OCTOBER 2004

Issue #2

This issue gives views on property prices, interest rates and other interesting articles. Hope you enjoy reading them.

• Real Estate Market – A Round Up
• Residential property prices to go up
• Finance - Small towns bag all the credit
• Home Loans and you 
• A Question of life and hearth
• A new home loan scheme that's twice as good
• Trust Worthy?
• Sans hidden clauses, a loan from HDFC is freed of risk
• New Projects

Amidst rising inflation numbers and volatile stock market conditions, real estate sector has shown sustained growth. The changes in the economic scenario have made a suitable impact on the stock markets as well. The reflection of this ‘feel good’ factor and the overall positive sentiment has reflected on the real estate sector also.

Commercial  

The commercial and retail sector in the real estate market has been witnessing an increased movement as compared to last year. The emergence of large shopping malls, multiplexes and entertainment centres across the metros and mini metros have given rise to large-scale developments. On the commercial side, the IT and ITES sector has continued its growth. There has been a rise in the number of BPO companies. The number of call centers has been increasing at a decent pace. The demand for such office space with larger number of seats and employee accommodation has brought in the development of suburbs and peripheral locations in most of the cities.

The choice of the corporates and companies still hovers around the traditionally developing cities. These include Mumbai, Navi Mumbai, National Capital Region, Bangalore, Pune, Hyderabad and Chennai. Cities like Kolkata, Jaipur have also seen some movement in the retail sector. However, they are facing a tough competition from the bigger cities in the absence of infrastructure offered by the big cities.

The overall industry trend shows that the corporates prefer to lease the premises. The recession that most of the companies have gone through, has brought about the sharp increase in lease arrangements, which are financially more viable. The increase in lease transactions has also gone up with the increase in the number of investors in the market. In a shaky stock market scenario coupled with falling interest rates, real estate has proved to be an important avenue of investment. This has turned out to be a win-win situation for all involved as the developer gets to sell his property, the corporate/company gets desired premises on rent; thereby saving on huge capital infusion and the investor who buys the property gets decent returns from the rent. The returns can go up by 10% to 13 %.

Residential

There has been lot of movement in the residential market as well. Emergence of new locations in various cities, entry of BPO companies/ operations, etc have fuelled the demand of residential properties. There has been a growth of actual home buyers in the market.

This has resulted in development of areas like Nerul, Koparkhairane, Kharghar in Navi Mumbai, Pashan Sus Road in Pune, Jayanagar in Bangalore, Gurgaon near Delhi and so on. Overall, the property rates have shown slight upward variation. The land rates too have appreciated with the rise in demand. There has also been development of mill lands in central Mumbai and non CBD areas like Faridabad, Ghaziabad, etc.

The tax incentives provided by the government coupled with attractive home loan rates have prompted many to buy a property. Various initiatives taken by different states with regard to stamp duty regulations, simplifying of registration process have further encouraged many to buy houses

Contributed by Amit Joshi, HDFC Realty, e-mail: amit@hdfcrealty.com 

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Manjiri Madhav Damle

If you are about to apply for a home loan better upgrade your loan requirement. Residential property prices are expected to go up by approximately Rs. 100 per sq ft in the city due to the impact of Union Budget 2004. The construction industry is expecting construction costs to go up by 20-25 per cent owing to increase in steel prices and levy of 10 per cent service tax on construction services for commercial development. P A Inamdar, president of the Promoters and Builders Association of Pune (PBAP) told Times News Network that cost of housing in Pune would go up by approximately Rs. 100 per sq ft. "Steel prices have been shooting up for the past one year and the additional 4 per cent duty on steel put in the 2004 budget will mean more than 100 per cent increase in steel prices," he stated. Rising steel prices plus the 10 per cent service tax on construction services for commercial development would mean that prices of commercial property would go up by approximately Rs. 150 per sq ft in Pune, he explained. Inamdar felt that people planning to buy residential or commercial property would have to upgrade their loan requirements accordingly. He, however, added that the changed prices would not adversely affect the construction industry. "Usually people who buy property are prepared to and have the ability to pay. With housing finance easily available, there should be no problem." The Budget 2004 has left the existing tax exemptions on housing loans untouched. Housing loan interest up to Rs. 1.5 lakh is still deductible under IT and tax exemption up to Rs. 20,000 on housing loan principal under section 88 is still in force. For builders the tax exemption on profits earned through projects on one acre land as per section 80 IB is still there.

Publication: Times of India, July 9, 2004

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Shillong, Shimla, Jammu and Dehradun are hot. So are Gurgaon, Cuttack, Noida and Rajkot. But Mumbai, Delhi, Kolkata and Chennai are no longer the credit destinations they used to be.

The share of the four metros in overall bank credit has fallen to 47.4% from 51% two years ago while smaller cities and towns and the new metros of Bangalore and Hyderabad, have almost doubled their share of bank credit in the last two years.

