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40087385 brijesh-kumar-final-report-2010

  1. 1. Final Research Project Report On “EFFECTIVENESS OF ADVERTISING ON REAL ESTATE ” For Submitted for Partial Fulfillment Of “Masters of Business Administration” (MBA -2009-2010) 1
  2. 2. Under The Guidance of:- Submitted By:- Minakshi Mam Brijesh Kumar Roll No. 0844070008 Naraina Vidya Peeth Management Institute Panki, Kanpur-208020 STUDENT DECLARATION I, Brijesh Kumar student of M.B.A at Naraina Vidya Peeth Management Institute, Kanpur of hereby declare that the Project work entitled “EFFECTIVENESS OF ADVERTISING ON REAL ESTATE” is compiled and submitted under the guidance of Minakshi Mam This is my original work. Whatever information furnished in this project report is true to the best of my knowledge. Brijesh Kumar MBA IInd Year Roll No: - 0844070008 2
  3. 3. INDEXINDEX 3 Sr. No Topics Page No 1. Introduction 1 2. Real Estate Industry of India 9 3. Financial Institutions in Real Estate 10 4. Challenges and Opportunities in the Real Estate Sector 12 5. Effect of Recession on Real Estate in India 14 6. Real Estate Scenario in India 25 7. Structure of Real Estate 33 8. Table & Chart 47 9. Research Methodology 82 10. Data Analysis and Interpretation 85 7. Findings 105 8. Conclusion 106 9. Suggestion 107 10. Limitation of the study 108 12. Bibliography 109 13. Questionnaire 110
  4. 4. INTRODUCTION The global financial crisis and the resultant slowdown in the global economy during the year 2008-2009 have halted industrial and business expansion. The subsequent drying up of liquidity has led to an overall slowdown in the real estate sector in India. There has been sales slowdown across all real estate asset classes: Residential, Commercial, SEZ/Industry Parks. Demand in real estate has remained grim, primarily due to low consumer confidence. This can be attributed to a weak economic scenario. High levels of inflation led to the government increasing interest rates. This led to the drying up of liquidity available for businesses to expand, leading to a slowdown in the commercial real estate demand. The increase in the cost of finance also led to a drop in residential real estate demand. According to a report released by UBS Investment Research in April 2009, unsold inventory with developers in major residential real estate destinations in India is still high at around 18% of the properties being promised for delivery over the next 12 months. The inventory situation is not limited to the residential space. Recent data from Jones Lang Lasalle REIS on supply and vacancy for office space in Delhi and Mumbai indicates that office vacancy rates are very high. However, analysts and industry experts believe that long term prospects of the Indian real estate sector remain promising. According to ASSOCHAM, the Indian domestic real estate market is estimated to be approximately USD 15 billion, of which FDI contributions are expected to be less than USD 4 billion. 4
  5. 5. The share of FDI in real estate is expected to increase manifold in the coming years with the gradual relaxation of ceiling in construction space permitted to foreign investors. India’s growing young population, rapid urbanization, growth in industry and services and rapid development of tourism are factors that will propel real estate demand in the long term. A number of reforms introduced by the Government in recent years have contributed to the scorching pace of development of the Indian Real Estate Industry in the past and will facilitate future growth. These real estate reforms include: ➢ Repealing the Urban Land (Ceiling and Regulation) Act, 1976 by a large number of Indian States ➢ Allowing FDI upto 51% in single brand retail outlets and 100% in cash and carry ➢ In April 2008, the Securities and Exchange Board of India (SEBI) announced amendments to the SEBI (Mutual Funds) ➢ Regulations 1996 permitting the launch of Real Estate Mutual Funds (REMFs) in India. REMFs are required to invest at least 35% of the net assets of the scheme directly in real estate (in ready-to-use property that assures rental income and capital appreciation) not stating the maximum investment limit ➢ Real Estate Investment Trusts (REITs) have been allowed entry into India. REITs cater to the capital requirement of the real estate sector as it enables the company easy access to funds and preferable exit options 5
  6. 6. REAL ESTATE The real estate story in India is growing bigger by the day. Industry experts believe that Indian real estate has huge demand potential in almost every sector -- especially commercial, residential and retail. Growth in commercial office space requirement is led by the burgeoning outsourcing and information technology (IT) industry. By 2010, the IT sector alone is expected to require 150 million sq.ft. of space across major cities. It is estimated that in the residential sector there is a housing shortage of 19.4 million units out of which 6.7 million are in urban India. The increase in purchasing power and exposure to organised retail formats has redefined the consumption pattern. As a result, retail projects have been mushrooming across even B-grade cities. The retail market is expected to grow at around 35 per cent. Industry observers feel that this growth is facilitated by favourable demographics, increasing purchasing power, existence of customer-friendly banks and housing finance companies, professionalism in real estate and reforms initiated by the Government to attract global investors. Global Majors in Indian Real Estate Policy changes introduced by the Government in February 2005 allowed 100 per cent foreign investments in construction projects with fast-track approvals. But the real attraction for foreign investors is potential investment returns of 25 per cent and more in Indian projects that might be hard to come by in the US and in Western Europe today. A report by property consultants Jones Lang LaSalle estimates that US$ 10 billion foreign investment will be injected into the Indian real estate sector in the next 12-18 months. International companies like Ayala of the Philippines, Signature from Dubai, Och-Ziff Capital, EurIndia and Old Lane have indicated their interest in entering the Indian real estate market soon. On the cards is sizeable FDI inflow from Malaysia, followed by the UK, US, Israel and Singapore. Industry sources say over 90 foreign investors are already in the country tapping investment avenues. Nearly two dozen US funds are raising US$ 3.5 billion for 6
  7. 7. investments in Indian realty. Those raising the funds include Wall Street powerhouses such as the Blackstone Group (US$ 1 billion) Goldman Sachs (US$ 1 billion), Citigroup Property Investors (US$ 125 million), Morgan Stanley (US$ 70 million) and GE Commercial Finance Real Estate (US$ 63 million). Others raising funds are JP Morgan, Warburg Pincus, Merrill Lynch, Lehman Brothers, Warren Buffett’s Berkshire Hathaway, Colony Capital and Starwood Capital. In mid-2007, Morgan Stanley closed a deal worth about US$ 150 million with Oberoi Constructions in Mumbai. The Nakheel Group in Dubai entered into a US$ 10 billion deal with DLF for residential projects in Tier I and II cities. This was followed by three financial institutions -- Khaleej Finance and Investment (KFI) from Bahrain, Kuwait Investment Company (KIC) and Kuwait Finance House (KFH) -- from the Middle East promoting a US$ 200 million fund for investing in India. Called the 'Indian Private Equity Fund', it targets activities with controlled risks in growing sectors like real estate. Close on its heels, California Public Employees’ Retirement System entered India, investing US$ 100 million in a US$ 400-million real estate fund promoted by IL&FS. Ascendas, Asia’s leading business space provider is launching the first property trust of Indian assets worth US$ 500 million in Singapore in July 2007 with the renowned real estate developer Embassy Group. Financial Institutions in Real Estate Indian financial institutions are competing with each other to invest in this higher return segment. Some of the prominent companies promoting real estate funds in India are HDFC Property Fund, DHFL Venture Capital Fund, Kotak Mahindra Realty Fund, Kshitij Venture Capital Fund (a group venture of Pantaloon Retail India Ltd) and ICICI’s real estate fund, India Advantage Fund. Regulated under SEBI’s (Securities and Exchange Board of India) Venture Capital Funds, these are closed-ended schemes with an initial public offer (IPO) contributing to a discount on NAVs (Net Asset Value). The Tata group has joined hands with private equity firm, Xander, through its group company Trent in April 2007 to raise US$ 1 billion for an institutional retail real estate fund. India's top real-estate firm DLF has raised US$ 2.24 billion in the country's largest 7
  8. 8. initial public offering in June 2007. It has also entered into a joint venture agreement with Indian pharmaceutical major Ranbaxy group company Fortis Healthcare to set up hospitals across the country with investments of about US$ 1.5 billion. Meanwhile, an HDFC sponsored real estate fund has been permitted to bring up to US$ 790 million of FDI into the country, while Indiabulls Real Estate (IREL) is looking to raise up to US$ 1.2 billion. Retailers and Malls India has emerged as the most attractive destination for retailers in 2007. According to the latest AT Kearney study, for the third year in a row, India leads the annual list of most attractive emerging markets for retail investment followed by Russia and China. Organised retail, which currently accounts for only 4.6 per cent of the US$ 270 billion Indian retail sector, is expected to grow at 37 per cent in 2007 and 42 per cent in 2008, according to India Retail Report 2007. The report adds that organised retail in India has the potential to add over US$ 45 billion business by the year 2010. This is expected to create a demand for around 220 million square feet of retail space by 2010. According to industry estimates, 27 million square feet of organised retail space is currently available. Another 90 million square feet is expected to be added by 2008 from 263 mall projects. Of these, 18 million square feet is slated to come up in Delhi as well as in Mumbai, 9.5 million square feet in Ludhiana, 6 million square feet in Chandigarh and 3.6 million square feet in Ahmedabad. With the retail sector experiencing a boom, the country is witnessing a spurt in extremely large retail spaces. Shopping malls with over 1 million sq ft of space have become the order of the day. About 20 of these are now at various stages of construction across the country. In the National Capital Region (NCR), Unitech's Great India Place has a million square feet (sq ft) of retail space. In Mumbai, at least eight 8
  9. 9. malls covering over 1 million sq ft each include R-Mall at Ghatkopar, and two 1 million sq feet plus malls proposed for Thane. In Bangalore, at least three malls with similar dimensions are under development. Ludhiana will soon have a 1.6-million sq ft mall by Today Homes. As the competition in the market intensifies, builders are going out of their way to be different. Specialised malls, designer brands and multi-movie options are marking the shopper's day out. Gurgaon, on the suburbs of New Delhi, has a jewellery mall and will soon have an auto mall. Bangalore will get an exclusive furniture mall. Two malls, first of their kind, targeting foreign tourists, will come up at tourist hotspots--Goa and Udaipur-- with a projected cost of around US$ 22 million each. A furnishings mall is coming up on Elgin road in Kolkata. And India's largest theme amusement park, Noida Entertainment City (E-City), will stand upon 150 acres approximately. Discount malls are also on the rise. Top realtors and local retail chains are developing malls in regional boroughs, specifically to sell premium branded goods at prices 30 to 40 per cent cheaper than the maximum retail price. At least 50 discount malls are expected to come up in the next two years across the country, positioned in the middle-to-the-premium end of the market. In what could perhaps become a trend in the booming retail business, Reliance Retail, Future Group and Bharti-WalMart are among leading retail companies that are acquiring housing societies and colonies in Ahmedabad to knock down and build mega-retail stores. Big Deals in Realty The biggest mall of the world--Mall of India--planned by DLF Universal along NH-8--will have 32 acres spanning a huge entertainment area and large city town squares offering a total retail experience.Chennai, on the radar of foreign real estate funds, recently witnessed two big-ticket property deals. AIG Real Estate Fund and RMZ Corporation purchased an 11-acre plot at Guindy for US$ 686.9 milion and Shyam Kothari, in another deal, bought IDBI's 2.5 acres Boat Club property in Chennai for US$ 40.3 million. 9
