Need for an Analysis focused Real Estate Blog

Need for a Real Estate Blog 

(This blog is RE Analysis based, and only somewhat India specific. The purpose is to provide an understanding and insight - not the market conditions or the prices etc )

RE -  an essential, complicated and huge asset class.

RE Sector in India is evolving- just like everything else in the world…

The difference is in the stage of evolution. RE is still in the nascent stage of this evolution. The more we evolve in this sector as professionals, the more we know how little we know about it.

During my experience spanning more than one and a half decades in Real Estate Markets, I have time and again felt the need for comprehensive guidance on real estate. The guidance came mainly in parts - through situations, errors as well as people (both well wishers and foes !)

I realized two things about the RE sector, specifically in India –

Firstly, the complications in real estate are mainly left for the experience (or inexperience) and faltering of the people in the field. Those who wish to do RE work professionally  in diverse related areas falter more, whereas the ones who see it just as a means to make fortunes stop making major errors over a period of time- they master a particular field of the subject and spend their entire lives honing their skills therein. Consequently, one seldom finds professionals with a well rounded professional expertise.

Secondly, there is no systematic recording or pooling of knowledge. The professionals in RE somewhat resemble the Ayurveda practitioners in India in the bygone days, who treated incidents of illness with great skill and understanding, but failed to record their findings and methodology. Modern medicine has managed to do just that – leading to its exponential rise and acceptance the world over. This other set of modern medicine practitioners can be compared to professionals in the investment and industrial sectors like the BFSI or FMCG sectors, where knowledge has been efficiently pooled in helping create over a period of time, an array of education institutions and plenty of written material.

The RE industry is now coming out of the shadows of a business model which was unorganized and crude – and moving towards the glamour and glitz of the corporate world. Just like the ‘village mahajan’ who has now been replaced by our well placed complicated lending, mortgage and financial institution setup. Judging by the way things are moving, the RE industry will soon be able to position itself as an efficient, regulated and professionally managed industry.

With this background in mind, I aspired to contribute in some little ways to this amazing industry. I once again wish to echo the feeling at the beginning of this section – “RE Sector is evolving- just like everything else in the world…”

Be pro-active in real estate- “Stephen R Covey’s – 7 habits- 1st habit”

The need to be pro-active in real estate (One of “Stephen R Covey’s – 7 habits”

WHY WE OFTEN DO NOT GIVE REALTY IMPORTANCE

> REALTY REALLY does not interest me.

> What do I have to do with realty; I have my career path set in a different direction/ industry

> Real estate is a rather unsophisticated, unorganized and crude work

> It is already there – so what do I do about it further?

We will be pro-active only when we understand "THE FINANCIAL IMPORTANCE OF REAL ESTATE" in our lives

1.PRESENT: A substantial part of you income will be spent in paying for rent and mortgages i.e. cost  related to real estate

2.FUTURE: It has been/ will be your biggest investment decision in life.

MICRO VIEWPOINT : It can be one of the best savings and income generating tools of your life

MACRO VIEW: For the academically oriented, the number of linkages it has on the economy are so complex and varied that its movement has a huge impact at a macro level in the economy

Real estate is a tool to generate great wealth in coming years - an opportunity always taken up by the wealthy and also the intelligent on their route to generating wealth.

However, there are no shortcuts. Shortcuts have pitfalls too, whereas the correct path in RE is practically the safest, most rewarding and long term wealth generating investment you can ever make. This is because it can give you: 

•Wealth generation by way of capital appreciation

. Wealth generation by way of savings of rentals in case of purchase by way of home loans.

•Wealth generation by way of savvy tax planning – tax breaks on loans repayments and interest repayments.

•Wealth increments by return on property by way of rental incomes.