Among the top hundred cities, the four major metros recorded a modest credit growth of 13% in '03-04. The remaining 96 centres - smaller metros and cities - recorded a 24% growth in credit helping to push overall bank credit growth to 17%. These 96 cities together accounted for 28% of total bank credit in '03-04, up from the 15% a couple of years ago.

This year the number of centres that have experienced credit growth of over 40% has gone up to 15 from 9 last year. These include cities such as Chandigarh, Jaipur, Tirupur, Raipur, Mangalore, Noida, Gurgaon and Jammu. The new IT hubs of Bangalore and Hyderabad are not far behind with 31% growth each during the year. Chandigarh has displaced Ahmedabad in ranking in terms of bank credit usage.

According to Reserve Bank data on top 100 centres, based on usage of bank credit, the growth has been in largely upcountry centres including satellite towns like Gurgaon and Noida, hill stations like Simla, Dehradun and Shillong, business centres like Mangalore, Tirupur, Rajkot, and even certain centres in backward states, for example Rourkela in Orissa which recorded a growth of 45% in credit offtake during the year. Among the centres to record a sustained high growth are Shillong, Dehradun, Noida, Gurgaon among others.

One of the reasons bankers point out is that a bulk of the growth has been from retail segment, particularly housing loans and these have originated from small centres and many have been witnessing a housing boom. This is corroborated by the loan pattern of the country's largest housing finance company - HDFC.

At its annual general meeting, HDFC chairman Deepak Parekh said that big-ticket growth in home loans has been from many smaller centres like Coimbatore, Bangalore and Noida in recent periods. A few foreign banks, which have been very metro centric, are now seriously considering opening branches in smaller centres, said a senior official with a foreign bank. The city that has improved its ranking by most among the top 100 centres is Gurgaon, which has moved to the number 43 position from 20 last year. Jammu is also a big mover in the list, rising 19 places to number 53. The cities that have dropped the most in terms of rankings are Bhanur - a largely defence production town in Andhra, which has fallen 23 places and Valiv an industrial belt to the north of Mumbai that has fallen 28 places to number 75. However, as far as deposits mobilisation is concerned, bigger metros still account for a higher growth. In '03-04, they together recorded a growth of over 27%, with Mumbai recording 31% growth in Deposit growth.

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JANAKI MURALI shares some tips on how to apply for a home loan.

Everyone is investing in property or so it seems. It seems to be the right time to invest in the real estate sector.

Whether you are a single or married woman, salaried or working from home or running your own business, if you have a repayment capacity of your own, you can apply for a home loan, but if you are married, it would make sense to take a joint loan, as both you and your husband can avail of income tax benefits.

But before you select the FI/bank for your home loan, do a survey and study the offer documents carefully before you sign any agreement. Many institutions that offer you a rate of interest that is lower than the market, will have included hidden costs, like higher service and loan processing charges etc. What you need to keep in mind essentially is how much EMI you have to pay every month. Compare the EMI workout of different lenders for the different periods - 10/15/20 year terms. The bank offering a lower rate of interest might have a monthly rest/quarterly rest, while a lender with a higher rate of interest might have a daily rest, and this might work out to a lower EMI. So go only by the lowest EMI you have to pay. There are also flexible EMI schemes, which work well if you have just started your career. In this scheme, you pay a lower EMI during the initial period of the loan, and step up as you go on.

Also find out whether there are any employer-lender linked home loan schemes that may give you a better package. Some private banks are also offering schemes linking deposits/current account with a home loan account, where you save on interest for the number of days that you have money in the account. Some lenders offer accident/life insurance for the borrower at a lower premium and some others have a scheme, whereby at an additional premium added to your EMI, in case of death of the borrower, the survivor is free from liability from paying the rest of the loan. You also need to choose between a fixed or floating interest rate, the floating rate will benefit you when the interest rates drop, but will be to your disadvantage when it rises. A fixed rate meanwhile, will protect you against any rise in interest rates. Don't shy away from playing lenders against each other to get the best rate for yourself, whether it is with the EMI or the add on charges. With so many lenders competing with one another, you can always negotiate the best deal for yourself.

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It's wise to have a home life insurance, say Chandralekha Tulal & Garima Singh

Got the loan for your dream home? But what if a freak accident snuffs out your life and robs your family of the dreams you wove together. Now there's a way to de-risk that eventuality and safeguard your family from the frightening prospect of being truly dispossessed. Life insurers now offer you a wholesome package whereby you can get adequately insured for the loan you have taken. Let's explain how it works. Ramesh Malkani, a 31-year-old executive working with an MNC, took a home loan of Rs. 20 lakh. Malkani has a 28-year old housewife and a 4-year old child, who's just started going to school. Two years after he took the loan, Malkani died in a road accident. His family was shattered trying to cope with the loss of its sole bread-winner and the onerous responsibility of meeting financial obligations.

