For clients looking at an integrated platform to consolidate information on their real estate assets, Sanctum Wealth Advisors, in collaboration with Props AMC, has built the Real Estate Aggregation Platform (REAP). REAP is an intuitive technology platform that helps improve the management of the overall lifecycle of real estate ownership by allowing clients to efficiently track their real estate assets as they do their financial assets.
The general principle guiding this effort is to ensure that properties held by clients are compliant and easily marketable.
For further queries on REAP, please contact us at +91 98202 48149 or write in to Manasi.Kaji@sanctumwealth.com
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Through the ‘The Real Estate Knowledge Series’, Sanctum Wealth Advisors take up key concerns around real estate as an asset class. This asset class is at the cusp of a major transformation with many changes of recent years affecting the outlook for this sector. The key concerns are around price-discovery, liquidity, value preservation, capital market implications and, more recently, the practical challenges businesses will face during their re-entry in the wake of the potential short and long-term impact of COVID-19. The series in collaboration with www.propsamc.com attempts to provide data-led answers to questions that guide decision-making related to this asset class.
To answer the above questions let us consider the two biggest metros of the country which contribute to more than 50% of the organized real estate value. The numbers are agnostic to the asset class and provide a clear flavour for the preference of the transaction.
*Source – Sub-Registrar records of respective cities
Looking at the transaction trend between sale and lease from 2013 to 2019, it is quite evident that lease transaction in both cities are steadily growing at an average pace of 8% and 12% annually in Mumbai and Delhi respectively. At the same time the sale transaction growth is at 5% and 2% only. If you remove the sale transaction spikes recorded in 2018, growth stands at -4% and -2% respectively.
Mumbai surely prefers to stay on rent in comparison to Delhi. For every sale in Mumbai the average lease is 2.5x and for every sale in Delhi there 0.65x of lease. The lease in Mumbai almost was 3.5x to sale in 2019 and trend on the graph suggest it is widening every year. While the rent to area affordability in Delhi is cheaper than Mumbai, the preference is bend towards sale than to lease.
The flattened numbers, in sales transactions, in both cities between 2013 and 2017 clearly indicate sale saturation of any developed property transaction market. While not much has changed in Mumbai in sales transactions between 2013 and 2019, Delhi has witnessed a sudden spike in registrations in 2018 which could be due to highest number of blocks on sale from DDA of approx. 20,000.
In our view, the gap between both transaction types (sales and leases) will further increase in Mumbai, making Mumbai glued towards rent. Delhi equation would remain the same since the biggest development is by the state controlled body. Matured markets suggests increasing lease transactions in any market suggests higher stress level in selling or creating liquidity for a property.
Is property price-discovery still a challenge?
According to an RBI Household Savings Report 2017 – property accounts for 70% of any individual’s wealth in India. Hence its valuation and liquidity, especially in times such as these, are most important to establish and monitor.
Raheja Viveria – Mahalaxmi – Mumbai Fig 1 (Lease) & Fig 2 (Sale)*
* Data Source – https://propsamc.com/zone-matrix/
This project has different wings (A, B, C or D) with premium views of the city. The highest sale value recorded for a 3118 sq. ft. area (a 4bhk) in 2019 on the 29th and 30th floor is 66,000 per sq. ft. and 68000 sq. ft. respectively and the lowest sale value in 2019 for a 2262 sq. ft. area (a 3bhk) on the 14th and the 15th floor is 34,845 sq. ft. The rates mentioned are for 120% of the actual carpet area.
At the same time, the highest lease value for a 3118 area sq. ft. (a 4bhk) in 2019 on the 18th and the 38th floor is 193 and 216 per sq. ft. and the lowest value for a 2106 area (a 3bhk) in 2019 on the 14th and the 18th floor is 174 and 185 per sq. ft. Therefore, given the yields of premium residential buildings in Mumbai being in the range of 3.25%-3.5%, for a high average rent of 205 per sq. ft., the value will be 70,000 per sq. ft. and the low average rent being 175 sq. ft, the value will be 60,000 sq. ft.
Hence, adding or subtracting the premium in the value will always be difficult, therefore the annual rent (known as yield) of such properties can indicate accurate valuation. Simply put if one is getting an annual rent of 24,00,000 on a residential property, at a cap rate of 2.5%, the house value would be 9.6 Cr. At the same time – a commercial property at 7.5% cap rate the value would be 3.2 Cr. Kindly note the value doesn’t consider fit-out rent or any additional capital expenditure on a property.
How secured are banks on property led loans? What works in an NPA – Cover or Quality?
To start with, look at the below two different data sets – Registered Mortgages with sub-registrar in Mumbai and Delhi and the NPA Ratio of all Scheduled Commercial Banks in India. The attempt is to identify if fair mortgage reporting practices are related with growing NPAs in India.
Issue 1: The sub registrar records don’t give the right picture of loans disbursed on properties. The biggest beneﬁciaries in Real Estate -“Banks” practice “equitable mortgage” which means they keep the original documents in safe-keeping and mostly not do registrations with the sub – registrars. Unlike every sale and lease which is recorded at sub-registrar level, all property led loans are not captured, therefore, title risks associated to buy and enforce these properties (primary and secondary market) is very high. While the banks predominantly rely on CERSAI (Central Registry of Securitisation Asset) since last 3-4 years, the risk persists due to a very small cost and procedure not under taken. Even in CERSAI, many times one can only come to know the loan amount and not the proper project name and unit number. It’s surprising to note that any property loan today has a compulsory insurance to be taken by the borrower, but how can there be no standard process of bringing property loans into public domain for title accuracy and fraud prevention. What is the solution? By paying the “English Mortgage” (it is a registered mortgage done with the sub -registrar of assurances so that the mortgage is fully secured and is in public record) and paying just 0.2% of the loan value with sub registrars, one can solve this issue to a fair extent.
Issue 2: According to RBI Report (Progress of Banking in India 2018-19), one can establish that the total outstanding loans with Banks stand at INR 97.09 trillion. Of these housing loans stand at INR 12.04 trillion and Commercial Real Estate loans stand at INR 2.43 trillion. Both loans when totalled come to INR 14.47 trillion though direct and indirect lending to Real Estate stands at INR 21.45 trillion as on March 2019. The NPA Ratio in India is at 9.07% of total loans (highest in emerging economies and 2nd highest in the world after Greece). The gross NPA is at INR 9.36 trillion and Net NPA is INR 3.55 trillion meaning around 61% of NPAs value is being written off or devalued. What is quite evident from the fact that of the cases which were taken to the courts (SARFAESI/DRT), only 15% recovery was possible of the loan outstanding with borrowers. Interestingly, INR 73.81 trillion of the total outstanding loan (INR 97.09 trillion) is given under ‘Secured Tangibles’ which could be gold, property, plant & machinery, etc which is 76% of the total outstanding loans. Above facts suggests the highest risk is not NPAs but the valuation and quality of the tangibles secured by banks.