‘Affordability’ can be defined as the consumers’ ability to purchase but it is a relative term that
could acquire different meanings under varying circumstances. With a bevy of real estate
companies riding on the wave of economic growth the focus on the “fortune at the bottom of the
pyramid” has become an important component of their strategy evident in numerous low price
housing projects sprouting across the nation. For instance Tata Group has come up with a project
at Boisar near Mumbai, Godrej Group is building a township outside Ahmedabad, Ansal
Properties is constructing homes for low income groups in U.P. and Rajasthan and the list goes
on and on.
However, the availability of adequate financing sources for the consumers is a major factor in
determining the sale of these projects. Thus, the role of microfinance institutions in enabling the
low income consumers, mostly employed in the informal sector in purchasing these “Affordable
houses” is of much importance. This is evident from the fact that real estate developers
constructing low cost housing projects are partnering with microfinance institutions like Micro
Housing Finance Corporation Ltd. (MHFC) and SKS Microfinance etc.
Demand for Affordable housing:
There is an enormous unmet demand for low-income housing finance. The segment earning
between Rs 7,000-Rs 15,000 has never been considered significant for home loan offerings.
While the prospects of getting a home loan for the formal sector employee do exist, chances for
informal sector employees and the self-employed like drivers, NGO staff, small caterers and
others are bleak. This is despite the fact that they have marketable skills, steady jobs/incomes
and employer/customer recommendations.
Moreover, urbanization has played a key role in making India’s housing problems worse. In the
present, scenario the total urban land is estimated at 2.3% of India’s total geographical area,
which accommodates 30% of population. Pressure on land and infrastructure is only going to
increase further with 40% of the nation expected to inhabit cities by 2020 at which time urban
population is expected to be 455 million. Apart from this, with 200 million people anticipated to
be living in slums and slum like conditions by 2020, the focus is bound to be on urban housing.
These people have the capability and willingness to make a 20%-25% down payment on houses
costing between Rs 4 lakh-5 lakh and are happy and able to take on a 15-year loan obligation, at
market rates, in order to realise their dream home. Given that in these small-sized homes, the
land cost represents a small percentage of the overall cost, the speculative risk is low, with a very
low probability of a drop in these property prices.
India’s housing shortage is estimated to be as high as 40 million units and demand from the low
income segment constitutes a large proportion of this shortage. Thus, the role of housing
microfinance becomes all the more important as a facilitator to bridge this demand supply gap.
Sources of finance for low income buyers:
Housing microfinance delivers housing finance to low-income people, typically but not
necessarily, without collateral specifically intended for housing-related endeavors, including new
constructions; repairs, improvements or up gradation of existing structures; purchase of land; and
investment in infrastructure. Banks face difficulty in financing the low income consumers mostly
employed in the informal sector terms of inability to accurately assess the credit risk associated
with low income borrowers, lower profit margins, lack of land titles, and uncertainty of
repossession.
Hence, banks like HDFC indirectly fund the low income consumers by lending in bulk to
organizations like SEWA (Self Employed Womasn’s Association) and IASC (Indian Association
of Savings & Credit) which in turn lend to these borrowers. HUDCO (Housing Development
Corporation) and NHB (National Housing Board) undertake the financing and refinancing of
organizations engaged in lending to the low and middle income households. Certain housing
companies like Dewan Housing Corporation Ltd. are playing a major role in providing loans to
the low and middle income households.
Government also promotes the rehabilitation of the urban poor by financing the State housing
boards under policies like the JNURM (Jawahar Lal Nehru National Urban Renewal Mission) &
National Slum development Programme but the success of these policies is limited due to
corruption and nepotism.
Thus, Housing microfinance with longer tenor, flexible payment options, less stringent KYC
norms and lower interest rates acts as the ideal source for providing loans.
Partnership between Microfinance companies & Real estate companies:
“The biggest challenge for our customers is accessing loans – 1,700 out of 3,000 customers in
Phase 1 wanted loans and out of these 1,300 have got sanctions after 6-8 months. There are still
400 customers who are trying to get loans”- Joe Silva, Chairman and CEO, Matheran Realty Pvt
Ltd- Promoters of TMC.
The above statement highlights an urgent need for partnership between real estate developers and
the Microfinance institutions. A case in point is the partnership between Tata Housing
Development Company and MHFC (Micro House Finance Corporation Ltd.) for the New Haven
low cost housing project at Boisar 80 km from Mumbai. The model, offering apartments of 283
sq ft, 360 sq ft and 465 sq ft, in the price band of Rs 3.9 lakh-6.7 lakh, is being replicated across
tier I and II cities.
MHFC is the first housing company in the country dedicated to providing house loans to low
income individuals in the informal sector. Similarly an Ahmedabad based MFI has tied up with
TMC for the latter’s project, the company aggregates customers and determines their credit risk.
Challenges faced by the Housing microfinance institutions:
The road to financing low income consumers is riddled with roadblocks, the first challenge is in
terms of the availability of long term money of the tenor of 15-20 years due to the long term
payment option provided to the economically weaker sections and the second is in terms of the
cost of furnishing the loans.
Currently most Microfinance institutions have short term money in the tenor of 3-4 years at a
rate of 15% to 17% which could translate into loans at the rate of about 18%-19% to the low
income individuals which is quite high. Institutions like MFHC are currently lending from their
equity money but as they take on debt, the loans are bound to get pricier.
The NHB lends to microfinance institutions at about 10% which in turn lend to the borrowers at
about 12%-14% after taking into account the operating costs, credit and interest rate risks. Thus,
in the event of the interest rates being increased by the NHB, the MFIs would have to transfer the
additional cost to the borrowers to remain profitable. This could be unaffordable to them and
would lead to a lower demand for the affordable housing. NHB engages in refinancing of loans
but the interest rates are not fixed but reviewed periodically.
The road ahead:
The success of housing microfinance shall depend on the access to low cost funds and of longer
tenor. This could be facilitated by developing a deep long term debt market, where longer
horizon investors like pension funds can invest in the house mortgages. Mortgage guarantee
funds could also be developed where investors can pool their resources to lend to the mortgage
institutions. An apex body exclusively for financing the microfinance institutions could also be
set up under the supervision of the NHB; incidentally NHB is in the process of developing the
Mortgage Guarantee Corporation on similar lines.
Thus, affordable housing is bound to have a huge impact on the economy in terms of providing
quality life to the economically weaker sections of the society which will in turn improve the
quality of the work force, needed for the growth of the country and Microfinance institutions
have a mammoth role and responsibility as the catalyst for this transformation.

