Real Estate Development Finance
India’s real estate market Revolution 2008
India Realty
Romance, melodrama, action, mystery, twist… All elements that one connects with a typical Hindi movie can easily be used as adjectives to describe the ‘India property’ of the ‘real estate’ in India’.
To justify, let’s club together last week’s happenings in the sector. The week has been a dampening one for real estate, as the dark clouds (with minimal silver lining) of global slowdown cast their shadow on the real estate sector as well. The reason is quite obvious – there was the thumping end of those glorious days of low-interest rates. The all-time low and lucky figure of around ‘7’ per cent changed to scary double digits, oscillating from 13 per cent to even 20 per cent in some cases.
Reality wee(a)k
On November 12, 2008, CB Richard Ellis (CBRE) released a report, via Press Trust of India (PTI), claiming that real estate projects in India are getting delayed due to paucity of funds, even as developers struggle to cope with decline in sales volume across residential, office and retail verticals. The report said that the real estate-investment market in India continued to remain subdued amid economic worries.
On November 14, The Times of India reported that Finance Minister P Chidambaram had assured real estate developers that the government will impress upon banks to accelerate lending to realty, which is facing one of the worst slowdown in recent times. A delegation of builders under the Confederation of Real Estate Developers’ Association of India (Credai) had met Chidambaram to complain against banks’ reluctance to disburse loans to real estate companies.
The very next day, on November 15, an Economic Times story urged people to invest in the real estate sector claiming that investing in real estate is a good idea to hedge ` against inflation. It talked about the benefits of the India property, real estate funds, and real estate investment trusts (REIT).
Realty years
Property dealers’/agents’ signboards at every nook and corner of the country, and inclusion of some of the Indian realtors in the world’s ‘billionaires list’, prove that realty, as a business, has always been lucrative and profitable.
The India property, in the recent past, has witnessed a revolution. According to a Cushman & Wakefield research, the sector has seen a growth rate of up to 30-35 per cent, and is estimated to be worth US$15 billion. If experts are to be believed, it is expected to grow at about 30 per cent annually over the next decade, attracting foreign investments worth US$30 billion.
However, in the last couple of years, realty has been affected adversely because of the rise in interest rates, which went up from seven per cent to around 12 per cent, as Reserve Bank of India (RBI) thought that price rise in realty could create a bubble. Additionally, the bank tightened the provisioning norms, making loans to the sector costlier, and when the inflation rate shot up, it constricted liquidity to keep price rise under check.
Such steep rise in the interest rates and tightened liquidity severely affected affordability and, in turn, brought down buying/investment in real estate.
Future reality
Nevertheless, the bad news will not be that bad for long, as the situation seems to be turning around, albeit gradually. On November 15, while the national dailies carried India property advisories, some of them also had news that banks are cutting housing-loan interest rates. Moreover, RBI’s policy is also expected to alter, or so assured the finance minister, thereby making at least the residential real estate affordable.
Almost 80 per cent of real estate developed in India is residential space (the rest comprising offices, shopping malls, hotels and hospitals), and five per cent of the country’s GDP is contributed to by the housing sector. According to the Tenth Five Year Plan, there is a shortage of about 22.4 million dwelling units. Thus, over the next 10 to 15 years, 80 to 90 million houses will have to be constructed, and easier availability of finance will facilitate the process. Housing Skyline of India 2007-08, a study by research firm Indicus Analytics, says that there will be a demand for over 24.3 million new dwelling units for self-living in urban India alone by 2015. Consequently, this segment is likely to throw up huge investment opportunities. In fact, an estimated US$25 billion investment will be required over the next five years in urban housing, says a Merrill Lynch report.
On the commercial side, the IT and ITES sector alone is estimated to require 150 million square feet of office space across urban India in the next couple of years; hence, there too lies tremendous opportunity and scope.
The ground real(i)ty
The India real estate sector supports more than 250 other ancillary industries including that of construction materials like cement, steel, paint and electrical. A study by rating agency ICRA says that in terms of direct, indirect and induced effects in all sectors of the economy, the construction industry ranks number three among the 14 major sectors. The study says that the sector has capacity to generate income as high as five times of the present level, and if the economy grows at a considerable pace, in the next decade the sector can create about three million new jobs.
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real estate finance homework cash-on-cash return and cap rates?
I am trying to calculate some financials based on a multifamily development. I am confused on how to calculate the cash-on-cash return. The annual debt service is $1,004,000 on a $10 million loan @ 8% 20 year amortization. I am not looking for a straight up answer, but some explanation on how to find it would be nice. I have some other info, but it doesn’t seem like I have what I need.
I am also needing to find a development profit based on a sale completion with an 8% capitalization rate.
I also need to calculate a loan-to-value ration, but I think I can figure that one out.
Try figuring out your annual gross income.
Subtract All expenses and Debt Service.
This is your cashflow.
Cashflow divided by the money you actual put in is your cash on cash return.
Say your Gross income is 1.8 Mil
Minus Debt Service of 1 Mil
Minus Expenses of 500 Thous
Equal Cashflow of 300 Thous
Divided by an initial Cash Outlay of 200 Thous
Equals a CCR of 15%
Hope this helps…
RE Development Financial Modeling Basics – 2/3
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