  10. 10. Residential Development Majority of retailers are now planning to expand within the current city, and a similar percentage is willing to open new stores in other cities within India. The most confident among them are home and interior retailers and sports apparel/equipment retailers, followed by department stores and jewellery and food retails. While the last decade saw the transition of sleepy towns like Gurgaon, Noida and Faridabad into enviable addresses, today these tier I towns, as they are called, are saturated and far beyond the means of the middle class. Naturally, the opportunity in the residential development in Tier-II and Tier-III cities--like Hyderabad, Cochin, Chennai, Coimbatore and Pune--is equally enormous. For instance, Pune, the engineering and automobile hub of western India--about 160- km south-east of Mumbai--is emerging as a major IT centre. With sprawling software parks coming up all over the city and its suburbs, the demand for high-value apartments is growing. Beyond professionals and people looking to relocate from Mumbai or even overseas, are the older people who have sold a bungalow and want to live in spacious, easy-to-manage surroundings. Developers maintain that the bar for the super-premium luxury housing has risen from US$ 231,964 to over US$ 463,929 per unit. If the year 2006 was marked by some of the countries biggest land deals, the future of India is set to usher in the gold rush of realty. 10
  11. 11. REAL ESTATE INDUSTRY OF INDIA The real estate story in India is growing bigger by the day as it continues to receive an ever increasing inflows of funds. While more than 35 big ticket foreign funds have already checked in, the first half of the 2010 will see at least 20 more funds making an India entry. Meaning US$ 12 billion of foreign direct investment (FDI) will be injected into the real estate sector. Merrill Lynch forecasts that the Indian real estate sector shall grow from US $12 billion to US $ 90 billion in 2015. Majority retailers are now planning to expand within a current city, and a similar percentage is willing to open new stores in other cities. While the last decade saw the transaction of sleepy towns like Gurgaon, Noida and Faridabad into enviable addresses. More and more people are turning to big cities thereby increasing the demand for high- value apartments. Developers maintain that the bar for the super premium luxury housing has risen from Rs. 1 crore to over Rs. 2 crore. If the year 2009 was marked by some of the country’s biggest land deals, the future of India is set to usher in the gold rush of realty. It is estimated that in the residential sector there is a housing shortage of 19.4 million units out of which 6.7 million are in urban India. The increase in purchasing power and exposure to organised retail formats has redefined the consumption pattern. As a result, retail projects have been mushrooming across even B-grade cities. The retail market is expected grow at around 35 per cent. Industry observers feel that this growth is facilitated by favorable demographics, increasing purchasing power, existence of customer-friendly banks and housing finance companies, professionalism in real estate an reforms initiated by the Government to attract global investors. 11
  12. 12. FINANCIAL INSTITUTIONS IN REAL ESTATE Indian financial institutions are competing with each other to invest in this higher return segment. Some of the prominent companies promoting real estate funds in India are HDFC Property Fund, DHFL Venture Capital Fund, Kotak Mahindra Reality Fund, Kshitij Venture Capital Fund (a group venture of Pantaloon Retail under SEBI’s Venture Capital Funds, these are closed- ended schemed with an Initial Public Offer (IPO) contributing to a discount on NAVs(Net Assets Value).The Tata group has joined hands with private equity firm, Xander, through its group company Trent in April Retailers and Malls Organised retail, which currently accounts for only 4.6 per cent of the US$ 270 billion Indian retail sector, is expected to grow at 37 per cent in 2009 and 42 per cent in 2010, according to Indian Retail Report 2007. The report adds that organised retail in India has the potential t add over US $ 45 billion business by the year 2015. This is expected to create a demand for around 220 million square feet of retail space by 2010. According to industry estimates, 27 million square feet of organised retail space is currently available. Another 90 million square feet is expected to be added by 2009 from 263 mall projects. Of these, 18 million square feet is slated to come up in Delhi as well as Mumbai, 9.5 million square feet in Ludhiana, 6 million square feet in Chandigarh and 3.6 million square feet in Ahmedabad. In what could perhaps become a trend in the booming retail business, Retailer Retail, Future Group and Bharti-WalMart are among leading retail companies that are acquiring housing societies and colonies in Ahmedabad to knock down and build mega-retail stores. The biggest mall of the world—Mall of India—planned by DLF Universal along 12
  13. 13. NH-8 will have 32 acres spanning a huge entertainment area and large city town square offering a total retail experience. Residential Development Majority of retailers are now planning to expand within the current city, and a similar per centage is willing to open new stores in other cities with India. The most confident among them are home and interior retailers and sports apparel/equipment retailers, followed by department stores and jewellery and food retails. For instance, Pune, the engineering an automobile hub of western India-about 160-km south-east of Mumbai—is emerging as a major IT centre. With sprawling software parks coming up all over the city and its suburbs, the demand for high-value apartments is growing. Beyond professionals and people looking to relocate from Mumbai or even overseas, are the older people who have sold a bungalow and want to live in spacious, easy-to-manage surroundings. Developers maintain that the bar for the super-premium luxury housing has risen from US $ 231,964 to over US $ 453,929 per unit. If the year 2006 was marked by some the country’s biggest land deals, the future of India is set to usher in the gold rush of realty. CHALLENGES AND OPPORTUNITIES IN THE REAL ESTATE SECTOR 13
  14. 14. Opportunities Firstly, it is the sustained high growth rate of GDP and increasing GDP per capita in the country providing and impetus to the real state demand across segments. According to t he recent FICCI report, the last three years have seen real GDP rise a cumulative 26 per cent, with impressive increase of 8.5 per cent in 2007/08, 7.5 per cent in 2008/09 and 8.4 per cent in 2009/10 on the back of the robust growth across industries. Thus, setting into motion the demand for commercial / industrial as well as residential real estate. Secondary, the huge demographic shift being witnessed in the country in the last decade is cited as one more reason behind the sect ors exponential growth. The increasing rate of life expectancy, declining infant mortality and a high but falling birth rate in the country have created an additional demand for housing and infrastructure for the ever-increasing burgeoning population. Besides these, favourable reforms ensuring easy project financing, increased fiscal incentives to developers and simplification of Government procedures are the few of the bottom factors that have catapulted the growth in this sector. Challenges In pursuance of the expected growth that this sector will take, the future is full of challenges. In the commercial office segment. In spite of the huge demand, the 14
  15. 15. developers may have to face heat from the ups and down of other sectors since this segment, in particular, is highly depended on the performance of the Indian IT/ITES. Secondly, with the introduction of the SEZ policy, it is believed that a significant amount of the office space demand will be targeted in SEZs. While in the residential segment, if one goes by the Planning Commission report there is a shortage of approximately 9 million units, and this deficit, as per the Asian Development Bank, would escalate to around 22 million units by 2009/10 and upto 10 million units by 2030. The most deterring challenge that would come on the way would be the product differentiation and correct understanding of the consumer needs. This challenge would be applicable to both the national or international players as the consumers preference in India vary from one location to other and brand value in a highly competitive market would be stiff without substantial product differentiating factors. Another segment that would gain momentum is the hospitality sector, According to the Ministry of Tourism, Government of India, there are as estimated 1.2 million hotel rooms in the country, of which star hotels account for a mere 7 per cent (approximately 80,000 rooms). The Ministry forecasts that there will be a total 2.9 million hotel rooms in the biggest deterrent in the growth in this segment could be the delay in further relaxation for FDI in the sector. EFFECT OF RECESSION ON REAL ESTATE IN INDIA The Development of real estate in India is attributed to the off-shoring and outsourcing businesses, such as high-end technology consultation, call centres and programming houses. The demand from the information technology sector certainly has changed the urban landscape in India. Several multinational companies (MNCs) continue to move their organizational operations to India to take advantage of lower manpower and other costs. Providing human resources and 15
  16. 16. home at their work place assumes great significance and therefore, the requirement to create space for people to live and work that in turn causes the development of other related infrastructure. It has been a predominant trend to set up the world´s best business centres, often campus-style establishments, bearing a distinguishing corporate stamp. Some of these locations are so distinctive that they are termed as the ´temples of new or modern India´. It is just an indication of the extent to which the development of real estate has been taking place. The real estate market in India remains unorganized, fairly fragmented, mostly characterized by small players with a local presence. Traditionally, real estate developers were viewed with an element of skepticism. Developers were often identified dealing with large amounts of unaccounted money, lacking transparency and would use unscrupulous mean to acquire a variety of regulatory approvals. The tremendous growth of the real estate sector is attributed to various fundamental factors such as growing economy, growing business needs, etc. This boom however is restricted to areas such as commercial office space, retail and housing sectors. The impending concerns of this sector namely- skill shortage, non availability of statistics, lack of low cost- affordable housing, lack of sustainability, high RE prices and last, to meet a future that might have downturn due to oversupply. The industry is presently facing a major resource crunch – an obvious lack of qualified skilled people from construction firms, PMC firms, etc. Coupled with this manpower shortage is the shortage of availability of relevant statistics which has created an ambiguity as to how much construction activity is actually taking place and one can´t gauge the demand and supply trends accurately. The opportunities and issues of affordable, low cost housing in India are mainly related with tremendous shortfall of middle class housing as majority of the developers are involved in developing high class housing, so there is a dearth of low cost affordable units. The negative version of Indian real estate industry is “they have complete disrespect for sustainability” and that the concept of green buildings, proper waste disposal methods and the longevity of the product are often dismissed. Presently, the impact of recession in US economy has impacted Indian Real Estate Market as well as it is also witnessing the recession. Till now the real estate industry was a very booming industry in India which were in pace with IT industry. Accordingly, the demand for IT space and Commercial spaces has been grown. Also the high net worth of individual investors has created a very fast pace of demand in Indian real estate sector which have gain a very high impact image of investing in India. 16