•A great hedge against inflation, can be used as a collateral or security for loans

On being proactive – 

Employ this financial asset to gain returns if possible

Make sure that it gets your attention at the right time- maintenance, legal formalities and general awareness effecting its value

Take a long term view but also do not hesitate to move out of an asset (to invest elsewhere) if you do not see its growth in the right trajectory

Begin with the end in mind....(quoted from "Stephen R Covey- 7 habits)

Think before you buy

When you buy real estate, it should be put to use eventually. Even if you are only an investor, ultimately, an end user will factor in his needs before making a real estate investment. So, when you buy non-agricultural land, you can use it (most commonly) only after you build upon it. Do keep this in mind before making any property decisions.

How does it work out for you?
For solutions : Mail me at gauravjaincontact@gmail.com

Various Factors which effect real estate

Defining characteristics of real estate

Factors Unique to real estate

1.   Unlike many other assets, real estate does not provide you minute-to-minute valuations for your holdings

2.   Huge transaction costs – registrations, authority permissions, society charges etc

3.    Reasonably Illiquid investment – extremely important but under considered factor

4.   Every real estate’s price and liquidity is location dependant – even in the same locality e.g. sunlight, neighbors, view etc

5.   Highly tangible- unlike most stocks you can see and touch your property. Creates substantial pride of ownership, but tangibility also has its downside - requires hands-on management. You don't need to clean and maintain bonds and stocks.

6.   During times of calamities (both natural and man made) it is a burdensome asset to own

Nature/ Inherent qualities of Real estate

1.   It is a limited resource – cannot be produced/ manufactured

2.   It is geographically static – cannot be moved to another place

3.   Benefits and returns enjoyed by

  a) the occupant or

  b) the legal owner only

4.   Being a fixed resource , you only add on it and any increment belongs to the land (and therefore its owner)

Measurements - Its different!

Do you know that every region has a different way of measuring land in India? Following is an illustration:

And the list goes on..

Naturally, it is impossible for any normal person to remember this stuff!

So what can we do? Read on in the next post.....

Measurements - why the confusion?

Probably before any analysis about measurements, it will be important to just mention that the most important reason for the variations is due to the fact that different measurements have made their place somewhere in the revenue records of the region.

However, the genesis is also to be understood for the recording of the measures differently at different places….

A general definition of Language is:  human communication, either spoken or written, consisting of the use of words in a structured and conventional way

A general definition of measurement is: Values made meaningful by quantifying into specific units

Thus, the purpose of both language as well as measurement is structuring and specification, or to put in another way, “standardization” for the purpose of understanding. Expressing this in other words, it can be said that measurement is a mathematical language for the purpose of communication. The need of communication at different places in a structured way is what has led to a lot of variation and confusion in measurement. People have always communicated what they understood at a certain place, and this ‘regional essence’ has prevailed earlier and still prevails.

Since land is one of the most fundamental things that a person is attached with right from the time he is born till the time he dies- he is born on it, draws his food from there and his remains are placed therein - from cradle to the grave. It is was always connected to a person’s very essence and so he had to measure it, whether there was a defined rule of measurement or not. Therefore, he used measures that were available at any given time.

In the olden times, in the absence of measuring systems and tapes, the measure used to be in terms of  the arm or the hand (palm) or the foot or the thumb. Or even measured by how much land can be ploughed by an ox on a given day.

A problem arises here because of non standardization of arm/ hand / foot / thumb length: a child , adult of short stature or an adult with above average growth. Or a healthier ox can plough more than a weaker one. To sort this out, development of systems continued and there were various region specific measurement standards  which defined the units by law and issued standards. These standards became acceptable at the region they were implemented in and reflected in revenue records also. There was evolution of various standards- there was a fathom  (fingertip to fingertip arms outstretched) or a ‘rood’, the traditional furlong could vary in length from country to country, so did the acre and so on. 

To understand the above analysis more clearly, do observe that there are hundreds of languages in the world. In fact in India itself, dialects change every few hundred kilometres. Due to its essential nature, measurement of land could never be avoided and found its way into the language of the region. Measurement terminology related to land thus became a  form of mathematical communication which was region specific . And this is the reason for the difference in measurement definitions in different geographical areas.