References:

http://www.mhfcindia.com/article_report.html

http://business.in.com/article/work-in-progress/jerry-raos-fourth-act/222/3

http://economictimes.indiatimes.com/Markets/Real_Estate/News_/Affordable_housing_in_India_is_no

t_sub-prime/articleshow/3785989.cms

http://business.rediff.com/column/2009/nov/20/guest-wholl-finance-affordable-housing.htm

http://economictimes.indiatimes.com/markets/real-estate/realty-trends/Affordable-housing-takeswing-

as-micro-finance-cos-step-in/articleshow/5228538.cms

http://www.blonnet.com/2009/05/07/stories/2009050750931700.htm

http://www.rics.org/site/scripts/news_article.aspx?newsID=1249

A report on low income housing: challenges and opportunities for microfinance by Centre for
Microfinance: IFMR
The opportunity for urban low income housing projects by Ashish Karamchandani, Monitor
Consulting

View expressed in this article are of author’s own.

Calculate important financial ratios
Internal rate of return (IRR)
Modified internal rate of return (MIRR)
Debt coverage ratio (DCR)
Debt to equity ratio (DER)
Gross rent multiplier (monthly) (GRM)
Gross rent multiplier (Annual)
Net present value (NPV)
Cash on cash return (before and after taxes)
Debt service ratio (DSR)
Capitalization rate (Cap Rate)
Annual ownership percentage
Loan to value ratio (LVR)

Public sector
Private sector

Money markets
Financial companies/institutions

The unorganised financial system comprises of money lenders, indigenous bankers, lending pawn brokers, landlords, traders, etc. There are also a host of financial companies, investment companies, chit funds, etc. in the unorganised sector. These are not regulated by the central bank or government in a systematic manner.

INDIAN BANKING SYSTEM
Banking system in India has its origin as early as the Vedic period. It is believed that the transition from the money lending to the bank must have occurred even before Manu, the great Hindu Jurist, who has devoted a section of his work to deposits and advances and laid down rules relating to rates of interest. The General Bank of India was the joint stock bank to be established in the year 1786. The others, which followed, were the bank of Hindustan and the Bengal Bank. The Bank of Hindustan is reported to have continued till 1906 while the other two failed in the meantime. In the first half of the 19th century the east India company established three banks; the bank of Bengal in 1809, the bank of Bombay in 1840 and the bank of Madras in 1843. These three banks also known as Presidency banks were independent units and functioned well. These three banks were amalgamated in 1920 and a new bank, the Imperial bank of India was established on 27th January 1921. With the passing of the state bank of India act in 1955 newly constituted state bank of India. The Reserve bank which is Central bank was created in 1935 by passing Reserve bank of India act 1934. In the wake of Swadeshi Bank Movement, a number of banks with Indian Management were established in the country namely, Punjab National Bank Ltd, Bank of India Ltd, Canara Bank Ltd, Indian Bank Ltd, the Bank of Baroda, the Central bank of India Ltd. On July 19, 1969, 14 major banks of the country were nationalised and in 15th April 1980 six more commercial private sector banks of the country were also taken over by the government. Today the commercial banking system in India may be distinguished into:
1. Public Sector Banks
State Bank of India and its associate banks called the State Bank group
20 nationalised banks
Regional Rural Banks mainly sponsored by public sector banks
Private Sector banks
Old generation private banks
New generation private banks
Foreign banks of India
Scheduled co-operative banks
Non-scheduled banks
Co-operative Sector Banks
The co-operative banking sector has been developed in the country to the supplement the village money lender. The co-operative banking sector in India is divided into 4 components.
State Co-operative banks
Central Co-operative banks
Primary Agriculture Credit Societies
Land Development banks
Urban Co-operative banks
Primary Agricultural Development banks
Primary Land Development banks
State Land Development banks
Development Banks
Development banks are those financial institutions which provide long term capital for industries and agriculture namely:
Industrial Finance Corporation of India (IFCI)
Industrial Development bank of India (IDBI)
Industrial Credit and Investment Corporation of India (ICICI)
Industrial Investment bank of India (IIBI)
Small Industries Development bank of India (SIDBI)
SCICI Ltd.
National bank for Agriculture and Rural Development (NABARD)
Export Import Bank of India
National Housing Bank
Money Market
The money market is the market in which short term funds are borrowed and lend. The leading money market institutions are:
Discount and Finance House of India Limited (DFHI)
Securities Trading Corporation of India (STCI)

