMI may not change much. In a 15-year period one might end up repaying nearly 30 per cent more than in a 10-year period.

Not only the actual figures, the rest period should also be clearly understood. It is only in the monthly rest system where one ends up paying the rate quoted. In the annual rest system, one pays interest for the amount of principal outstanding at the beginning of each year, regardless of the money returned in that year, so the interest rate works out to be higher than that quoted. Some of the other things to watch out for— whether the rates are floating or fixed, whether the package can be restructured midway to give more flexibility in repayment and whether there are any cutbacks available for timely repayment.

However for those seeking small value loans (less than Rs 5 lakh) nationalised banks remain the best option as they give housing loans at comparatively lower rates, though their paperwork is lengthy and the service casual. For the middle segment, the housing corporations are a good bet, given the several options available. And for the big players foreign and private banks meet the special service needs. Whatever the mode of arranging the funds and whatever the size of the holding and its locale, a final advice to all : This is probably the last opportunity to strike a good bargain.