Measurements - Different measurements, one solution

If you cannot change it merge with it (Learnings from a chameleon)

You cannot change the way things have been going on for years , decades or even centuries. The same goes for different measurements done at different places. You must do what comes to you naturally then - standardize for yourself, the distances and areas that you understand. Then, merge your understanding with the given environment.

The key to this standardization is being conversant with both the Imperial system as well as the metric system of length (and areas).

  

As a rule, do not get bogged down by the plethora of measurements available. Rather, convert all measurements into only the ones you are familiar with and which will serve YOU as a standard, no matter where you go….

In most situations, you can just remember 3 conversion denominations: feet (area = sq ft), yards (area = sq yards) , meters (area = sq mtrs). Convert all the denominations into these

Meters and yards=

1 mtr = 3 feet and 3”

1 yard = 3 feet

So a meter is a bit more than a yard.

An thus a Sq mtr is around 20% more than a sq yards (the reason why private developers always prefer quote the per unit price in yards - making you more comfortable - around 20%- with the prices!)

For smaller areas, convert using above calculation parameters into sq mtrs or sq yards

For larger areas, there are three other standard denominations used widely : Ares, Acres and hectares

Thus, 1 Acre = 4067.9 sq.metres (= 43,560 sq.feet = 4840 sq yars)

Also, 1 Hectare = 10000 sq mtrs (or around 2.5 acres)

And 1 Are = 100 sq mtrs

That’s it!

Application of above learning:

Definition of 1 Bigha in different states is different. So we convert it to bighas in one acre                            

We know that:  1 acre  = 4840 sq yard                           

In Assam and Bengal , Bigha = 1600 sq yard thus becomes 3.025 bighas in an acre( 4840/1600)

In Bihar, UP, Bigha= 3025 sq yard    thus becomes 1.6 bighas in an acre (4840/3025)

And in Gujarat if bigha is  1936 sq yard, it thus becomes 2.5 bighas in an acre (4840/ 1936)

We can now manipulate the data as we want and give it in any denomination we wish to.

Practical tips on distance and area conversion, regularly used :

1.     Distance conversion: Converting meters to feet: Generally we will need to convert meter to feet and vice versa. Simply do as follows:

Distance of Meter to feet conversion : Divide meter by 3 and multiply by 10. So if it is 3 mtr, then it is 3/3*10 = 10 feet (approx)

Thus for distance : Divide any meter by 3, you get the feet

2.    Area conversion: Converting sq meters to sq yards. Multiply by 1.2 times, the given sq meter area.

For the converse (ft to mtr or sq yard to sq mtr, do the opposite)

Thus for area: Multiply any sq meter by 1.2, you get sq yards

The logic behind working of the above approximations:

Distance approximation works because:  1 mtr = 3.28 ft. If a number is divided by 3 and multiplied by 10, you are multiplying it by 3.33 effectively, which is very close to 3.28.  

Area approximation works because : Since 1 sq mtr = 3.28ft *3.28ft = 10.7584 sq ft (1 mtr*1mtr, in terms of ft) and 1 yard = 3ft*3ft (9 sq ft). Thus 1 sq mtr is more than 1 sq yard by approx 20% i.e 9 sq ft*1.2=10.8 sq ft

Returns from Real estate ownership

Economists have defined four types of returns: Wages, Rent, interest and profit. It is common knowledge that returns from the ownership of real estate do command rent. From a certain perspective capital appreciation can be clubbed under the of interest. Why interest? Because there is a value to parting with cash and investing in real estate which gets realised as a compounded value. What about the extra amounts earned? Can it be classified under the 3rd category of profit? Maybe....comments please....

Capital Returns - the power of compounding

The returns from Real Estate because of capital appreciation is mainly due to the power of compounding. We know that real estate is illiquid as an investment and has high transaction costs. Due to these characteristics, one hardly sells and buys it frequently. As a result, it gains from a reinvestment of funds, which happens by default, whenever you hold an asset consistently, over a long period of time.
To elaborate the power of compounding consider the following example of A grade commercial locations :

This clearly shows the potential that real estate as an asset class commands, to generate long term wealth for the owners.

Valuation - the tricky business in RE