Nationalised Banks
Until independence, the banking system was primarily associated with urban culture. In order to achieve the social and economic objectives of the country, the banks have to spread out into rural and UN-banked areas and make credit available to the large mass of the people in those areas. Therefore in 1950, the Imperial bank of India was asked to expand its offices in rural areas and it was brought under government control in July 1955 and renamed State Bank of India. In 1968 to supplement efforts of the State bank of India the government introduced social control over the banks. But this control is found wanting. In 19th July 1969 the government nationalised 14 major banks with deposits over 50 crores. On 15-4-1980, 6 more commercial private sector banks with deposits over 200 crores were nationalised.
In July 1993, New Bank of India was merged with Punjab National bank. Now, there are 27 banks in the public sector viz. State Bank of India and its 7 associates, 19 commercial banks exclusive of regional rural banks.
Allahabad bank Andhra bank
Bank of Baroda Bank of India
Bank of Maharashtra Canara bank
Dena bank Indian bank
India Overseas Bank Oriental Bank of Commerce
Punjab and Sind bank Punjab National bank
Syndicate bank Union bank of India
United bank of India UCO bank
Vijaya bank
Performance of PSU Banks in 2003
As per the report compiled by ICRA, the combined net profits of the 27 PSU banks increased by 48 percent to Rs 12,294 crores in the last fiscal. Net NPAs fell drastically from 5.8 to 4.5 percent. The capital base of PSU banks increased to Rs 14,175 crore by the end of last fiscal, from Rs 3,034 crore in 1990-91, with all the bank meeting the RBI stipulated 9.0 percent capital adequacy ratio by March 31, 2003.
As per a report compiled by ICRA, the combined net profits of the 27 PSU banks increased by 48 percent to Rs 12,294 crore in the last fiscal. The net profits has increased 92.5 percent in 2001-02. Thus, the net profit of PSU banks increased 2.8 times during the last two financial years. Of the total State Bank of India and its associates contributed Rs 4,510 crore or 36.7 percent of the pie, while the share of 19 nationalised banks was at 73.3 percent at Rs 7,784 crore.
SBI topped the list posting a net profit of Rs 3,105 crore. SBI was followed by Canara Bank with the net profit of Rs 1,019 crore, Bank of India (Rs 851 crore), Punjab National Bank (Rs 842 crores) and the Bank of Baroda (Rs 773 crores). Net NPAs fell drastically from 5.8 to 4.5 percent. Gross NPAs came down to less than 10 percent from 11.1 percent. The PSU banks were able to reduce their gross NPAs to 9.2 percent at about Rs 54,134 crore while net NPAs came down to Rs 4.5 percent Rs 24,974 crore. Three of eight SBI and associate banks had a net NPA exceeding 10 percent in 1996-97 but the number reduced to NIL in 2002-03. The number of PSU banks having NPAs in excess of 10 percent also declined from seven at the end of 1996-97 to three at the end of last fiscal.
For PSU banks, gross NPAs banks increased to Rs 14,175 crore by the end of last fiscal, from Rs 3,034 crore in 1990-91, with all the banks meeting the RBI stipulated 9.0 percent capital adequacy ratio by March 31, 2003. The main reason for improvement in CAR was the Rs 22,500 crore recapitalisation in 19 PSU banks during the last decade. In 2002-03, Canara Bank, PNB, Union Bank and Allahabad Bank raised nearly Rs 937 crore.
As per ICRA report, the combined income of the PSU banks inched up 9.6 percent to Rs 1,28,464 crore last fiscal. The trend in declining interest rates in the economy resulted in a mere 1.0 percent increase in interest expenses to Rs 69,853 crore. NPAs and taxes resulted in a 30.3 percent rise in provisions to Rs 17,420 crore.
Role of Banks
Banks in India have traditionally offered mass banking products. Most common deposit products being Savings Bank, Current Account, Term deposit Account and lending products being credit and term loans. Due to Reserve Bank of India guidelines, Banks have had little to do besides accepting deposits at rates fixed by Reserve Bank of India and lend amount arrived by the formula stipulated by the Reserve Bank of India at rates prescribed by the latter. PLR (Prime Lending Rate) was the bench mark for interest on the lending products. But PLR itself was, more often than not, dedicated by RBI. Further, remittance products were limited to issuance of drafts, telegraphic transfers, bankers cheque and internal transfer of funds.
In view of several developments in the 1990s, the entire banking products structure has undergone a major change. As part of the economic reforms, banking industry has been deregulated and made competitive. New players have added to the competition. IT revolution has made it possible to provide ease and flexibility in operations to customers. Rapid strides in information technology have, in fact, redefined the role and the structure of banking in India. Further, due to exposure to global trends after information explosion led by internet, customers- both individuals and corporates- are now demanding better services with more products from their banks. Financial market has turned in to the buyers market. Banks are also changing with time and are trying to become one-stop financial supermarkets. Market focus in shifting from masses banking products to class banking with introduction of value added and customised products.
A few foreign & private sector banks have already introduced customised banking products like Investment Advisory Services, SGL 2 accounts, Photo credit-cards, cash management services, Investment products and Tax advisory Services. A few banks have gone into market mutual fund schemes. Eventually, the bank plans to market bonds and debentures, when allowed. Insurance peddling by banks will be reality soon. The recent credit policy of RBI announced on 24-4-2000 has further facilitated the entry of banks in this sector. Banks also offer advisory services termed as ‘private banking’ to “high relationship value” clients. Products like debit cards, flexi deposits, ATM cards, personal loans including consumer loans, housing loans and vehicle loans have been introduced by a number of banks. Public Sector banks like SBI have also started focusing on this area. SBI has opened more than 100 new branches called personal banking branches (PBB). The PBBs will also market SBIs entire spectrum of loan products: housing loans, car loans, personal loans, consumer durable loans, education loans, loans against share, financing against gold.