Thanks to the life insurance policy her husband had bought with the loan, his wife does not have to jostle to save her shelter.

A home loan insurance plan provides a lumpsum on the unfortunate death of the life assured during the term of the plan at a very low premium. More importantly, it allows one to cover the outstanding liability on a home loan. The lumpsum is a decreasing percentage of the initial sum assured. As the outstanding loan decreases according to the loan schedule, the cover under the policy decreases. The premium-paying term may vary from single to regular (monthly, quarterly and annual) and differs from one insurance company to the other. The individual must make a choice based on how comfortable one is in shelling out the premia. Since this is a non-participating (without profit) pure risk cover plan, no benefits are payable on survival at the end of the policy.

In the term assurance policy, the individual is covered only for life risk, which means there is no saving element. The individual's premium is calculated according to his age and tenure as in an endowment plan. But unlike an endowment plan where premiums are high, term assurance plans have very low premium since they cover risk to life only and do not have a savings component.

In other words, if the individual were to survive the term plan tenure, nothing will be received - not even the premiums paid. If the individual has the option to go in for a return-of-premiums plan, the premiums would be given back at the end of the term. However, this might not be a smart move. Let's see why.

Term assurance plans are particularly advisable for those who have taken home loans and wish to cover it against any eventuality. Remember, a home loan is a long-term liability. Should anything happen to the breadwinner in this period, his dependents could potentially become homeless after his demise. It makes sense for the breadwinner to provide for such an eventuality by covering this risk. Since the plain vanilla term assurance plan does not provide for return of premium, the insurance-seeker must try to minimise his premium outflow.

A caveat: it is generally advisable for the individual to shop before he eventually takes a home loan cover.

What do you look for?

Look carefully at the credentials of the life insurance company, including its past performance in paying up claims and product specifications.

Pricing remains the most distinguishing factor. Check out the premium amount and the payment tenure.

Convenience of the customer is again a major deciding factor. If the institution from where the person is taking a loan already has a tie-up with an insurance company, it becomes easier for the individual to buy insurance.

Publication: Telegraph, June 21, 2004

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Buying your dream home might turn into a nightmare if you fall into the hands of an unscrupulous builder or developer, says Subbalakshmi S

IT'S No easy task to check out the credentials of a builder and the project in question. One way to find out is through banks that have tied up with builders / developers. Such banks offer property valuation services to their house / home loan clients.

According to Atul Shah, Estate Agent and former president of the Estate Agents Association of India, doing your own leg work to find out the credentials of a builder is the right way to go about it. It also helps to get a real estate lawyer and an architect on your team. Here's a checklist to help you out:

Background check

Check out his resume: As Shah says "One must look at his past projects and find out if they have been completed on time, are people staying in those buildings satisfied with the construction and if there has been a problem then has the builder been able to solve it successfully." According to L. L. Narang, a real estate consultant concurs, "The best way to check a builder's credentials is to look at his past performance, quality of his constructions, his financial stability and the brand name."

If the builder is relatively new, check out the credentials of his suppliers and whether he has cleared his dues with them. The names of the suppliers are usually found in the contract that you sign with the builder. Find out if he has with contractors or supervisors and why.

Paper work

§      Check whether all the paper work is in order. Check the development agreements. An authority for conveyance of title in favour of builder / promoter would show whether builder has a clear property title for the property he is selling you.

§      Check if the property has been involved or is involved in any legal disputes of land titles or ownership. You could visit the local land registry office to check this out. According to Shah, "Land records can be checked by architects only under the 7 / 12 extract at the registrar's office."

§      Ask your builder to show the approvals he has got from the various authorities regarding electricity, water supply: sewage drains for the property in question. He should also have approval of development from the respective authorities of Municipal Corporation and Area Development.

§      The sanctioned plan of the area.

§      Once the building or the property is developed the municipal authorities issues a Completion Certificate that shows that the work was done in accordance with rules and regulations and the sanctioned plan. Your builder should have this.

§      He should also get the Occupancy Certificate, which notifies that a building is ready to be occupied.

Agreement to sell

Go through the fine print in the 'Agreement to sale' with the builder-developer. "Customers should be aware of their property rights under the Maharashtra Ownership Flat Act. Then the customer can check on the agreement to sale through a lawyer. That is the best way to do it," says Narang.

§      Take note of the time frame or the delivery of the project.

§      See if the builder has worked in his right to change the location and the area of the flat that he has promised to give you.

§      Look for the clause in your agreement, which says in case the property cannot be constructed, the builder-developer will be liable to refund your money with interest.