  17. 17. As the money was coming in terms on investment in India from NRI as well as Private Equity funds, the well known developers and real estate players have grown their portfolio as well many small sized players have also created in Indian market. It has provided a very high supply of real estate segments either in residential or in commercial or in office space. SEZ has also creates a very good opportunities for investors as well as corporate to invest and get benefited from Indian real estate market. So the booming market has created a niche as modern living in India and created a very mass employment in Indian segment. The recent changes which happened in American market such as Bankruptcy of Lehman Brother an oldest financial firm of American market and sell process of PE Firm Merryl lynch by the largest US bank Bank of America has created a very fast drops/recession in financial industry and created a crisis in all over US economy. Both of these firms were invested their more part of funds in to real estate sector without having the proper analyzing or effect. They also have given the funds for mortgage industry of US which is currently facing the hurdle of Sub prime lending and have impacted many players to bankrupt. All of these changes in US economy have impacted in Indian economy as well as Real estate segment as most of the Indian players have their liquidity funded by both of these firms. Also the IT segment which was mainly funded by the PE firms or have their export to US markets have noticed very sharp drop of net worth of their firms. This recession also impacted the Sensex which has bullish very sharply and brings down the net worth of the leader of Indian real estate player very low. The impact can be shown in share price of DLF, Unitech, GMR group, Reliance group, Wipro, Satyam etc groups. All of these sudden changes in Indian and US market created a point of thinking to investors & individuals that where it will go and what will be best option in real estate investment. The market rates in India are also dropped by 10 to 30% in most of prominent as well as upcoming cities and the trend appears to be still continuing till it will not recover the effects of this financial crisis. Major Players in Real Estate ➢ Ansal Properties. ➢ DLF Group 17
  18. 18. ➢ Eros Group ➢ Parsavanath Developers ➢ Eldeco Group ➢ Sahara ➢ Omaxe ➢ Plumeria Snapshot of Real Estate Growth in urban population 20-25% 25-48% rise in incomes Income Profile Residential Property Rates By 10-90% 18
  19. 19. By 10-30% Commercial Property Rates INDUSTRY PROFILE Real Estate Pei 2008-09 $ 13 Billion Real Estate Pei 2015 $ 50 Billion Projected Demand of Residential Property 20 Million houses In next five years. Projected Demand of Residential Property 20 Million square feet. In next five years. 19
  20. 20. 1. OVERVIEW OF REAL ESTATE INDUSTRY IN INDIA. 1.1 Real Estate Industry in India: The size of the real estate industry in India is estimated by FICCI, to be around US$ 12 billion. This figure is growing at a pace of 30% for the last few years. Almost 80 % of real estate developed in India, is residential space and the rest comprise office, shopping malls, hotels and hospitals. This double-digit growth is mainly attributed to the off shoring business, including high-end technology consulting, call centres and software programming houses which in 2003-04, is estimated to have accounted for more than 10 million square feet of real estate development. This is the ideal time to invest in the country as policy makers have begun to emphasize on developing adequate infrastructure for the country. Real estate companies would also do well to maximize their own performance and operational efficiency. The future of the real estate sector in India is going to be guided by two important factors, namely suitable amendments in the Foreign Direct Investment (FDI) guidelines in townships, housing, built-up infrastructure and construction –development projects as well as abolition of Service Tax on the construction industry especially the housing sector. Conversely, if the abolition per se is not possible then drastic modifications in the existing Service Tax norms is the need of the hour. This Sector is already overburdened with taxes; any further imposition of taxes in any form would adversely affect the growth of this sector of the economy. The importance of the Real Estate sector, as an engine of the nation’s growth, can be gauged from the fact that it is the second largest employer next only to agriculture and its size is close to US $ 12 billion and grows at about 30% per annum. Five per cent of the country’s GDP is contributed by the housing sector. In the next three or four or five years this contribution to the GDP is expected to rise to 6%. The Real Estate Industry has significant linkages with several other sectors of the economy and over 250 20
  21. 21. associated industries. One Rupee invested in this sector results in 78 paise being added to the GDP of the State. A unit increase in expenditure in this sector has a multiplier effect and the capacity to generate income as high as five times. If the economy grows at the rate of 10% the housing sector has the capacity to grow at 14% and generate 3.2 million new jobs over a decade. Furthermore, this sector has witnessed a spurt in demand not just in residential property but also in commercial property. A fast growing area is the I.T. and I.T.-enabled services along with the BPO boom. Estimates worked out show that 42 million sq. ft. of space will be required every year till 2008, only in I.T. and I.T.-enabled services especially in the cities like Bangalore, Chennai, Hyderabad and Pune, which is also now gradually shifting to North India. To achieve the much desired growth and development in the Real Estate Segment, FICCI would like to submit the following 10 points for consideration: Infrastructure Status to Housing: Infrastructure status should be provided to housing sector. This will enable easier access to low cost institutional funds as also allow the sector to tap long term funds. Real Estate Mutual Funds: The Government should consider setting up of Real Estate Mutual Funds/ Investment Trusts to provide the much needed support to the cash starved housing sector, similar to the structures adopted for Estate Mutual Funds/ Investment Trusts in developed real estate markets such as, USA, Singapore. Hong Kong, etc. Real Estate Mutual Funds/ Investment Trusts would be an efficient mode for providing equity financing as against debt, which is currently the norm for financing real estate developments in India. Stamp Duty: In some States the Stamp Duty is as high as 14- 15 % of the value of the transaction. Astonishingly in the Indian context, not only are the rates high, but also the levy of Stamp Duty is applicable in every subsequent transaction, be it the initial transfer purchase of land or on further sale of the same land after development or any other succeeding transaction. Opportunely some states have brought the Stamp Duty down to between 6-8 %, this should ideally be further brought down to 2-3 % and made uniformly applicable across all states. However, if the above suggestion is not 21
  22. 22. acceptable then if stamp duty has already been paid on one transaction, there should be a mechanism in the law, whereby there is a provision for concession or a system of credit for any subsequent transactions. This would avoid the resultant cascading effect of Stamp Duty, thereby reducing the cost of a property. The concept of credit for taxes paid on subsequent transactions already exists in other statutes such as CENVAT, VAT, Minimum Alternate Tax (MAT), etc. Public Private Partnership: There is a need to evolve a regulatory framework that encourages participation of the private sector in bringing technical and managerial expertise in formulating and delivery of basic amenities like water, sanitation, sewerage, transport and electricity. Archaic Laws: Availability of land for housing projects has been constrained by a variety of laws like the Rent Control Act and Urban Land Ceiling and Regulation Act, which must be repealed in all the States. A necessary legal and policy framework has to be put in place to restrict growth of slums and at the same time to re-develop the slums into hygienic and livable. Foreclosure Laws: The existing foreclosure laws are cumbersome as well as time consuming and make it practically impossible for Housing Finance Institutions (HFIs) to repossess a dwelling unit financed. HFIs are reluctant to take risk and continue to land primarily on salaried urban borrowers. Amendment of (National Housing Board) NHB Act has already been initiated. The implementation process needs to be expedited to bring in the required changes. Environmental Impact Assessment Notification: The notification specifies that no construction activity to be taken up, inspite of the approval of plans by the Competent Authority, till the environmental clearance has been sought. In cases where approval has already been granted it is suggested that construction activities should be allowed. In the intervening period the builder / developer can obtain the environmental clearance certificate. In the case of the environmental clearance certificate being denied then appropriate action if necessary and warranted can be taken against the developer / builder and builder be given time to get clearance before he applies for completion certificate, otherwise the completion certificate will not be given Furthermore, in the 22
  23. 23. case of future proposed projects the environmental clearances should be taken by the States themselves or by the planning bodies and not b individual builders. Land Acquisition: The Land Acquisition Act of 1894, still, to a large extent, governs the procurement of raw land. With the changing investment scenario it has become necessary to review the existing law, in order to ensure that private developers and colonizers procure the land directly from farmers and land owners without putting undue financial burden on State/ Central Governments on land acquisition for public purposes. Today, a builder is governed by “Agriculture Land Ceiling Act” even after the land have been urbanized in the zonal plans / master plans. This makes builders to create several companies in order to circumvent the archaic laws. It is submitted that once the land has been urbanized and incorporated in the master plan, then Agriculture Land Ceiling Act should not apply and builders should be permitted to acquire lands as per their requirements, for the development of townships. Foreign Direct Investment (FDI): Suitable modifications in the FDI guidelines are required, particularly in repatriation of funds, clarification on the basic definition of “built- up area”, streamlining of Clearance procedures as well as the opening up of the Retail Segment to FDI. This aspect has been discussed in detail in Section II of this paper. Service Tax: Service tax in relation to construction of residential complexes having more than 12 houses have been proposed to be introduced as a new service. However, no rationale has been provided for exclusion of services in relation to construction of residential bungalows, which may not form part of ‘residential complexes’. Marco-economic Overview The Indian economy currently stands among the world's fourth largest growing economy in terms of purchasing power parity and holds the distinction of being a key contributor to Asia's balance of payment surplus. India's GDP is estimated to be the third largest in the world by 2020. India is also considered the second most attractive country in the world for Foreign Direct Investment (FDI). Forex Reserves (excluding gold and SDRs) stood at US$157.25 billion at the end of July 2006. India now holds the 23