HOUSING FINANCE
Major Player and Market Shares
Housing finance can be raised from banks, housing finance companies. HDFC dominates the housing finance sector with 45% market share, followed by HUDCO by 21% and LIC housing with 16% share. Other major players include SBI homes promoted by SBI and CanFin homes promoted by Canara Bank- Gujarat Rural Housing Corporation promoted by HDFC.
The housing finance industry, encompassing banks and housing finance companies (HFCs), have exhibited a 36 percent growth between April and December 2002 despite the high repayment levels experienced by some HFCs. While banks have not faced significant prepayments in this period, credit rating information services of India (crisil) estimates the prepayment levels of HFCs outstanding loans to be about 12-14 percent. Were it not for these prepayments, the industry’s outstanding assets would have grown at a higher 43%.
The competitive landscape in the sector has changed with banks laying a greater thrust on housing finance resulting intense competition. Banks have an inherent advantage in retail finance, especially in housing loans, because of their lower cost of funds, existing retail relationships in liability products and large branch network. Major banks have overtaken HFCs in the April-December 2002 period, as a result of which they have a higher market share maintain its high growth rates in future given that the key growth drivers, the governments thrust on the housing sector in terms of fiscal incentives for individual housing loans coupled with the demand supply gap in housing, would remain strong.
Housing Finance: Building in Strength
HOUSING FINANCE Companies (HFCs) are building up fast and strong. While most financial sector entities continue to be troubled by poor quality assets, the HFCs are growing fast, and there is unlikely to be declined in the quality of assets.
To get an overview of the industry status, consider the growth in disbursements of HDFC and LIC housing finance which account for about 75% of all housing loans. Their disbursements recorded a compound annual growth rate of 28% over the last two years, reflecting the demand for housing loans.
The buoyancy in the industry comes on the heels of a mix of favourable set of factors. A study of these factors would give an indication of the prospectus for the industry.
Unique Product…..
Among the most important reasons for sound base on which a HFC rests is the unique nature of the end-product for which a HFC performs the task of financial intermediation. Housing may be characterised as a basic for which there is a perennial demand.
….and Factors Leading to its Affordability
A critical factor in determining the demand for a housing loan is the ability of a borrower to afford one. This may be loosely described as the ability of a borrower to comfortably repay the installments on the borrowed amount.
At the moment, the ability of a typical borrower to afford a housing loan is higher than it was in the last two decades. HDFC, the market leader in housing finance, sys that the cost of a house, when expressed as a multiple of a borrowers annual income, has come down about 12 times the annual income in the early 1980s to just four times now.
As a consequence of the general rise in income outstripping the rise in the cost of housing, the potential market size for HFCs have grown enormously, while simultaneously reducing the risk attached to a housing loan.
Low interest and fiscal benefits
Two other factors contributed to ‘affordability’. Interest rates are at their lowest. Following the Reserve Bank of India’s decision to reduce the bank rate by one percentage point to 7% in April, the HFCs took the cue and reduced the interest rate on the housing loans in the 12.75-13.5% range, a level reached after a series of interest rates cuts iver the last two years.
The level of construction activity plays a critical growth in the growth of the economy because of its strong linkage to others sectors. It is believed that housing has a direct impact on 32 upstream and 76 downstream industries, including cement and steel. In some parts of the world, ‘housing starts’ are critical macroeconomic indicators.
In this backdrop, the previous two union budgets provided significant fiscal benefits for the housing sector, in the form of substantive deductions in the tax liability of individuals who take a loan to purchase a dwelling unit.
From the industry has come a series of innovations in the terms of housing loan products. Driven in the part by the increasing competition, the HFCs are tailoring the loan products to meet a variety of differing needs of borrowers. For instance, HDFC has introduced housing loans which come with a floating rate of interest. Besides tailoring the products, housing loans also come with additional benefits, such as an insurance cover.
The Unfolding Scenario
Low interest rate, positive legal amendments and fiscal benefits have all combined to make the market for housing loans one of the safest segments in financial intermediation.
In this upbeat situation. The areas of concern for the HFCs tend to get little attention. While the problem areas may certainly be lower than the other segments of financial intermediation, about 300 HFCs do have to face up to concerns that are common to the other areas.
The chief concern for the HFCs is the increasing competition. According to one section of the industry, about 300 HFCs are operating of which only a few are registered with the NHB. Registration allows an HFC to seek refinance from the NHB.
Over the last year, the market has witnessed the entry of new players of significant size. Primarily, the advent of ICICI, a financial institution which would not be operating under the same constrains as other HFCs in terms of prudential guidelines. Among the other entities in the housing loan market are non-banking finance companies-promoted entities and banks which seem to have targeted the market with renewed vigour.
Low Margin Business…….
Following the gradual breakdown of the compartments that separate the different aspects of financial intermediation, the entire sector has seen a relentless squeeze a of the spread. The same trend is responsible for the declining spread in the housing loan market. The trend in spreads is best captured by the declining spread of HDFC, the most important HFC today. HDFCs spread on loans over the cost of borrowing declined from 2.06% per annum in 1997-98 to 1.83% in 1998-99.
……….But Low Risks Too
the special nature of housing finance makes it one the least risky areas in financial intermediation. The NPAs, defined as the outstanding loans on which installments remain unpaid for more than six months, of the HFCs are among the lowest in the financial sector. HDFC, for instance, recorded only 0.90% of NPAs in relation to its total portfolio in 1999-2000. LIC housing finance, on the other hand, registered a higher level of NPAs; it was around 4% of the total portfolio in 1998-99.
Like the new-generation private sector banks, the HFCs are typically going to have a superior quality of assets vis-à-vis other entities in the financial sector. This, in turn, means the business will be characterised by low risk. With spreads declining, the business of giving housing loans is going to be characterised by both low risk and low returns.
ROLE OF BANKS
In this milieu, some banks seem to have made an aggressive bid to attract customers. With the advantage banks may have in terms of low cost of funds, they are generally in a position to price a product at a lower level compared to the others in the financial sector.
It is debatable, however, if banks can sustain their aggressive foray in to the market for housing loans because banks typically have a higher degree of operating cost of funds.
With the interest rates among the top HFCs tending to converge, and borrowers generally willing to be neutral among the HFCs there is a difference of only about 25 basis points, the quality of service is what lends the competitive edge to an HFC.
Service, the key
Last year when ICICI made a foray into the market for retail housing loans, quality and value-added service was the thrust area rather than interest rate. ICICI capitalised on the absence of ‘door delivery’ for housing loans, and a quickly built a reputation by going to the potential borrower rather than waiting for him to come to them.
With the quality of service gaining importance, market leaders, such as HDFC, and new entrants, such as ICICI, are likely to do well as their track record suggests that quality of service is a strong point. Other HFCs that score on this count are the ones linked to some of the top-rung NBFCs. The ability to reach and quickly cater to the customer, traditionally out of the ambit of the banking and financial institutions, is the fort of the NBFCs. The same quality may see them gaining a significant chunk of market share.
The absence of prompt and easy service may let down banks. The ones in a powerful position to shake up the market, such as nationalised banks with a wide network, do not have reputation for service. Banks are believed to insist on a higher level of documentation -–a deterrent for a potential customer.