Commitments

Get a written commitment of the amenities and the services that the builder would provide so as to prevent them from asking extra charges after you take possession of flat / house. For example, sometimes the builder offers open parking spaces for the car along the boundary of the building. Sometimes the builders sell those spaces. There have been cases where after construction builders have turned around and asked huge sums for what they had promised to provide for free.

Having a co-operative society is imperative for the occupants under the Co-operative Housing Society byelaws. Check out when the builder is going to write the property in the favour of the society.

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In the past few years interest rates have been coming down and during this period the floating rate became popular for home seekers, as they were able to secure home loans at low interest rates. Before this period only fixed rates were being offered. In the current volatile scenario it is difficult to predict the interest rate movements. To address this issue, HDFC today is offering customers a number of customised options.

After almost three decades in the industry, HDFC has worked out solutions to this customer issue. There are umpteen customised interest rate options and repayment choices available to HDFC customers. One can either go in for a fixed rate product where the interest rate remains fixed throughout the tenure of the loan or go in for a floating rate product where the interest rate changes depending upon various macro economic parameters.

Customers who are risk averse are likely to go in for the loan at a fixed rate basis as it provides immunisation from any fluctuations in interest rates. Here, in the case of rising interest rates, the risk is borne by the financing company and not the customer. A fixed rate loan also enables better financial planning as the customer is aware of the liability per month – Equated Monthly Instalments (EMI) – right at the onset. More importantly, it remains fixed throughout the term of the loan.

But, the customer needs to exercise a little caution while opting for the fixed rate product. He has to find out whether the fixed rate loan is also offered with a clause wherein the company has the right to increase the rate in case of adverse money market conditions or changes in their internal policies, as often the customer is not even informed about this clause. At HDFC, however, the customer is offered two options under the fixed rate at differential interest rates, one where HDFC has a right to increase rates but only in the event of extreme volatility in the money market conditions and the other at a slightly higher rate where the rate is fixed for the entire term of the loan irrespective of any fluctuations. In the latter, irrespective of market volatility, the liability to the customer remains fixed and the risk in borne by HDFC.

And then, for the customer who is more willing to take the risk in interest rates, a floating rate or variable rate is a viable option. Here, the interest rates charged on housing loans tends to vary with a benchmark, which is generally the prime lending rate (PLR), which is based on the company’s cost of funds and the money market environment. Most financial institutions offer floating rate loans at interest rates that are slightly lower than the fixed rate loans.

A reset of the interest rate in a floating rate loan takes place usually on a three-month basis after which the interest on the floating rate is appropriately altered if there is a change in PLR. At HDFC, the review takes place every three months. If a loan is sanctioned at say, 2 per cent below PLR and the present PLR is around 9.75 per cent, the borrower would pay 7.75 per cent interest. If PLR becomes 9.5 per cent, the rate would be 7.5 per cent. But on the other hand, if the PLR rises to 10 per cent, the borrower would have to pay 8 per cent.

Interest rate fluctuations are reflected in the form of changes in the loan tenure. For instance, if the PLR falls, the interest rate dips, leading to a reduction in the tenure of the loan. Conversely, if the interest rates rise following an increase in the PLR, the tenure of the loan will go up. Understanding this is vital for home loan seekers.

HDFC believes in complete transparency in all its dealings. The HDFC home loan customer is provided with an annual statement so that he/she is fully aware of all the interest and principal payments details made during the financial year. In the case of a floating-rate loan scheme, HDFC always apprises the customer of the inherent interest rate risks irrespective of its effect on business unlike other players.

Customers currently planning to take a home loan could do well to go in for a fixed rate as the bias today is towards higher interest rates. Those who are looking to swap an existing floating rate loan with a fixed one, an important determinant of whether to swap or not should be based on their long-term expectation of interest rates and also the cost of swapping taking into account the outstanding tenure of the loan, the amount outstanding and the likely extent of interest rate increase.

For example, if one expects rates to rise maybe for the next one year, but then decline gradually over the next several years, a floating rate product may be preferable. If one decides to convert to a fixed rate, then the costs of conversion could entail a conversion fee of 1-2% of the outstanding loan amount. If one decides to change the lender instead to convert to a fixed rate, then they are most likely to pay a foreclosure penalty of 2 per cent of the outstanding amount as well as 0.5 to 1.0 per cent of the new loan amount as processing and administrative charges to the new lender. If one has to incur all these costs, then conversion to a fixed rate may not make financial sense.

Again a fixed rate loan is generally priced higher as compared to a floating rate product. This holds true in the current environment where the fixed rate loan is at a higher interest rate as compared to a floating rate loan. The difference is currently about one percentage point. So if the customer expects that interest rates are likely to move up, but only to the extent of this differential, then they should ideally be indifferent between the two types of loans.

At HDFC, when a customer is indecisive about whether to go in for a fixed rate or floating, they guide and educate the customer and lay out the options before him. They leave the final decision to the customer, which is based on his needs & requirements and ability to take risks.

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