  24. 24. fifth largest stock of reserves among the emerging market economies and the sixth largest in the world. The performance of the country has been consistent and steady over the past three years with an average annual growth rate of 8%. The growth trend is being led by positive movements across sectors in agriculture, manufacturing and services. 24
  25. 25. In recent years, the broad based growth in services sector has been a principle driver of the GDP growth. Business services (including Information Technology (IT) and IT Enabled Services), communication services, financial services, hotels and restaurants and trade (distribution) services are among the fastest growing service sectors. India’s share in the world market for IT software and services (including BPO) increased from around 1.7% in 2003-04 to 2.3% in 2004-05 and an estimated 2.8% in 2005-06. The proportion of manufacturing in the GDP has remained stable at around 25%, however, the growth rate of manufacturing has increased over years, from 2.7% in 2001 to 9.0% in 2006 against the growth rate of 2.3 % and 9.8% in agriculture and services respectively. Manufacturing Industries like textiles, automobiles, cement, steel, petrochemicals, Infrastructure (civil aviation, roads, and ports), electronics, beverages and tobacco products have been the prime drivers in India’s Industrial growth. 25
  26. 26. REAL ESTATE SCENARIO IN INDIA The size of the Indian real estate market is estimated at USD 12 billion and it is currently growing at rate of about 30% annually. Real estate lending by banks has increased by 3.78 times in the last two years, forming 18% of the total bank credit. Strong and improved economic growth, proactive policy initiatives like relaxation of FDI in construction and availability of finance (institutional and retail) has driven the demand for real estate across all sectors - Commercial, Residential, Retail and Hospitality. Also, there is an increased focus towards development of Special Economic Zones (SEZ) in India. 26
  27. 27. The last few years have seen Indian market mature through regulatory reforms (rationalization of stamp duties, reform of urban land ceilings), improving products in terms of quality and technology, changing tenant profile (MNCs, and respect for tenancy laws), and improving management and maintenance models (enhanced product life-cycles and sustained project / real estate yields). Although the initial real estate boom was concentrated in places like Bangalore and the National Capital Region of Delhi (including Gurgaon), more recently the geographical spread has widened. There has been a significant shift in real estate market from metros to its suburbs and to tier II and tier III cities. Lease rentals and occupancies have been picking up steadily and there is an increasing demand for quality infrastructure across various segments of the real estate sector. Commercial Real Estate The demand for new office space in India has grown from an estimated 3.9 million sq. ft in 1998 to over 16 million sq. ft in 2004-05. 70% of the demand for office space in India is driven by over 7,000 Indian IT and ITES firms and 15% by financial service providers and the pharmaceutical sector. Cumulative demand for office space in India over the next two years (2006- 08) is estimated to be in excess of 45 million sq. ft. The Indian IT-ITES Industry, estimated at USD 36.3 billion in 2006 has grown at a CAGR of 36% over the last decade and by 2008, is expected to account for over 7% of India’s GDP and 30% of foreign exchange inflows. In 2005 alone, IT/ITES sector absorbed a total of approx 30 million sq. ft and is estimated to generate a demand of 150 million sq. ft. of space across major cities by 2010. South Indian cities like Bangalore, Chennai and Hyderabad along with NCR (National Capital Region) continue to attract the major share of IT/ITES and business investment. However, secondary cities, like Pune, Chandigarh, Indore, Kochi and Kolkata are now emerging as the new preferred destinations for these companies due to their cost and infrastructure advantages. 27
  28. 28. 28
  29. 29. Residential Real Estate The residential property market in India constitutes almost 75% of the real estate market in terms of value. Low per capita housing stock, rising disposable income coupled with easy availability of finance from the housing finance companies and banks are driving demand in this sector. Also, Average age of housing loan borrowers have decreased to 30- 35 years from 40- 45 years a few years ago, indicating a younger buying threshold. The housing sector is currently growing at 30-35% per annum. A proportion of demand is also being driven from investors who view housing as an attractive investment option as compared to mutual funds and stocks. The demand for housing is geographically widespread with townships being built in both the metros and the tier II and III cities. In India, there is a housing shortage of 19.4 million units out of which 6.7 million are in urban areas alone. This translates into very high opportunities for investors in the residential sector. Retail Real Estate The Retail industry in India continues to be dominated by individual small format stores with floor space of less than 500 sq.ft. Total number of retail outlets is estimated to be around 12 -15 million, indicating a retail density of 12-14 outlets per 1,000 people, which is one of the highest in the world. The retail sector in India is currently estimated at USD 230 billion. The current size of the organized retail activity is USD 7 billion, which is a mere 3% of the total retail market. The retail sector is witnessing a growth of 5-7% per annum; however the organized retail is poised to grow at a rate of 25% - 30% per annum and is expected to be worth over USD 30 billion by the year 2010, thereby increasing the share of organized retail activity from the current level of 3% to 15% in the coming decade. 29
  30. 30. Hospitality Real Estate Hospitality industry in India is growing at an annual rate of over 8%. The number of foreign tourists’ arrivals (a major driver of hospitality industry) in the country increased to approx. 4 million in 2005. Over 55% of the total demand for hotels in the country is generated by foreign leisure tourists and business travellers (domestic and foreign). A large proportion of lodging demand in commercial cities such as Bangalore, Mumbai, Delhi etc. comes from business travellers. This category also accounts for the major proportion of demand for five star or five star deluxe hotels. However, against the total current supply of 96,000 rooms, five star category accounts for just a quarter of the supply. With the expected growth in demand for rooms at 18%, another 65,000 – 80,000 hotel rooms will be needed till 2010. This demand – supply gap is expected to result in high level of activity in construction of hotels. The established brands in this sector such as Asian Hotels, Indian Hotels, ITC, Le Meridian etc are in expansion mode with many new players such as Accor Group, Marriot, Choice, IHG Group keen to establish their footprint. 30
  31. 31. Special Economic Zones The upcoming realty trend in India after multiplexes and mega housing projects are the Special Economic Zones (SEZ). Currently, 28 SEZs are operational in the country, including those converted from Export Processing Zones (EPZ) to SEZ. Approx. 189 proposals have already been granted approval since the SEZ Act, 2005 came into force. These include SEZs in various segments such as multi-product, Information Technology, Bio- technology, Gems and Jewellery, Textiles and technology intensive industries. Both developers and corporate have shown tremendous interest in developing SEZs in the country. Reliance Industries, for instance, is planning a 25,000 acre SEZ in Gurgaon and is also the main partner in twin SEZs coming up at Navi Mumbai and Maha Mumbai, with a combined size of 35,000 acres. The Adani group is also setting up an SEZ at Mundra, covering 30,000-35,000 acres, and it proposes to invest Rs 7,300 crore on infrastructure. Other corporate who are in process of setting up SEZs include TCG Refineries of the Chatterjee Group (SEZ refinery at Haldia in West Bengal), Suzlon Infrastructure (hi-tech engineering products and services near Coimbatore in Tamil Nadu, Udupi in Karnataka and Vadodara in Gujarat), Hindalco (aluminium SEZ at Sambalpur in Orissa), Genpact (IT SEZ at Bhubaneshwar in Orissa, Jaipur in Rajasthan and Bhopal in Madhya Pradesh), Vedanta Alumina (aluminium SEZ at Orissa). Seeking the permission for SEZs are also a number of real estate developers, including DLF, Ansals, Omaxe, Parsvnath, Shipra Estate and Sunny Vista Realtors. FDI in Real Estate With the opening of the sector for 100% FDI under automatic route, the real estate sector is estimated to capture about 18-20% of the total FDI coming to India in 2005-06. The FDI in Real Estate is expected to have a favourable multiplier effect on the economy. As an indicator, for every rupee spent on construction, an estimated 75-80% gets added to the GDP. The spill-over effect of 31
  32. 32. this initiative can also be witnessed in important sectors like the cement and construction industries, where the key players are expanding capacity to meet the soaring demand. With the relaxation of the FDI limit, the country saw an influx of global real estate developers like Dubai-based Emaar Properties (the largest listed real estate developer in the world) – which enetered India in a joint venture with Delhi based MGF Developments. Growth and leverage to higher India growth The real estate sector is developing rapidly in India. The demand side has robust and sustainable macro drivers across all segments. Residential: Accounting for more than 70% of the sector in terms of space, residential segment growth is driven by urbanization and the migration of households up the income curve. According to the National Council of Applied Economic Research estimates, the number of urban households earning more than INR 500,000 (about US$12,000) should more than double to 7.6m in 2006-10. Commercial: Rapid growth in IT/ITES services (manpower in the sector has doubled in the past three years to 1.6m) is the main driver of Grade A commercial office space demand. Jones Lang LaSalle, a property consultancy, estimates that the absorption of office space in the top seven cities in India was 31.1m square feet in 2006. Retail: 32
  33. 33. According to CRIS INFAC, the penetration of organized retail into the overall market will increase from 3.5% in 2005 to 8% in 2010, thereby driving the demand for mall space. Hospitality: According to CRISIL, the number of 5-star rooms is expected to grow by 60% in the next four years with foreign tourist arrivals growing at 10% CAGR. 33
  34. 34. STRUCTURE OF REAL ESTATE The real estate industry has historically been fragmented and opaque, but this is changing: Penetration of mortgage finance: Mortgage disbursals grew by 38% in FY2001-06 and have become an integral part of the buying process. This has helped reduce the unaccounted “cash component” of transactions. Entry of foreign capital: Regulations governing foreign capital in the sector have been relaxed, motivating developers to become transparent and improve corporate governance. Change in legislation: In many states, strict laws like the Urban Land Ceiling Act (which defines ceiling of land holdings in urban areas) have been repealed or modified. Consumer preferences: Consumers are now willing to pay premium prices for better amenities and a good brand. In response, most of the bigger developers are scaling up geographically, which necessitates rigorous systems and processes. MUMBAI REAL ESTATE Mumbai is no way behind when it comes to a talk on property. The Mumbai real estate is in its growth orbit and attracts investors from major 34