With housing finance emerging as a low risk, low margin business with service providing a competitive edge, it may difficult to dislodge existing market leaders such as HDFC and LIC housing finance which have considerable experience. For equity market followers, HDFC remains the best long-term investment because of its responsive service and ability to contain risk in the business.
The HFCs as a standalone business are likely to become increasingly rare. With the barriers between different areas in the financial sector breaking down, the industry is likely to be characterised by entities that seek to provide a variety of loans under one umbrella. Thus, the market has seen the entry of ICICI, Sundaram Home Finance and HDFC planning ventures in other segments of the financial sector.
The outcome of the trend towards providing different services by capitalising on a common database and brand name may lead to stiff competition and significant product innovation. But for now, among the HFCs, HDFC remains on top and presents the soundest equity investment in the sector.
View from the other side
The market for housing loans is not as simple as it appears at first sight.
Housing finance companies (HFCs) officials point to quite a few quirks in the market that make for a challenging environment. Typically, housing loans are disbursed for 15 years. But when it comes to repayment, the situation takes an interesting turn. According to HFC officials, quite a few loans are repaid by the end of the eight or ninth year. They attribute the large-scale prepayment to psychological factors including the average Indians discomfort with outstanding debt.
Given the experience the HFC have had with prepayment, officials of ones—that are two into the first and second year of operations—say they have actually factored in the prepayment for all their 15 and 20 year loan disbursements.
Another interesting factor about the Indian housing finance market is that individuals usually for about 40% of the cost of the house out their savings. In other words, the loan to value ratio is only about 60%. This, in turn, may have a significant bearing on the relatively low NPA levels of the industry.
The loan to value ratio has a bearing on the areas of the finance too. NBFCs that finance commercial vehicles claim that the cost incurred by the borrower to add value to a commercial vehicle serves as a deterrent to the likelihood of a willful default because if the NBFC repossess the vehicle, the borrowers funds too get locked up.
This may not be the only reason for the low NPAs in the housing finance market. The unique nature of the product itself makes the likelihood of default dim.
One of the leading HFCs claimed that an internal study revealed that the maximum number of defaults came from the category of the borrowers who borrowed less than Rs 1 lakh towards a housing loan.
Another interesting claim from the same HFC is that the highest number delinquencies, when studied according to the profession of the borrower, shows that the worst offenders are lawyers, teachers, politicians and journalists.
The implications of the amendments to the provisions on foreclosure evoked slightly varied response from the industry. while one entity felt that the amendment may change the business model, other entities felt that the amendment was unlikely to have a significant impact on appraisal.
As for changes to the business model, it was felt that if the dwelling unit could be repossessed within a definitive time-frame, property value would play a bigger role in appraisal. The credit-worthiness of the borrower per se may not be that important.
The contrasting opinion was that creditworthiness of the borrower would continue to be of paramount importance. The amendment may only help securitisation. One trend that seems to be emerging is that the HFCs will fall over one another to introduce innovations in an attempt to attract customers. This is one market where the customer is definitely the king.
Case Study: STATE BANK OF INDIA
The state bank of India has crossed its targeted lending in housing finance for the year. Housing finance constitutes the major plank of the state banks new thrust into retail banking and represents about 40% of the banks retail assets. Housing finance forms of a major chunk of SBIs personal loans portfolio. For this financial year the bank had targeted disbursements of Rs 7,000 crore through its personal loans, of which housing finance alone is expected to contribute upto Rs 4,500 crore.
State bank had identified retail finance, along with infrastructure finance, as key areas to sustain growth in the backdrop of a slowing economy. The bank has recently revamped the entire housing loan procedure following major relaxation’s permitted by the Reserve Bank of India in April, 1998. With the new procedures in place, SBI is now placed on an even keel vis-a-vis housing finance companies.
State Bank has identified 500 branches across the country to specifically push housing loans. Housing loans have been assigned as the core business focus of these branches.
State bank is heavily banking on the completion of its 100 branch personnel banking network to give the big push to its retail products.
The bank is in the process of putting up a network of over hundred new branches exclusively dealing with personal banking products and with a distinct brand identity of a posh new generation bank. These branches meant to counter the growing aggression by foreign and new private sector banks will offer only personal banking services and not deal in corporate and business accounts. SBI plans to use these branches as an outlet for all its personal banking products. The idea is to make an account holder in these branches satisfy all his personal finance needs at the branch itself. At present, these products include SBIs housing loans, consumer finance scheme, educational loans, car loans, personal loans scheme, depository participant services, and advances against shares, debentures and PSU bonds. SBI has already opened about 15 of these branches in various metros.
INSIGHT
HFCs may lose out to PSU banks
The recent years have seen more and more banks enter into housing finance. As the cost of the funds for banks has traditionally been low, they stand a good chance of weaning away business from the two established players. The fact that banks such as SBI that have a large network of branches that can be used to service consumer of housing finance at virtually no additional costs also goes in their favour. In order to gain prominence in the business, SBI merely needs to ensure a quick response to customer needs.
Social Responsibility for Nationalised Banks
The deficit in housing is continuously increasing despite all the hype created in this sector. To meet the scarcity and to help people who cannot afford to have their homes, the Government comes up with special housing schemes from time to time. One notable example is Pradhanmantri griha vikas pariyojana launched by the honourable Prime Minister, Mr. Atal Bihari Vajpayee. Nationalised banks have very significant role to play for such social welfare schemes.
What to expect…….
Year 2004 is unlikely to be significantly different. Tax benefits have played a major role in popularising home loans. Recommendations to curtail tax benefits have been rejected in the past, also no surprise elements are likely to find place in the forthcoming budget considering that general elections are scheduled to be held in late 2004. The rate-cut wars which commenced in 2003 are likely to continue into 2004 as well; however their intensity might taper off.
One disturbing feature in the entire scenario is the emergence of herd mentality. Consumers across board lured by falling rates have opted for home loans with floating rate. The notion that interest rates will continue to southwards has become increasingly prevalent.
While only a soothsayer may be able to predict how interest rates will move, circumstances seem to suggest that an upward hike in interest rates is a possibility which should not be ignored. Fixed rate loans would make a lot of sense if such situation arises. More importantly consumers need to select loans based on their profiles. Opting for floating rate loans simply because everyone does is so poor move. If you are in your mid-forties and have a low risks appetite, fixed rate loans should be the right choice, since the liability is defined and three are no unpleasant surprises. Conversely for some one in his thirties with a greater risk appetite and a view on interest rates, a floating rate fund makes perfect sense.
Give and take a few inches 2004 could be another favourable year for consumers. However from the consumers perspective it becomes critical that they make informed choices i.e. select the right options and understand implications of their loan agreements.
Conclusion
Banking industry in India is undergoing a rapid metamorphosis. Their role of traditional banker has been replaced with financial services provider for the clients. Most of the PSU and private sector banks in our country have already started looking at their portfolio of services offered and what they should do in the future for remaining competitive in the industry. as public sector banks are likely to undergo major consolidation, suddenly for many Indian banks things have changed.

