World as I Think

It would be easily the most scrutinized topic in any casual or serious discussion of recent times; the real estates are tooo hot in Chennai. The prices seem to have consistently risen over by 30% every year for the past three years. There seems to be a mad rush for apartments and individual properties in every damn place in the city, in fact the real estate prices have skyrocketed in any corner where there have been signs of economic activity.

There are innumerable theories floating around to explain the recent spike in prices

• The builders are artificially constraining the supply of apartments and hiking prices till the prices spiral up to desirable levels.
• There is too much NRI money, estimated to be around $15Bn, which has been infused into the system and that has lead to the speculation of the prices.
• There is hot money chasing properties which would be sold out once there is a desirable appreciation.
• The Morons in IT industry/new economy jobs have higher income levels and can’t stop the mad rush for home loans irrespective of interest rates.
• There is a supply side shock and if we consider the demographics we need millions of homes and limited land supply.

Every reason seems to be possible, I thought, I'll give a shot at this. There is gonna be some finance in this post and non finance reader have to pardon me. I would try to explain the concepts in a common man's perspective. Here we go

I have collected the prevailing rental prices and the flat rates in the city and have summarized the same in the table below

The valuation summary has been presented below

You might have understood the first two columns, monthly rent (per Sq.ft) and yearly (per Sq.ft) rent which are quite straight forward.

Then what is this thing called PV of Rent. It is in the present value of the rent, which I would get from the asset in financial terms. It is essentially the current worth of the monthly rent which I would get every year. i.e getting Rs 60(current year)+Rs 60 (next year)+Rs 60(year after that) and Rs 60 in eternity which is worth Rs 895 now.

It is not worth Rs 1200 (Rs 60 *20 years) because the value of the money decreases due to inflation (rate at which my purchasing power decreases) and it has some adjustment for the risk in the asset (I am not going to confuse with risk adjusted expected returns so on and so forth) .Just get the concept that it is gettin an mothly rent of Rs 60 is worth only Rs 895 now.

It is assumed that the investor would expect at least a return of 10.5% (current floating home loan rates). The net rental present value is computed after considering a 3% annual maintenance expenditure of the annual rent .it is assumed that the annual rent would increase by about 4% year on year.

Suppose, we demolish the building, we may loose the rental income but there is always this value of the land that we can get. On an average the land price is at least 60% - 70% of the flat cost. So if we buy a flat for 10 Lacs, the land price is at least 7 Lacs, to be precise. If a Sq.ft cost about Rs 1000, a healthy proportion of about Rs 700/- can be easily apportioned towards the land price.The present value of the land essential captures this component of the price paid towards the flat price. The land price is assumed to be around 65% of the existing price while valuing the properties.

Now we need to compute the current worth of the tax benefits. We can avail a waiver of around Rs 2.50 lacs and save ourselves about Rs 75,000 every year. I have assumed the exemption amount to be around Rs 2.0 lacs (the interest component in the EMI is expected to decrease over the period) over the loan period.The current worth of the tax benefit is expected to be around 5.0 Lacs which translates to an average tax benefit of Rs 374/ Sq.ft (Rs 494 -1000 Sq.ft; Rs 353 -1400 Sq.ft; Rs 274 -1800 Sq.ft ).

The present value of the asset (6th column) is computed based on the expected future income (rent), land price and tax benefit.

The current price is based on the regressing the current market prices of rent and land prices. The equation turned out to be

Market Land Price/Sq.ft = -983.4 + 574.1 * Market Rent/Sq.ft
Current Asset Price = Market Land Price/Sq.ft * (1+Registration charges)

The government registration charges are usually about 10% of the Land price.

For all people who thought the Indian housing bubble is a reality we have to reconsider it, the calculations say that the asset prices are trading at a discount of about 10.8%.

There is more incentive for people to buy small homes which are in the suburbs where the assets are at a discount of about 25%.

If you were a frenzy fan of real estates and you wanted reasons to invest in the real estates, you can be sure that the real estates are not in a state of bubble. If you were skeptical of the valuations (Actually I was not convinced at that point) and need to cross check various scenarios,here we go.

we would try to take the worse case scenarios to the various variable that can signigicantly affect the valuations.