  35. 35. multinationals in the recent times. Such is the potential of the city's infrastructure that it is known to be spearheading most cities as far as property market is concerned. With Mumbai serving as the entertainment city, even the organized retail sector here is fast flourishing. Purchasing real estate in Mumbai requires a significant investment, and each piece of land in the city has unique features, so the property market in Mumbai has evolved into several different fields. Having the potential to leverage high returns, a large number of real estate projects are financed everyday in Mumbai. NRIs can shop for property in the city with the expectation of attaining an investment good, or with the purpose of utilizing it as a consumption good, or both. Mumbai is also the fashion capital of India, so it is one of the foremost cities to be hit by the retail buzz. With the opening up of the retail market, there has been a growing demand for retail properties in Mumbai. This has created a viable market for mall space and other retail stores and showrooms. These retail stores and malls are either owned by a business group or leased for hefty prices as the demand is high. The property prices as well as the increase in rental values in Mumbai owe much of its credit to the large scale investments in the commercial sector. Mumbai has always been the hot favorite for most of the corporate sector to have their headquarters in the city. And with increasing investments by MNCs in the IT, ITES and the BPO sector, there has been a growing demand for office space; which have consequently created an imbalance in demand and supply for residential properties. The rental values in Mumbai have also in high corresponding to that in other metros. 35
  36. 36. NAVI MUMBAI- EMERGING COMMERCIAL HUB Even India’s leading conglomerates have taken up commercial space here. The state administration has already shifted wholesale commodity markets to Navi Mumbai. So, you have endorsements from different segments that Navi Mumbai’s commercial real estate is much sought after,” he says. Suresh Haware, MD, Haware Builders concurs. “Even at the ‘nano’ end of the commercial real estate spectrum, demand is high,” he says. It is the small offices and shops’ segment that have witnessed the highest demand at Haware Builders’ commercial projects in Navi Mumbai, he reveals. Today, industrial units in Navi Mumbai are relocating to locations in Raigadh district and commercial is the latest buzzword in Navi Mumbai’s real estate scenario, says Vijay Gajra of the Gajra Group. “Commercial options in Navi Mumbai span a huge price band. Growth of the residential segment in Navi Mumbai, prior to that of the commercial segment, actually works out in favour of the end-user today, as manpower resources are easily available,” he points out. “Commercial real estate in Navi Mumbai comes at competitive prices vis-à-vis other options in the Mumbai metropolitan region (MMR), with the added advantage of being located in a well- planned city,” adds Gajra. IT/ ITeS SEZs and businesses that have anything to do with rail/road transport and logistics or shipping, are proving to be the next big segment in Navi Mumbai’s commercial spectrum, shares Mayur Shah, honorary secretary, MCHI. Ramneek Bakshi, principal of global property consultants, LJ Hooker, points out that MNCs view India within the parameters of the ‘Brazil, Russia, India, China’ (BRIC) equation. “When they look at India as a business entity, Mumbai takes prime position. When they start looking out for space, Navi Mumbai, which forms the third level of real estate pricing, is attractive for MNCs looking to set up shop in the Mumbai region,” he explains. At the Norwegian consulate in Mumbai, George Mathew, honorary consul general, concurs, “If you look at real estate pricing trends in the MMR, Navi Mumbai fits the bill on many counts. However, the clincher is the price efficiency and developed infrastructure that Navi Mumbai provides,” he concludes. Appreciations 36
  37. 37. The hike in demand as well as supply and appreciation in capital values are attracting good attention from overseas investors. The Mumbai real estate has become a reflective of the high growth in Indian property market. There has been an increase in real estate value across micro markets in Mumbai as well. Mumbai is looked upon as one of the most organized and transparent property market in India. With cash components and transactions shooting up in the last two years, the city has gained much popularity among the investors, both domestic and international. The investment market has been thriving with excellent returns going high over the past few years. The real estate boom and an upsurge in development activities in major parts of Mumbai have led to a rise in investment prospects in commercial and residential sector. Known locations like Bandra-Kurla Complex (BKC) and Lower Parle have seen appreciations in commercial spaces falling under the category of Grade A. The occupancy levels in other preferable locations like Andheri West and Nirman Point also increased in the current year and are believed to have marked the rise by 90-95%. Another mark appreciation is in regard to commercial properties in Mumbai, and is prevailing in the city's micro markets barring a few exceptions. 37
  38. 38. NRI REAL ESTATE TRENDS Major property developers in Mumbai, underpinned by the vastness, scope, success and scale of progress in the city are now transforming developing properties into strong retail bases. Then of course, the government permitting foreign direct investment (FDI) up to 51% in retail trade has also brought about major moves in retail industry. The demand for property whether commercial or residential, is very high in Mumbai. There has been steady demand for consecutive years and has resulted in an increase in the yield rate. New real estate projects in Mumbai are always in queue to be launched by private as well as by government. This encouraged overseas investors especially Non resident Indians (NRIs) to make significant investments in Mumbai properties. With an excellent accessibility across the globe, the city of dreams, Mumbai has emerged as an ultimate destination for most people. As per property surveys, one can sell any property and get a price which is fairly good. Within the real estate industry, it is believed that such periods come in cycles and bring an apt time to cash upon. What makes real estate in Mumbai so exciting are an ongoing demand and the proposed projects that are to be executed in approaching years. Builders always have special offers and attractive schemes in store for end consumers. Capital Values of quality apartments, in well-maintained old buildings and upcoming projects, in South and South Central Mumbai, have gone through the roof 38
  39. 39. Agency Agency is that branch of the real estate business which engages the attention of the greatest number of persons who are concerned with the business, and in that respect it is of prime importance. It is divided into two parts, brokerage and management. A broker is a person who for compensation, usually proportioned to the value of the subject-matter, brings about transactions between principals. Brokerage has two divisions according to the kinds of business which usually engage the attention of the broker. The sales broker is a broker who devotes his time and attention to the bringing about of the sale or exchange of real property. A loan broker is one who gives his attention to the obtaining of loans upon the security of real property. One man may practice both branches of the business, or a specialist may devote himself to either of these branches. Management, the second branch of agency, is the operation of deriving income and caring physically for real estate structures. It concerns itself not only with the deriving of income, but with the keeping down of expenses and the care in making expenditures. It is popularly known as "Agency." Corporate Real Estate Services Transactions for all kinds of properties across the country including: ➢ Residential
  40. 40. ➢ Office ➢ Commercial ➢ Retail & Shopping Malls ➢ IT Park ➢ BPO/ Call centre ➢ Hotel & Resorts ➢ Leisure & Entertainments ➢ Hospitals ➢ Multiplexes ➢ Industrial ➢ Institutional. Advisory Services: ➢ Investment Advisory Services ➢ Third Party Due Diligence & Service Management ➢ Feasibility Analysis ➢ Lease & Utility Audits ➢ Relocation Studies ➢ Property Valuation & Tax Consulting ➢ Site Selection Modeling Analysis & Strategic Planning ➢ Merger and Acquisitions ➢ Joint Venture, Collaborations, Franchise ➢ Foreign Direct Investment (FDI) Allied Services: ➢ Valuation and Land Appraisal ➢ Tenant / Purchaser Representation ➢ Research & Feasibility Studies ➢ Project Management
  41. 41. ➢ Bank Finance: Preparing project and feasibility report, Bank Turnkey Financing Solutions Value added Services 1. Turn Key Projects : Lessoning for Approval a) Central Govt. of India b) State Govt. of India c) Local Govt. and Municipal Corporations 2. Joint Venture with Best Indian Realtors for Multinational Companies. 3. Office Buildings and Houses for Company Management. 4. Project Management Consultancy Services. 5. Design, Architect, Marketing, etc. 6. Local Assistance for Site Development / Construction. 7. Global Partnership with leading realtors overseas for Indian Realtors. After achieving a reasonable success in Mumbai and Navi Mumbai, they are now planning to have branches and associate offices in all cities and Tier 1, 2 and 3 towns of India as well as all the parts of the world. They would be willing to start a no commitment tie-up with organizations. ADVANTAGE FOR REAL ESTATE AGENT : 10-Year Tax Holiday The finance Ministry has announced a 10-year tax holiday for developers of Industrial parks set up from April 1, 2006 to March 31, 2009. According to the Industrial Park Scheme 2008 notified by the Central Board of Direct Taxed (CBDT), the industrial park developers will be eligible for 100% tax deduction which is to be provided for 10 consecutive assessment years out of 15 years after the commencement of operations of such units. The developers will be free to choose the 10 consecutive years for the purpose of availing themselves of the tax holiday.
  42. 42. Price Variations in India There are unbelievable variations in the prices of real estate sector in the past. Which mainly affect to the sale of business. Mainly there are two causes for the same:  Per Capita Income  GDP at Market Price Per Capita Income As depicted by fig. 2 per capita income is increasing in India, which has increased the purchasing power of the people. Due to this over the last year (2006-07) houses prices have raised by 10-90% and commercial property prices by 10-30% in different area of India. Correlation .996 is found between PCI and real estate prices. Thus there is a positive correlation between per capita income and real estate prices. GDP at Market Price GDP, the indicator of the national growth, from the past 2-3 years is increasing by 6.5% to7.5%. Every rupee spend on the construction add to nearly 60% of GDP. As shown by the figure the GDP has increased from the 2463324 crore to 3529240 crore from 2002- 03 to 2005-06, so it indicates that how the spending on the construction sector helps the real estate prices to increase.
  43. 43. Price Variations in Different cities: Price variations in Mumbai Price variations in Delhi
  44. 44. Price variations in Pune Price variations in Kolkata It is clear from the above tables that in real estate prices are touching heights. In some areas the prices are increased by 90-100%. In Gurgaon and Noida prices has jumped by as much as 200%. The cheapest DLF apartment in Gurgaon costs Rs. 1 crore.