Property Rates of Prime Commercial districts in Mumbai

Location Lease Rates**/SFT* Purchase Rates**/SFT

Cuffe Parade 60-100 8000-15000
Nariman Point 80-165 8000-15000
Ballard Estate 80-125 7000-12000
Fort 80-125 7000-12000
Tardeo/Mumbai Central 70-100 7000-10000
Worli 60-110 5500-10000
Prabhadevi 60-100 5500-9500
Lower Parel 50-85 4800-9000
Bandra Kurla Complex 75-125 6000-12000
Kalina 30-75 4000-6500
Andheri(E) 15-75 2000-5000
Andheri(W) 25-60 2500-5500
Powai 30-55 4000-5500
Goregaon 30-50 3800-5200
Malad 20-50 2000-5000
Navi Mumbai 10-50 1000-2800

*Deposits Equivalent to 6 to 12 months are normally charged.
*Business centres also plug and play offices in most of the above districts for Short/ Long Term.
**All rates are in Indian Rupees

Property Monitor-Chembur
Chembur, the central suburb of Mumbai, is one of the greenest suburbs. It is just 15 km away from Churchgate. Chembur is a residential and commercial area. Like the other suburbs of Mumbai, Chembur is growing at a fast pace.
Chembur has good infrastructure facilities. It has easy access from all the suburbs of Mumbai. Chembur is at key location, connecting Navi Mumbai and old Mumbai. Chembur has a variety of options for shopping, with Shoppers’ Stop and many other shopping centers. New multiplexes and shopping centers are also on the anvil. In education and entertainment, Chembur is on par with other suburbs. Various schools and colleges, and cinema halls including Ashish, Basant, Nataraj, Vijay and New Vijay are present
The well known Tata Institute of Social Science is here. Chembur is famous for its Golf Club and R K Studio. Gardens like Sadhu garden, Dr. Ambedkar garden and Diamond Garden are adding to the beauty of Chembur. Although this suburb is growing rapidly in both residential and commercial sectors, it is not overpopulated and can retain its peace and green atmosphere.
Residential:
Chembur is an ideal location for residential purpose. Chembur has number of Bungalows surrounded by trees. The reasonable property rates are attracting buyers in the residential sector. On other hand, builders have also come up with projects having all modern amenities. The residential property rates in Chembur are in the range of Rs 2000 to Rs 3500 sq.ft, while rental rates are in the range of Rs 8 to Rs 25 sq.ft/pm. Reputed builders like Runwal group, Prime realty, Sabari builder and Kalpataru builders, have their residential projects here.
Commercial:
The prospectus of commercial markets are also bright. Many commercial projects are in progress. Shoppers Stop has opened a branch here, and a multiplex is under development. the commercial property rates are also reasonable, as compared to other suburbs of Mumbai. It ranges between Rs 2500 and Rs 5000 sq.ft, depending upon the exact location and amenities, while the rental rates are in the range of Rs 15 to Rs 65 sq.ft/pm.
PROPERTY MONITOR – GHATKOPAR
Ghatkopar is a central suburb of Mumbai. Ghatkopar, with a history of more than a century, is one of the oldest settlements in Greater Mumbai. Its strategic location, which facilities easy access to the key areas of Mumbai, is the primary reason for its growth in residential and commercial sectors. In the recent past, it has been seeing a spurt in growth, with more developmental activities coming up in Navi Mumbai.
Ghatkopar has good connectivity, educational institutions, modern hospitals and entertainment facilities. Odeon in Ghatkopar (E), Uday and Shreyas in Ghatkopar (W) are some of the theatres here. Besides, it has good shopping facilities, with the famous retail shop, Shoppers Stop and many small shopping centres such as Jayant Villa, Shree Krupa, etc. Ghatkopar (E) is becoming more popular as compared to Ghatkopar (W). the main reason appears to be the presence of slums and industrial units in Ghatkopar (W).
Residential:
The residential property rates in Ghatkopar (E) and (W) are in the average range of Rs 3000 to Rs 5000 per sq.ft., while rental vary between Rs 10 and Rs 30 per sq.ft pm. The rates differ depending upon amenities, quality of construction, etc. since Ghatkopar has easy access to commercial and industrial areas, the rates are little higher, when compared to the nearby suburbs. Upcoming residential projects in Ghatkopar include Everest gardens & Nand Ashish by Everest group, Mahindra Park by Gesco Corporation. Godrej Grenville Park is being developed by Godrej properties on a 50000 sq.ft area.
Commercial:
Fast and rapid development of residential market in an area naturally boosts commercial activities. Ghatkopar is no exception to this rule. Ghatkopar is an ideal place for commercial establishments. The property are in the rates are in the range of Rs 4500 to Rs 7000 sq.ft. the retail chain shoppers is present here. Bhaveshwar Plaza, an office/shopping complex is promoted on an area of 40000 sq.ft. VHP House is developed by VHP builder on 7000 sq.ft, exclusively for office space. Krushal commercial center, spread over 100000 sq.ft. area, has been already completed.
PROPERTY MONITOR – JUHU
Juhu, in the Northern suburbs, is a cool and posh area and has some of the prime real estates of Mumbai. Besides, Juhu is also famous as a picnic spot. Juhu Beach is the most popular beach of Mumbai and attracts all the Mumbaikars and other tourists. The Iscon temple, renown for the Hare Rama Hare Krishna movement and the evening aarti is located in Juhu. Juhu has excellent transportation and communication facilities. All the suburbs of Mumbai can be easily accessed from here both by bus and train. Well know industrialist Jamshetji Tata had purchased a plot here in 1890 and built a bungalow. Juhu is a posh residential locality of Mumbai with many bungalows of film personalities. The southern end of Juhu is full of luxurious hotels and apartments. many reputed schools and colleges are located here. Some reputed hospitals like Nanavati hospital and N.R Cooper hospital are also present here.
