MCM 518

Real Estate Principles and Practices

Deepak Sundrani
Session 2

Determining the value of Real estate

1)
2)
3)
4)
5)
6)

Competition
Scarcity
Modification
Location
Heterogeneity
Durability

The Real Estate Market

A market is a place where goods can be
bought and sold.
The function of a market is to provide a
setting in which supply and demand can
establish market value, making it
advantageous for buyers and sellers to trade.

Characteristics of Real Estate

1)
2)
3)
4)
5)
6)

Durability
Lumpy and large economic unit
Costly information, difficult to compare
High transaction cost
Uniqueness
Regulated use by Government

The operation of supply and demand in the

market is how prices for goods and services
are set.
When supply increases and demand remains
stable, prices go down. (producers need to
attract buyers)
When demand increases and supply remains
stable , prices go up. ( buyers compete for
product)

Factors affecting supply

1) Labour force , Construction and material cost
2) Government controls and financial policies :
(i) Interest rate
(ii) Real estate taxation : high tax deters, tax
incentives attract new business and industries
(iii) Careful planning for control of use of land

Factors affecting demand

1) Population : demand grows with growth in
population . Local.
2) Demographics : Family size, ratio of adults to
children, ages of children, number of
retirees, family income, lifestyle, growing
number of `empty nester households
3) Employment and wage levels : When
opportunities are scarce or wage levels are
low, demand reduces

Real estate classification

1) Residential : Housing
2) Commercial : Office, Shops, Theatres,
Hotels , Car parks
3) Industrial : Warehouses, factories, Power
plants
4) Agricultural : farms, orchards, etc
5) Special purpose : Hospitals, schools, etc.

Residential Real Estate contributes to more

than 70% of total real estate constructed in
India.

Flat v/s apartment

Differences
Flat

Apartment

Cooperative Society

Association of apartment Owners

Legal title of land/building rests with the

society. The flat holders have the right to
occupy and use their respective
flats/premises as shareholders but no
independent or exclusive ownership of
any portion of the land or building

Each apartment owner is entitled to

exclusive ownership and possession of his
apartment and undivided interest in the
common areas and facilities in the
percentage specified in declaration

Each flat holder has Shares

No `Shares

Before re-selling , the permission from

No permission required for reselling
Society necessary. Many times Society will apartment
charge fees

Flats / Apartments
How long have flats / apartments been in
existence ?
2000 years ago, Roman Senate passed
Condominium laws that permitted Roman
citizens to own individual dwelling units in
multi-unit buildings. This form of ownership
resulted because land was scarce and
expensive in Rome.

Reasons for growing number of

flats/apartments vis-a- vis
detached houses
1) Land scarcity
2) Continuing escalation in construction costs
3) Disenchantment with the work of
maintaining the ground around home
4) Desire to own rather than rent (owning a
bungalow not affordable but renting a
bungalow affordable. For almost same EMI a
flat can be purchased.)

Example :
Consider a person earning Rs. 1.5 lakh per
month.
Option A
Option B
Rent a bungalow Buy a flat @ EMI
@ Rs. 39,000 per of Rs. 39,000 per
month
month

In case of Flats/Apartments
Land is efficiently used
Roads can be efficiently used : Long roads not
required, sewer and utility lines shorter,
unlike in case of detached houses as under :
utility line

Road

Contd In case of flats/apartments

Also saving in construction material and labour
because of :
Shared walls
Ones ceiling is others floor

Advantages of flats /apartments vis-a- vis

detached houses, other than cost of home
1) Maintenance : Gardening : lawn mowing,
weeding , Building maintenance
2) Security
3) Recreational and Social facilities like
Swimming pool, Gymnasium etc.

Economically very expensive on a single

dwelling basis

Bungalows : advantage
Neighbours not very close
You can decide which colour to paint the
exterior of the house

Separate and common elements in

Flats/ apartments
Flat buyer owns the air-space between the
interior of walls and between the floor and
the ceiling.
Everything else is common : the land, shell,
lobby, stairs, elevators, recreation areas.