Upward bias on the Land Price

There could be a current upward bias in the land prices due to higher rentals which have been prevailing in system due to supply constraints of apartments. The other thing could be that the rentals could be on the higher side compared to the prevailing land prices. For instance, parts of velachery demands a rent of about Rs. 8/ Sq.ft, whereas land prices float around the Rs 2800 mark. We can test them right way

We can see that the current market price of the assets are at a premium of about 30%, if we consider that the land is worth only 30% of the current flat price, which is approximately the land price before three years. It seems to be fairly priced if the land is worth 50% of the current flat price.

The housing starts in sub urban areas, redevelopment in the existing areas and the SEZ (Special Economic Zones) can put the prices down as the demand would ease in the future. The demographics of India however suggest that the housing demand isn’t going to stop in the mid term. The demand rentals are expected to be in the upper spectrum as there is a constant movement of labor in the country towards zones of higher economic activity.

Concerns on Interest rate moving north

The next concern is about interest rates, the home loan rates have been increasing in the recent past and are slated to be high in the mid term (that is what the treasury yield curve seem to suggest).The table below kind of summarizes the premium or discount in the property if the interest rates increases or decreases.

Limited Tax benefits as the Property value increases

The next issue could be that a segment of people who buy the flat may not have the tax benefit and the tax benefit is capped to the people who buy properties of higher value.

The table below summarizes the premium or discount in the asset according to the property value purchased..

Labels: economics

Labels: economics

Labels: Love

I somehow did not want to write this post but Its itching me in my brain and I had to put it down somewhere.How does it feel when you know that somebody dramatises things and is taking unfair advantage of somebody.It is quite expected out of hyenas or wolves but not out of the lions.It's hard to digest that somebody wears a social goodie mask and wears an hyena's clad in personal life.

When we can influence somebody and we know that it could make all the difference to turn the tides towards them, the genuine would certainly abstain from it.There is this dark side of the masked one, the so called "goodies" somehow would substantiate the influence with an ulterior motive to influence them.Why would you make somebody vulnerable and be the vanguard as well.

I really appreciate the courage in the pack of hyneas to accept their inherent nature of deceit and I certainly admire them because they are what they are.I always confess this,its not the bad people that create all they problems in the society, they are there to do their part.It is the trans-qualified that disorient the equilibrium in the system.

I always wonder how they kind of mange to keep their conscience at bay.They need to be acting all the time.it is easy to be bad but it's very difficult to act like not one of those.

Labels: hypocrisy

So when was your first crush on somebody? I must be getting you people back to those sweet teens when only a few glances from "that person", would invoke a butterfly which got to mellow in your heart. Gone are those days when I gottu to swim the "Crush Pond”. I had half mushies and tender masculine voices and would blush like a colgatEEEE when I get to be in the vicinity.

That’s a tough question indeed, as who my first crush was? I think it must be my seventh standard and I won't stop gazing at that girl. It was like nine pins, I fell into the "Crush pond", so often, with so many people. I was such a naughty guy that I would be "punished" (Don’t tell me its a punishment my dear teachers) to sit between girls in my higher secondary, no wonder it was a habit to me. I love examinations as I would have the greatest three hours, writing the examinations with senior and junior girls and in most cases I gottu sit with pretty girls ("at least in my eyes").I loved the annual examinations rather than the monthly test which were of shorter durations.

Age was no barrier to me, I can't tell you as to how I would concentrate in Physics just to get the attention of my Physics Mam, No wonder I have varied interest in most subjects. I love language classes, that was when I could have the chance to gaze at those Section "E & F" girls with sweet eyes and chinky looks. I can still remember that day; I would sit in that hot sun to look those cute faces in the bus stop when I was asked to take vanguard in our dad's business place during my school days.

When I asked this around in to my close chums, the experiences were even fascinating, Somebody had a crush on the nurse when he got out to see the world, some took advantage of his principal father to follow that girl in the school, some would borrow news papers so often with that neighbor to see that bubbly girl, somebody could remember that girl with the color purple dress and nothing more, some had the crush on that lovable aunty, some had crush on the receptionist, some had it on that cultural secretary, some had it on Shilpa Sheety , Some had it on their project manger, some had it on that girl who sit right nexts to him, some had it on his girl friend's best friend.

Ohhh My Godddd, So many people, so many experiences. Somebody even floated a theory that there is a higher probability to have a crush on a elder person when we are in teens. It’s an endless journey to fall into the crush pond.

How I loved those happy days buoyant in that "Crush Pond"

Labels: Crush