As a commercial area, Juhu has also its separate identity. Juhu has a number of five star, four star and three star hotels. These include Sun N Sand, Holiday Inn, Hotel Sea Princess, The Emeralde Hotel, Hotel Ajanta, Centaur Juhu Beach and Citizen. J W Marriott’s, a seven star Hotel is also located here. In addition to these hotels, restaurants / coffee bars like Barista, Café Coffee Day, Mahesh Lunch Home, Roti and Dosa Diner are present here. Another major advantage of Juhu is the presence of Sahar International and Santacruz Airport.
Residential:
Juhu is considered one of the posh residential areas of Mumbai. Cine stars have preferred Juhu for their residential place. Hence the property rates are high as compared to other suburbs. The residential property rates in Juhu are in the average range of Rs 6000 to Rs 8500 per sq.ft. while the rental rates are in the range of Rs 15 to Rs 55 per sq.ft pm. Reputed builders like Mittal have Megh apartments, Mittal paradise and Mittal Ocean view while Rizvi have their projects with super duplex flats and modern amenities.
Commercial:
As a commercial area, Juhu is more known as a picnic spot due to the beach. There are several excellent hotels here along with all the facilities and shopping arcades. Supreme shopping center and body basic beach haven shopping arcade are some of the names present. The commercial property rates are less than the residential property rates here. The commercial property rates are in the range of Rs 4500 to Rs 7000 per sq.ft. while the rental rates are in the range of Rs 50 to Rs 80 sq.ft pm.
PROPERTY MONITOR – KALYAN
Kalyan is a satellite town of Mumbai, lying 54 km to the south. Kalyan is characterised by hills and green areas. Kalyan comes under the governance of Kalyan Dombivili Municipal Corporation.
Kalyan has been developing fast in both residential and commercial sectors. Kalyan owes its growth to its proximity to Mumbai and location at the junction of south, and east bound railway lines. Another reason for Kalyan’s growth is the industrial areas such as Dombivili, Murbad, Badlapur and Tarapur. Also a number of car spare part manufacturing factories and rice mills are here. Kalyan is mostly populated by middle class people.
Kalyan has quality infrastructure facilities. Local train running on Mumbai-Karjat and Mumbai-Kasara tracks pass through Kalyan. Educational facilities are very good. Many major convent schools are here.
KDMC ( Kalyan Dombivili Municipal Corporation) is doing a lot to improve the infrastructure. KDMC has computerized its operations and created citizen facilitation centres for providing better services to the public. It is one of the few IT enabled municipal corporations in India.
People, mainly from Dadar, Girgaon and near by suburbs are shifting to Kalyan and Dombivili. Although Kalyan is more known as residential area, many commercial projects are also coming up. Mumbai builders are concentrating on Kalyan and developing several residential and commercial projects. Plenty of land is available here, since factories in these area have been shifted to other industrial areas.
Residential:
Kalyan is ideal residential area for middle class people. The residential property rates are in the range of Rs 900 to Rs 1200 sq.ft, while rental rates are in the range of Rs 2.5 to Rs 6 per sq.ft pm, approximately. These affordable prices, educational and medical facilities are attracting to buyers to stay here. With all the advantages, Kalyan is also ahead in entertainment. More than 12 cinema halls and drama theatres are here. Residential projects like Godrej Hills by Godrej, Lok Surbhi, Lok Udyan, Lok Vatika by Lok Group, Yogi Dham by Ajmera are in the progress in Kalyan. Also Deshmukh Brothers, D.S.K Group, Mantri Group, Ravi Constructions are also involved in developmental activities.
Commercial:
The commercial market in Kalyan is also picking up. The areas adjacent to the roads near Kalyan railway station are the important commercial area. Mahavir Shopping complex, Jojwala complex and Sreedevi complex are some of the famous shopping centres. Besides, several small and medium size shops and hotels are also present. The commercial property rates are in the range of Rs 1500 to Rs 3500 per sq.ft., whereas the rental rates are in the range of Rs 12 to Rs 35 per sq.ft pm.
PROPERTY MONITOR – MALAD
It is a boom time for real estate market in the suburbs of Mumbai. In the western suburbs of Mumbai, Malad has been seeing a lot of growth in both residential and commercial sectors, thanks to the increasing demand from Mumbaikars.
Malad is blessed with many shopping centres, good medical facilities, and quality educational institutes. Besides, it has proper transportation and communication facilities. Malad has good picnic spots and is famous for its beaches (Marve/Aksa/Erangal). A few well-known restaurants & hotels, e.g. Land mark Hotel, The Resort and Retreat, are present here. Malad has good entertainment facilities. Another advantage of Malad is its proximity to suburbs like Goregaon and Kandivili. All these factors have contributed to the growth of real estate in Malad.
Residential:
The residential market in Malad has seen a steady growth over the years. The affordable prices and the facilities available here attracting buyers. The residential property rates for Malad (E) & (W) are in the range of Rs 1800 to 2200 per sq.ft. approximately. The upcoming residential projects include Palm Court by K Raheja construction, Rustomjee Adarsh Regal & Rustomjee Riviera by Keystone Group, Saraswati by D.S. Kulkarni, Serenity Heights by K Raheja Corp. and Raj Manor. The following table gives the property rates for Malad and its neighbourhood.
Residential Property Rates:
Locality Outright Purchase [Rs/sq.ft] Rental Rates [Rs/sq.ft.pm]
Min Max Min Max
Malad [e] 1800 2200 5 18
Malad [w] 1800 2200 5 20
Kandivili [e] 1800 2500 5 18
Kandivili [w] 1800 2500 5 20
Goregaon [e] 1900 2700 5 22
Goregaon [w] 1900 3000 5 25