Limited common element

Example : Parking may be reserved for some
persons

Managing Committee of
Society / Association
Formed to control , regulate and maintain the
common elements for the overall welfare and
benefit of its members.
Jobs : Finding, hiring and paying gardeners,
garbage collectors, Liftman, sweepers, repair
people, maintenance person for swimming
pool, etc.
Collects maintenance charges and pays for
expenses

Bylaws : Society rules

Annual meeting

Reserves ( say for painting external walls once in

10 years)
Say Rs 100 per month per flat for ten years
Property tax separate for each flat
Financing : Since each flat has separate owner,
each is separately financed. Hence not in the
control of Association. Similarly for
foreclosure.

Advantages of living in
flats/Apartments
1) Spreads cost of site among more dwellings
( Builder does not have to make miles of
streets, sewers and utilities;
shared walls and foundations hence saving
in construction material and labour
2) Since land cost is high ( Say Rs. 3000 per sq.
ft. in Balewadi), only a flat/apartment system
can make housing units possible

Flats may be the difference between buying

and renting for some people.

Disadvantages of flats
Close proximity of ones neighbour whose
lifestyle may differ and whose opinions on
how to run Association may differ from you
( compare with a bungalow : sole control,
choose which colour to paint house, what
landscaping)
Say : Swimming pool : decision : what months to
keep open.

Contd ..
Group must decide about landscaping : who will
do, how much to spend, security group
decision, how much, when, who should be
hired
Committee is made from volunteers ;
Owning a flat is not entirely carefree and
committee may do things differently from
what the individual would like.

Problems with Committees

Lack of interested people for committee, things
may be left undone, possibly posing hazard.

Time Sharing Resort

Vacation facility
For one week in a year for 20-40 years
Cost paid in advance

Advantages
To builder
Assume a Rs. 1 crore unit : sell it 50 times for
Rs. 10 lakhs = Rs. 5 crores
To consumer
Go to resort at a prepaid price

Disadvantage
For the Builder :
Lot of money spent on Marketing
For the Consumer :
Money given in advance : even if you dont use it
wheras in a hotel pay as you use.
Peak periods ( in vacations) overfull
Going to same resort (s) every year wearisome
Maintenance : Developer has not much interest,
so who will oversee maintenance work ?

Real Estate
Investment

Reasons for purchasing Real Estate

1) Consumption
2) Investment

Many times, a house purchased for

consumption turns out to be the best
investment

Homeownership as an Investment
Homeownership provides more than shelter
and pride.
It is one of the most substantial investments
that most people make.
It is a Hedge against inflation.

Disadvantages of Homeownership
1) Illiquidity : hence owners not as mobile as
renters
2) Liability : in case of injury of visitors, also
responsible for repairs and maintenance
3) Risk of loss : natural /man made disasters
4) Financial constraints : EMI may be so much
that person may not be able to spend on
anything else such as vacations, movies, etc.

Rationality of buying a house

in a good locality
Consider a 2 BHK flat costing Rs. 50 lakhs,
Option 1
Buy by paying Rs. 10 lakhs down-payment
and EMI of Rs. 39,000 per month for duration
of 20 years

Option 2
Similar flat he takes on rent @ Rs 15,000 per month,
and gives the landlord a Deposit of Rs. 1.5 lakhs.
Put Difference between Downpayment and landlord
deposit i.e. Rs 10 - 1.5 lakhs = Rs. 8.5 lakhs in FD for
20 years @ 9 %
If he had bought flat, Annual EMI would have been :
39,000 x 12 = 4,68,000
Put difference of EMI and rent in Bank FD

Option 2
Assuming Increase in rent and deposit to be
given to landlord by 10 % every year
At end of 20 years get a huge amount , namely :
Amount from FD of 8.5 lakhs for 20 years
+ Original Deposit back from the landlord
+ Additional deposit which was increased
every year
+ FD made every year from Difference between
EMI and rent