  45. 45. Clear Title 90% of the lands in India do not have clear title. The ownership is unclear, thereby creating a scarcity of land. This is due to poor record keeping and outdated complaint processes. All updated records must be computerized to increase transparency in land ownership. And special fast track courts must be set up to clear all legal land disputes in a short period of time. Stamp Duty & Registration The cost of transferring land titles must be reduced from rates of 10% stamp duties to reasonable levels of 3 to 5%; similar to prevailing rates in developed countries. This will encourage sellers to pay stamp duties, instead of trying to cheat the government, thus increasing the revenue for the country. The high duties have also encouraged unaccounted money being used in most real estate transactions in India. The registration procedure should also be made transparent and simple so that corruption can be minimized. Building Codes, Standards & Permissions There are several building guidelines and standards in various cities and states, however they are neither followed by the developers nor implemented by the authorities. Development and Planning In India development and planning concerned with real estate sector is not up to the mark. The city or state authorities must use professionals to plan and execute all development plans for cities and towns, with future development in mind. This must be done without political compulsions. This will allow proper zoning within cities and towns, green areas and other infrastructure systems to fall into place as the development plans unfold. PRESENT SCENARIO IN INDIA
  46. 46. Up to the end of 2007 real estate sector in India was growing at a very high rate. There was a situation of boom in this sector. The home loans were easily available and RBI was following very liberal policies regarding the interest rates. But in 2008 the things are changing due to the high rate of inflation in the Indian economy. There is uncertainty in the market as share market is showing depression and the RBI is also increasing the Bank rate leading to the increase in the interest rates. So the buying power is reducing. The major reasons for this downfall are inflation and the low rate of GDP.
  47. 47. TABLES AND CHARTS Three tables and charts have been prepared for each of the three cities namely Gurgaon, Noida and Ghaziabad to analyze what respondents from each of these cities think about five cities included in NCR namely Gurgaon, Noida, Greater Noida, Faridabad and Ghaziabad on the basis of five parameters namely Location, Business Opportunity, Law and Order, Style of Living and Infrastructural Development and also to know the reasons for which they bought the property. GURGAON
  48. 48. 0 50 100 150 200 250 Location Business opportunity Quality of living law and order Infrastuctural development No. of People Parameters Perception of People About the Cities of NCR Gurgaon Noida Greater Noida Faridabad Ghaziabad Perception of people about the cities of NCR Findings: Location Business Opportunity Quality of living Law and Order Infrastructural Development Gurgaon 202 180 210 184 106 Noida 34 36 19 25 63 Greater Noida 1 12 8 17 65 Faridabad 2 10 1 1 2 Ghaziabad 1 2 1 4 5
  49. 49. 1. Gurgaon buildings stand tall in each and every parameter. Gurgaon tops in all the parameters among Gurgaon respondents. 2. Though in case of Infrastructural Development Greater Noida and Noida are also ranked well by the Gurgaon residents. Probably the credit goes to DND flyover. 3. Location wise, people of Gurgaon feel only Gurgaon and Noida are good in the entire NCR as Greater Noida, Faridabad and Ghaziabad could fetch only 1, 2 and 1 favourable response out of total 240 responses.
  50. 50. First Pull to choose the Housing Complex Brand name Advertisemen ts Location Affordabilit y 46 10 140 72 17% 4% 52% 27% Most important factor Brand name Advertisements Location Affordability Findings:
  51. 51. 1.The basic reason for people buying property in Gurgaon in mass scale is its location advantage. It shares border with the Capital of India. Moreover huge employment generating BPO companies are located in Gurgaon. Many Reputed schools and colleges have also come up in Gurgaon. Some of India’s biggest shopping malls having shops of international brands as well as famous national brands are also situated here. 2.Second major factor which attracted people to buy property in Gurgaon was affordability. Developers realizing that most of the people shifting to Gurgaon will be from middle class society they constructed big towers with numerous reasonable flats. Since the price of the property kept by the developers suited the pockets of buyers they were able to buy it without any financial problem. 3.Third major factor was brand name. According to 17 % of the total respondents brand name was the prime reason for which they bought the property. In Gurgaon Housing Complexes have been constructed by popular and leading property developers of India like Unitech, DLF, Ansals, Omaxe, Etc. 4.Only 4 % of the total respondents feel that it was advertisements which made them buy the property. Advertisements can actually put the name of the property in the mind of the buyer but no one actually buys the property only on the basis of advertisements. Thus it will be wrong to say that advertisements are useless since they do help in selling though not directly. Major reasons for shifting Reason More Better Better Healthy Increase in Quality
  52. 52. 0 10 20 30 40 50 60 70 80 90 m o re sp ace B etter L o catio n B etter F acilities H ea lth y en v iro n m en t In crease in liv in g statu s Q u aity co n stru ctio n L ack o f facilities P ro x .to w o rk p lace Jo b tran sfer O w n h o u se In v estm en t O th ers N u m b e r o f p e o p le Reasons Major Reasons for Shifting s space Location Facilities environment living status of construct ion No. Of people 46 84 54 43 38 11 Reason s Lack of facilities Proximity to Workpl ace Job transfer Own house Invest ment Othe rs No. Of people 18 58 10 42 11 26 1.Among various reasons better location is the most important reason for the people to shift to Gurgaon Housing and Society Complexes. Why location is most important has become apparent till now. 2.Proximity to Workplace and Better Facilities are close second and third most important reasons. Proximity to Workplace may become the most important reason in few years time as industry migration to Gurgaon is happening quickly. All the
  53. 53. international brands are preferring Gurgaon over Delhi for their regional office. Moreover people in need of better facilities like water availability, Power Backup, Safety and security, etc also prefer to shift to Gurgaon as Housing complexes of Gurgaon provide all these facilities. 3. Need for more space, Need for Healthy Environment, Need for Own House and Increase in Living Status can be considered as other major factors for people shifting to Gurgaon Housing Complexes. 4.People also purchased property in Gurgaon for investment purpose. This reason may not be seen in such a large number in any other city of NCR. Its so because people consider investment in property in Gurgaon as a very safe bet and expect high return on Investment. NOIDA Perception of People about the cities Locatio n Business Opportunity Quality of living Law and Infrastu ctural
  54. 54. Order Development Gurgaon 2 13 22 22 6 Noida 54 32 32 27 9 Greater Noida 0 2 2 7 41 Faridabad 0 9 0 0 0 Ghaziabad 0 0 0 0 0 0 10 20 30 40 50 60 Location Quality of living infrastuctural Development Parameters Perception of people about the Cities Gurgaon Noida Greater Noida Faridabad Ghaziabad Findings: 1.In Location, Noida is a clear winner with 54 out of 56 respondents choosing it as the best location in the entire NCR. That is a huge percentage around 96%. This shows that Noida people are happy with its Location. Noida is located close to the Capital of India and is also very closely located to Indirapuram, another upcoming city. 2.In all parameters other than location, Gurgaon has also been ranked as no.1 by many people.
  55. 55. 3.One significant thing in this chart is that Faridabad was selected by many Noida respondents as no.1 in case of business opportunities available. 4.The most significant thing indicated by the chart is that people of Noida have chosen Greater Noida as no.1 in Infrastructural Development.41 out of 56 respondents have favourably marked for greater Noida while only 9 have marked for Noida. First Pull to choose the Housing Complex Brand name Advertisements Location Affordability 1 0 40 31
  56. 56. Findings: 1.In Noida just like in Gurgaon, location is the most important factor that pulls the people to buy a new home.
  57. 57. 2.Advertisements have no role in the sale of homes but as said before in the report advertisements do add the advertised property as an option in the mind of the prospective buyer. 3.According to respondents from Noida Brand name of the developer didn’t play a big role in making them buy the property. Its probably because Noida doesn’t have highly popular brands like Ansals, Unitech, Eros, DLF, etc. 4.Affordability is another major reason for the buying the property in Noida. As there is hardly any popular developer in Noida and the homes provided in Noida are not as luxurious as that in Gurgaon, the prices are very low as compared to the prices prevailing in Gurgaon. In Gurgaon Higher class and Upper middle class people also buy homes in large numbers whereas in Noida the number of high class and upper middle class people looking for new home is very less. Major reasons for shifting Reason s More Space Better Location Better facilitie s Healthy environment Increase in living status Quality constru ction
  58. 58. No. Of people 31 28 35 11 13 9 Reason s Lack of facilities Proximity to workplace Job transfe r Own house Investm ent Others No. Of people 5 2 0 31 1 3 0 5 10 15 20 25 30 35 40 MoreSpace BetterLocation Betterfacilities Healthy environment Increaseinliving status Quality construction Lackoffacilities Proximityto workplace Jobtransfer Ownhouse Investment Others Numberofpeople Reasons Main Reasons for Shifting Findings: 1.One of the most important thing found out in the survey was that the one of the major reasons to buy the house was the desire of people to have their own house. This reason was not at all important in case of Gurgaon. This goes on to show that houses in Noida are very reasonable. Mostly people earlier living in rent have bought properties in
  59. 59. Noida either to avoid high rents prevailing in Delhi or due to the desire of having an own asset. 2.Need for better facilities was tick marked by maximum number of people as a reason for buying the property. This again proves the fact that people buying property in Noida are generally from middle class who earlier used to live in less popular colonies of Delhi which are deprived of essential facilities like water, power and safety. 3.Another major reason for buying the property in Noida is Need for more space. Generally people earlier living in joint families or newly married couples prefer buying property in Noida as they are affordable. 4. Only 1 out of 56 respondents have said that investment was the main reason to buy the property, which is around 2 % of the total respondents. This goes on to show that people don’t generally buy property in Noida for investment purpose. 5.Another important point to notice is that in Noida proximity to workplace reason is insignificant. Its probably because virtually non-existence of BPO companies in Noida. GHAZIABAD Perception of people about the cities of NCR Location Business Opportunity Quality of Living Law & order Infrastructur e Gurgaon 20 28 59 60 40 Noida 93 75 74 64 49 Greater 2 6 9 12 48
  60. 60. Noida Faridabad 1 17 2 5 0 Ghaziabad 34 24 6 9 13 Findings: 1.Respondents from Ghaziabad have chosen Noida as the best location in the entire NCR. As many as 93 out of 150 respondents have marked favourably for Noida which is around 60 % of the total respondents. This clearly goes to show that Ghaziabad respondents have good image of Noida as far as location is concerned. 2.In all other parameters there is a clash between Noida and Gurgaon but Noida seems to lead in every parameter.