Option 2
Factor for
increase in
rent

At end of
year
1

Net saving
p.a. after
giving
additional
Saving p.a. Rs Add to
( 4,68,000landlord
rent per
deposit to
month (Rs)
landlord (Rs.)
Rent p.a. (Rs) rent p.a.)
deposit (Rs)
15,000
1,80,000
2,88,000
15,000
2,73,000
16,500

1,98,000

2,70,000

16,500

Amount from
FD @ 9 % per
annum
interest (Rs)
14,03,673

18

11,95,790

1.1

3
4
5

1.1
1.1
1.1

17
16
15

1.1

14

7
8
9

1.1
1.1
1.1

13
12
11

10

1.1

10

11

1.1

12

1.1

13
14
15

1.1
1.1
1.1

7
6
5

16
17

1.1
1.1

4
3

18
19
20

1.1
1.1
1.1

2
1
0

Rs

2,53,500

No. of years
putting
money in
bank
19

Rs

For Compound interest

( assume compounded yearly, for simplicity)

Amount = P ( 1 + r)
Where P is the Principal Amount
R is the rate of interest
N is number of years

Option 2
( for Re. 1 put in FD at 9 % compound interest)
No. of years
At end putting
of
money in
year
bank

1
2
3
4
5
6
7
8
9
10

19
18
17
16
15
14
13
12
11
10

Amount
@ 9 % per
annum
interest

5.14
4.72
4.32
3.97
3.64
3.34
3.06
2.81
2.58
2.36

At
end
of
year

11
12
13
14
15
16
17
18
19
20

No. of years
putting
money in
bank

Amount
@ 9 % per
annum
interest

9
8
7
6
5
4
3
2
1
0

2.17
1.99
1.83
1.677
1.538
1.41
1.295
1.1881
1.09
1

Option 2
At end of year
1

Net saving
p.a. after
giving
additional
Saving p.a. Rs Add to
( 4,68,000landlord
rent per
deposit to
month (Rs)
landlord (Rs.)
Rent p.a. (Rs) rent p.a.)
deposit (Rs)
15,000
1,80,000
2,88,000
15,000
2,73,000

Factor for
increase in
rent

No. of
years
putting
money in
bank

Amount from
FD @ 9 % per
annum interest
(Rs)
273000X1.0919
19
14,03,673

1.1

16,500

1,98,000

2,70,000

16,500

2,53,500

18

11,95,790

3
4
5

1.1
1.1
1.1

18,150
19,965
21,961

2,17,800
2,39,580
2,63,538

2,50,200
2,28,420
2,04,462

18,150
19,965
21,961

2,32,050
2,08,455
1,82,501

17
16
15

10,04,227
8,25,000
6,64,757

1.1

24,157

2,89,891

1,78,108

24,158

1,53,950

14

5,14,459

7
8
9

1.1
1.1
1.1

26,573
29,230
32,153

3,18,880
3,50,769
3,85,845

1,49,119
1,17,230
82,154

26,573
29,231
32,153

1,22,546
87,999
50,001

13
12
11

3,75,702
2,47,512
1,29,024

10

1.1

35,369

4,24,430

43,569

35,369

8,200

10

19,412

11

1.1

38,906

4,66,873

1126

38,906

-37,779

- 82,052

12

1.1

42,796

5,13,561

-45,561

42,796

-88,357

-1,76,057

13
14
15

1.1
1.1
1.1

47,076
51,784
56,962

5,64,917
6,21,408
6,83,549

-96,917
-1,53,408
-2,15,549

47,076
51,784
56,962

-1,43,993
-2,05,192
-2,72,511

7
6
5

-2,63,225
-3,44,128
-4,19,292

16
17

1.1
1.1

62,658
68,924

7,51,904
8,27,095

-2,83,904
-3,59,095

62,659
68,925

-3,46,563
-4,28,020

4
3

-4,89,202
-5,54,298

18
19
20

1.1
1.1
1.1

75,817
83,398
91,738

9,09,804
10,00,785
11,00,863

-4,41,804
-5,32,785
-6,32,863

75,817
83,398
Nil

-5,17,621
-6,16,183
-6,32,863

2
1
0

-6,14,985
-6,71,639
-6,32,863

Total

7,67,383

21,31,815

Option 2
At end of 20 years
Person will have :
Rs. lakhs

From FD of 20 years
Original Deposit to Landlord (without
interest)

Additional yearly deposit to Landlord

(without interest)
From yearly difference (Between EMI
and rent ) FD
Total

47.6
(5.6X8.5)
1.5

7.67
21.31
87.08

Advantages of Option 1
(Purchase of house)
assuming mortgage rates will not rise, his EMI
remains same unlike rent which will increase
because of inflation.
Income tax benefit ( if you take loan, not for full
down payment)
After 20 years has a flat worth maybe 2 crores,
inspite of depreciation of house becoming 20 years
old ( because of inflation plus real increase, the land
cost rises)

Disadvantages / risks of Option 1

(Purchase of house)

Poor liquidity
If not able to pay EMI
Earthquake, fire ; pay insurance
Pay property tax
Do maintenance ; painting etc.

Advantage of Option 2
(Rent a house)
Deposit to be given to the landlord is not as
big as down-payment
During 20 years, he has liquidity
Easy mobility
After 20 years he has a lot of money
Tax saving ( if showing House rent as expense)

Disadvantages / risks of Option 2

(Rent a house)
If inflation very high , then will not be able to
buy a house ever as prices will also increase

Investment aspect of homeownership

If Real appreciation ( beyond rate of general
inflation) is expected in a particular area,
people would want to become home-owners
sooner, as their income may not be rising as
fast as home prices.
If home prices are stagnant, stable or inflation
is less than expected, then renting makes
economic sense from an investment
perspective

If person rents and invests in stock market and if

stock market crashes , his wealth gets
reduced.
Typically, homes help preserve wealth or even
increase it. Over the last several decades
homes have generally increased in value more
than the rate of inflation, but local
appreciation rates will vary.

 The main rise in price of a house is because of

the rise in land price.
Due to land being scarce economic resource
that is not replenishable, real estate is likely to
be a prominent attraction for investments.

(The prices may not increase always )

David Beckham and Brad Pitt among celebrities

caught up in Dubai developer's debt crisis
27 November 2009
David Beckham and Brad Pitt are believed to be among the stars
caught up in Dubai's spiralling credit crisis. The pair have seen
the value of property they bought in the Gulf plummet as
Dubai struggles under a mountain of debt.
Things have now gone from bad to worse after Nakheel, the
island's developer, and its parent company Dubai World
yesterday made a request to suspend debt repayments.
House prices in Dubai slumped by 47 per cent in the second
quarter, compared with a year ago.
A multi-billion pound development designed to make Dubai
the envy of the world has ground to a halt

Psychological factors influencing

home-buying
Ego
Satisfaction
Pride

Discuss Gold as an investment v/s Real Estate

Discuss Reduction in rents of retail properties ,
(maybe because of growth of e-commerce)

Rate of Gold in India per 10 grams

Illustrative example for comparision of Land v/s Gold

Please note : Rate of rise in price of land is not same everywhere
In 1948, price of land in Sindh Society was 25 paise per sq.ft, a typical plot was 8,000 sq.ft = Rs. 2000
In 2014, price of land is Rs. 15,000 per sq.ft , the same plot of land is worth Rs. 12 crores

Price of land in Sindh Society, Aundh

(Rs. psf)

Price of Gold
(Rs./10gram)

1950

2014

Growth

0.25

15,000

60,000

99

30,000

303