  61. 61. 3.In business opportunity Noida have again been favoured while rest four have almost same image in the mind of Ghaziabad respondents. 4.In case of quality of living both Noida and Gurgaon have been marked by many as number 1. Style of living in other three places do not have enjoy good reputation in the mind of the Ghaziabad respondents. 5.In case of law and order Ghaziabad and Faridabad are clear losers. This fact has been observed in all the three cities. 6.In Infrastructure Greater Noida enjoys good reputation. First Pull to choose the Housing Complex Brand Name Advertisemen ts Locatio n Affordabili ty 14 11 85 92
  62. 62. Findings: 1.In Ghaziabad affordability is the main reason for the people buying property out there. The occupied Housing complexes of Ghaziabad are pretty old and very reasonable. Developments in Ghaziabad started much before it started in Gurgaon and Noida. So at that time prices were low. Now with the massive development of Noida, Gurgaon as well as of Indirapuram price of property have increased like anything.
  63. 63. 2.Location is the second most important factor which makes people buy property in Ghaziabad. Ghaziabad is located close to Noida as well as Delhi. Moreover Indirapuram, the real upcoming area is its neighbour. Moreover Ghaziabad’s development took place years ago so it already has lots of facilities available. 3.Advertisements and brand name did compel few to buy the property in Ghaziabad but still they were not so important factors. Major reasons for shifting Reasons More Space Better Location Better facilities Healthy environment Increase in living status Quality constructio n No. of People 49 71 37 9 11 2 Reasons Lack of facilities Proximity to workplace Job transfer Own house Investment Others No. of People 9 12 5 54 1 20
  64. 64. Findings: 1.Though Ghaziabad respondents have rated Affordability as the major reason for buying the property in Ghaziabad but if we exclude affordability as a factor we find that location too was a very important factor as we can see in this chart. 71 out of 150 Respondents have marked location as a reason for buying the property i.e. around 50 % of the total respondents. 1. Just like in Noida, the desire to have an own house is a major reason to buy a property, in Ghaziabad too. This proves the reliability of the previous chart which shows that the major reason to buy a property in Ghaziabad is affordability.
  65. 65. 2. Third most important reason for buying property in Ghaziabad is requirement of more space. 3. Same as Noida reasons like proximity to workplace and investment are almost insignificant. Developers Buildings surveyed (Sample Size: 25) Building: Parsvnath Estate (Greater Noida) Project Completion: 100 % Estimated Date of Possession: Ready Total No. of Flats – 264 Sold Out 264 Vacant 0 Price Range 1400 per Square feet
  66. 66. User: 100 % USP: Location and Amenities provided Building: Parsvnath Green Ville (Sohna rd, Gurgaon) Project Completion: 85 % Estimated date of possession: Dec’ 07 Total No. of flats – 500 Sold out – 99 % Vacant – 1 % Price Range – 50 Lacs to 2 Crores User: 70 % Investor: 30 % USP: Affordability Building: Parsvnath Majestic (indirapuram) Project Completion: 100 % Estimated date of possession: Ready Total No. of flats : 340 Sold out: 340 Vacant: 0 Price Range: 1500 per square feet
  67. 67. User: 95 % Investor: 5 % USP: Location Building: Parsvnath Prestige (Noida) Project Completion: 90 % Estimated date of possession: June07 Total No. of flats: 472 Sold out: 95 % Vacant: 5 % Price Range: 2000 per square feet User: more than 95 % Investor: less than 5 % USP: Centrally Located Building: Parsvnath Edens (Noida) Project Completion: 75 % Estimated date of possession: March ‘ 07 Total No. of flats: 644 Sold out: 95 % Vacant: 5 % Price Range: 2800-3200 per square feet
  68. 68. User: 90 % Investor: 10 % USP: Very Well Located Building: Parsvnath Platinum (Noida) Project Completion: Low rise – 100 % Tower – 40% Estimated date of possession: Low rise - ready Tower – By March `07 Total No. of flats: 400 – Low rise 200 - Tower Sold out: Low rise – 100 % Tower- 90 % Vacant: Tower – 10 % Price Range: 1800 per square feet User: 90 % Investor: 10 % USP: World-class facilities provided Building: Eldeco Mansionz (Gurgaon) Project Completion: 90 % Estimated date of possession: ready
  69. 69. Total No. of Villas: 141 Sold out: 134 Vacant: 7 Price Range: 1 Crore User: 100 % USP: Quality of Construction and Design Building: Eros Rosewood City (Gurgaon) Project Completion: 100 % Estimated date of possession: Already Given Total No. of Villas: 240 Sold out: 240 Vacant: 0 Price Range: 30 lacs – 55 lacs User: 100 % USP: Location and Quality of construction Building: Eros Wembley Estate (Gurgaon) Project Completion: 50 % Estimated date of possessionJun 07 Total No. of flats: 632 flats Sold out: 90 % Vacant: 10 %
  70. 70. Price Range: 2300 per Square feet User: 100 % USP: Location and Quality of construction Other Buildings Surveyed Unitech Nirvana Country (Gurgaon) Unitech ‘The Close” (Gurgaon) Omaxe Nile (Gurgaon) Omaxe NRI City (Greater Noida) Omaxe Forest (Noida) Omaxe Royal Residency (Noida) Jaipuria Sunrise (Indirapuram) Ashiana Greens (Indirapuram) Ashiana Orchids (Greater Noida) Supertech Estate (Indirapuram) Supertech Avant Grade (Indirapuram) Eldeco Golf View Apartments (Greater Noida) ATS Green Village (Noida) Assotech Windsor Greens (Noida) Assotech Windsor Park (Noida) Vatika City (Gurgaon)
  71. 71. Before you make a written offer, know exactly what you are buying and what the costs will be after you own it. For example, in addition to the monthly principal and interest payments that you will have to finance the purchase of your home, you will need to budget for utility bills, property taxes, and insurance and maintenance costs. If you buy a home that has a homeowner's association, you will also have to pay association fees. Some homes have special assessments in addition to the regular property taxes. Make sure that you ask the seller for copies of the past years" bills for these services, and that you inquire as to whether there are any assessments scheduled to be placed on the property in the future. Also, check the condition of the house and any appliances, window coverings and other items that you want included in the sale. Consider purchasing a home warranty. For a minimum fee, the home warranty company will insure that the house and the appliances are in working condition. Many companies will provide coverage for washers, dryers, pools and pool equipment, air conditioning, and some roof repairs. Your agent or escrow holder can provide you with information on these policies. 2. Do I need a real estate agent or an attorney? An experienced local real estate agent can assist you in finding a home that meets your particular needs. He or she will also have information about the home and area that an outsider would never find just by looking at the particular home. Most homes are listed for sale by a real estate broker who is referred to as the seller's agent. The seller's agent represents the seller. The agent who helps you find the home is called the buyer's agent. Usually you will not have to pay your agent a fee for the time and energy he or she spends in finding the home and assisting you in closing the sale. The buyer's agent's fee will be paid by the
  72. 72. seller when you complete the purchase of the home. Your real estate agent will also assist you in negotiating the price, learning about the community, obtaining a loan, inspecting the home, and in closing the escrow. In some instances, a real estate agent can represent both the buyer and the seller. This is referred to as a dual agency. This must be disclosed to you before you make an offer. It is advised that you proceed carefully in this situation, since your agent will be working for both the seller and you at the same time. If you are not sure that you understand all of your rights and responsibilities, it is advisable to see an attorney who is experienced in the purchase of residential real estate. An attorney can help you with legal and tax questions that come up during the purchase of the home, and can assist you in reviewing all of the documents and reports that will be provided to you in the process of purchasing the home. For more information on how to locate a qualified attorney, order a free copy of the State Bar pamphlet How Can I Find and Hire the Right Lawyer? To find out how to order a free copy of this pamphlet and other State Bar consumer education pamphlets, call 415-538-2280. Or visit the State Bar's web site(www.calbar.ca.gov) where you'll find the bar's consumer education pamphlets, as well as information on ordering them. The pamphlets also can be ordered in bulk. 3. What information must the seller provide us? In most cases, when you are preparing to buy a home, the seller must provide you with a Real Estate Transfer Disclosure Statement. This is a pre-printed form that lists many features or conditions about the home, the land, and the area where the home is located. The seller must list on this form any possible problems he or she is aware of that might affect your willingness to purchase the home. This includes, for example, easements, rights of others to control how you use the property, environmental problems, nonfunctioning equipment, zoning and building violations, and special assessments. The seller's agent must visually inspect the home and report all facts that he or she feels might affect your decision to buy this property. If you want information that is not covered in the Real Estate Disclosure Statement or additional information that is disclosed, put your questions in writing and ask the seller to respond in writing. You should review the Disclosure Statement immediately and carefully. In most instances, you will have a limited period of time to decide whether you wish to
  73. 73. proceed with the purchase despite the stated disclosures. Depending upon your purchase agreement, some sellers will require a written acceptance of the conditions contained in the statement. Other sellers will consider your silence as acceptance of all of the conditions contained in the Disclosure Statement. If you buy a condominium, the seller must give you copies of the homeowners association's rules and bylaws, and financial statements, and must inform you if there are any unpaid assessments. You should also ask to see the past minutes of the association board meetings. You might find that there are pending or future lawsuits or defects in the construction of the complex being discussed in these meetings. All of which would affect the value of what you are buying. 4. Should the house be inspected? Before buying any property, it is advisable to have it inspected by trained specialists. The kinds of inspections you need depend on the location and condition of the property. For example, in a hillside area, you might want a soil stability inspection. If you are buying a home built before 1978, you should seriously consider an inspection for lead-based paint. At a minimum, you should have the home inspected to determine if it is structurally sound, a pest control inspection to see if the house has been infected by termites or dry rot, and a natural hazards inspection to see if the home is located in an area subject to fire, earthquakes or flooding. The real estate agent can advise you about additional inspections that might be warranted under the circumstances. Keep in mind that while the seller has to tell you about anything he is aware of that is wrong with the house, he is not insuring the quality of the house; for this reason, and an inspection is a good idea. 5. How do I make an offer on a house? Most homes are sold through real estate agents who have expertise in valuing homes. You can also get information on home sales in your area by visiting a host of Internet sites provided by professionals in the industry, or by reading the real estate section of your local newspaper. Once you have found the home of your choice and have determined how much you are willing to pay, you need to make a deposit (called earnest money) to show the seller that you are serious about buying the house. The deposit is considered a down payment on the price of the home. In some instances you may have to increase your deposit or increase your
  74. 74. offer, especially if there are multiple offers on the home. The deposit is usually deposited in escrow upon the acceptance of your offer. You submit a written offer on a form known as the Residential Purchase Agreement and Receipt for Deposit. This form sets out the terms upon which you are willing to purchase the property. The price you offer on a home will, in most cases, be less than the amount you will need to purchase the home. There will be expenses incurred in purchasing the home that will have to be paid by either the buyer or the seller. These include, for example, title reports, document preparation, recording fees, local taxes, fees for inspections, escrow fees, homeowner's insurance, and notary fees. Ask your agent or escrow officer to provide you with an estimated closing statement. This will give you an idea of some of the additional costs you will incur in purchasing your home. You do not want any surprises. 6. What is a Residential Purchase Agreement and Receipt for Deposit? This agreement is an offer which, upon acceptance by the seller, results in a binding contract. It should cover all of the important terms of the sale. For example, it should include a complete description of the property and of any personal property that will be sold with the house, such as window coverings, kitchen appliances, washers and dryers. It should state the exact purchase price, including the amount of your initial deposit, any increases in that deposit, the amount you will pay in cash, check or wire transfer, and the amount you will need to finance to complete the purchase price. This agreement should also list any conditions that may allow you to back out of the contract. You will want a condition that allows you to cancel the contract if you cannot obtain a loan on favorable terms or if the inspections reveal substantial defects or problems with the home. You may also need a condition that allows you to cancel the sale if you cannot sell your current home. Please understand, however, the more conditions you have, the less likely the seller is to accept your offer. This agreement should also set forth what will happen to your deposit if you cancel the sale, what will happen if you and the seller have a disagreement over the terms of the sale, and how the brokers will be paid. The agreement should also indicate whether you are purchasing the property in "as is condition" or the seller is warranting the condition of the property. Take the time to go over each and every term of the agreement with your agent before you sign the agreement.
  75. 75. 7. Can I change my mind? You should not make an offer to purchase a house unless you are serious about buying it. You can, however, revoke your offer before it is accepted by the seller. This revocation should be in writing. If your offer has already been accepted by the seller, you may be able to terminate or revise your offer if you are unhappy with what your inspections reveal or if other conditions of the offer are not met. The Residential Purchase Agreement and Receipt for Deposit contains several provisions that discuss what will happen in the event the sale does not go through. There is a mediation provision, an arbitration provision and a liquidated damages provision. The liquidated damages provision can result in you losing most if not all of your deposit (up to 3 percent of the contract price) in the event you elect not to complete the purchase price, and your election is without good cause. There is no provision in the standard contract for liquidated damages in favor of the buyer in the event the seller wrongfully refuses to go through with the sale. You do not have to agree to this provision. Carefully discuss the pros and cons of initialing this provision with your agent or attorney. 8. How can I get a loan? Most home loans are made by financial institutions such as banks, savings and loan associations, and credit unions. Other sources of loans are insurance companies, mortgage bankers, finance lenders, mortgage loan brokers, pension funds and investment trusts. Lenders charge different fees and offer different interest rates so it pays to shop around. Your agent will be able to recommend lenders in your area. When you apply for a home loan, the lender will check your credit rating and review your past employment, income history, and credit and debt obligations. It will also obtain information about the property that will be security for the loan. This will include an appraisal or estimate of the fair market value of the home, a review of the preliminary report prepared by the title insurance company to determine what liens, easements and other conditions will be superior to its loan, and a review of any taxes, assessments and zoning regulations that affect the property. Some lenders will charge you a loan application fee, document preparation fee, appraisal fee and other fees to consider or close the sale. You should discuss these fees with your lender before you submit your application.
  76. 76. 9. What types of home loans are available? In exchange for cash from the lender, you agree to pay interest and to make payments over a period of time. In most instances, the property you purchase will be security for repayment of the loan. Sometimes a seller will offer a seller-financed or carry back deed of trust. This financing method is often used when a seller wants to receive income over a period of time or when lenders are stringent in their loan requirements. The terms of these loans should be discussed with your agent or attorney. He or she is best qualified to determine if the loan documents and agreement meet all legal requirements. Occasionally, you can "assume “a loan or take over a loan that the seller has been paying off. You should be careful in assuming any loan. Most loans have an acceleration or due on sale clause. This means that the lender can demand that the seller's loan be paid in full when the property is sold. If you wish to assume a loan, you should have your agent or attorney review all of the seller's loan documents and make approval by the lender a condition to your offer. Most home loans that are available to Californians offer one of two interest rate structures. A fixed rate loan offers a set interest rate, so that your monthly payment never changes. Some fixed rate loans are federally insured or guaranteed, such as a Veteran's loan or an FHA loan. These loans usually have a lower interest rate and require smaller down payments. For more information on these loans, get in touch with a local office of the California Department of Veterans Affairs, the U.S. Veterans Administration or the U.S. Department of Housing and Urban Development (HUD). Another type of loan that is available is an adjustable rate mortgage loan, sometimes called an ARM. An ARM is a mortgage loan which provides for adjustment of its interest rate as market rate interest rates change. The ARM's interest rate is tied to an index that reflects changes in the market rates of interest. Some indexes used are the Cost-of-Funds Index published by the Office of Thrift Supervision, and the Federal Reserve Discount Rate. These loans usually have interest rates that are lower than the fixed rate loan interest. ARMs can be complicated. Make sure that you understand all of the terms of these loans before you agree to accept one.
  77. 77. Occasionally, new mortgage plans become available that are intended to meet specific needs of a community. These include loans for first-time homebuyers, and loans for teachers. Check with your local consumer affairs office and housing departments for up-to-date information on these types of loans. 10. What occurs when I "close" on a home? For the protection of the seller and the buyer, a person or company that has no connection with you or the seller holds the money and papers involved in the purchase. This procedure is called escrow. The escrow holder's job is to make sure that all of the terms and conditions of the agreement are met. He or she will also coordinate all of the activities of the broker, the lender and the title insurance company. The escrow holder will deliver the deed to the county for recording when it can pay the seller the money. Escrow services can be provided by title companies, banks, savings and loan associations, independent escrow companies, realtors or lawyers. The escrow holder does not act as a mediator, a lawyer or an advisor. The escrow holder is required by law to remain neutral. Its only job is to carry out the terms of the escrow instructions. In Southern California, escrow instructions are signed when the escrow is opened. They are modified throughout the course of the escrow as the agreement between the buyer and seller change. In Northern California, escrow instructions are executed just prior to the close of escrow. These instructions should be clear and certain as to the intentions of the parties and the duties of the escrow holder. Make sure your Purchase Agreement does not conflict with your escrow instructions. If they do conflict, the escrow instructions may be considered your final agreement as to the terms of the purchase. If you are uncertain as to what the instructions say, discuss them with your agent, your lawyer, and the escrow holder. After the close of escrow, the escrow holder will provide you with a Settlement Statement. This document will show you, as the buyer, all of the costs incurred by you in purchasing the property. You should review this document carefully and save this statement for later. Many of these costs may be deductible from either your state or federal taxes. If you have any questions or concerns about the charges you incurred, contact the escrow holder immediately and ask for an explanation.
  78. 78. 11. How should the title to the home be held? Prior to the close of escrow, the escrow holder will ask you how you wish to hold title to your new home. How someone holds title will affect what will happen to the property in the event of the death of one of the owners. It also will affect whether certain taxes will be incurred or whether a probate of the estate will be necessary. You should discuss your options with a tax specialist and your agent before you make your selection. You can hold title to the home by yourself, as separate property, with your spouse, as community property, or with your spouse or a third party, as joint tenants or tenants in common. You can also hold title to the property in a family trust. For more information on the different forms of ownership, see the State Bar pamphlet Do I Need Estate Planning? To obtain a complimentary copy of this pamphlet, mail a self-addressed envelope (with 55 cents in postage) to the Estate Planning, Trust and Probate Law Section, The State Bar of California, 180 Howard Street, San Francisco, California, 94105-1639. For information on ordering multiple copies, call 1-888-460-7364. 12. Do I need title insurance? Title insurance is necessary for your protection when you buy a home. It is, however, not a guarantee that problems will not arise after the close of escrow. When you make an offer to buy a home, you, as the buyer, have the right to choose the title company. This decision should be based on the local office's expertise, and the company's record for fairly handling claims under its policies. You should discuss these issues with your agent. Once you have chosen a company, you should make one of the conditions of the close of escrow clear title to the property. "Clear title" means that when the sale to you is completed, the title to the property will be free from liens, judgments and other claims that you have not agreed to accept. You should also discuss with your agent the need for a survey of the property and title insurance coverage for boundary line disputes. In many instances, especially in rural areas, boundary lines are not where they should be. A survey and survey coverage can help eliminate future disputes with your new neighbors. Before a title company issues an insurance policy, it will make an investigation to find out if anyone besides the seller claims to own the property. It will also search