Commercial:
Malad’s commercial market is also looking up. Most of the reputed companies in IT sector and IT enabled sectors are shifting to Malad, mainly due to attractive property rates, as compared to other suburbs. In addition many shopping centres are also coming up to cater to the needs of growing population. Malad has many shopping centres, e.g. Natraj shopping center, Shivam shopping, Vaishali shopping center, Malad shopping center on S.V. Road, Shantinath center near New Era Theatre. Vasant Plaza has come up recently. A major, high class shopping center by Dheeraj builder is to be opened up soon on a 75000 sq.ft area. One more commercial project by K Raheja builder, Mindspace with 350000 sq.ft, is expected to be complete in 2003. Intelenet Global Services Ltd is promoting their second centre, which covers an area of 200000 sq.ft.
Commercial Property Rates:
Locality Outright Purchase [Rs/sq.ft] Rental Rates [Rs/sq.ft.pm]
Min Max Min Max
Malad [e] 3000 5000 15 60
Malad [w] 3000 5000 15 60
Kandivili [e] 2500 4000 15 70
Kandivili [w] 3000 4000 15 50
Goregaon [e] 2500 4000 20 50
Goregaon [w] 2500 4000 20 50

PROPERTY MONITIOR – MULUND
Mulund is a green, well planned suburb of Mumbai, located close to the boundary of Thane and Navi Mumbai. Mulund has seen synchronized growth in both residential and commercial sectors. Mulund, once preferred mainly by the middle class, now offers prime residential and commercial projects. A number of huge residential and commercial projects are coming up here. Despite its rapid growth in residential and commercial sectors, Mulund is not over populated, and can retain its peaceful, green atmosphere, thanks to its grid pattern layout by German town planners the most developed area is LBS Marg to Mulund-Goregaon link road. A major advantages are the presence of shopping malls and super markets, medical facility, entertainment facilities, and sports facilities such as badminton and tennis courts, swimming pool and gymnasium. Several theatres including Kalidas Natya Mandir and Jai Ganesh and Mehul Cinema halls are present here. Mulund has also a number of reputed schools and colleges. One more advantage of Mulund is the residential belt, which is within 30 minutes drive from Mumbai.
Residential:
Mulund is emerging rapidly as the best residential area. A host of large and small project is in progress and many are ready for possession. The areas occupied by some of the closed down industries have converted into residential areas. The residential property rates are in the average range of Rs 1500 to Rs 2500 per sq.ft., depending upon the exact location, amenities, reputation of the builder, parking space, etc., while rental rates are in the range of Rs 2.5 to Rs 10 per sq.ft.pm . Many prime projects, including Nirmal Lifestyle and Takshashila by Nirmal Group, Indraprasth by Karia Builders and Marathon Galaxy by Marathon Group are coming up.
Commercial:
With the rapid growth in residential sector, the commercial market is also picking up. Many shopping malls and shopping centres are under construction. Nirmal group is promoting a huge shopping mall on 500000 sq.ft area, while Runwal Group is also coming up with another shopping mall on a 300000 sq.ft. area on LBS road. Another commercial-cum-super market (Marathon Cosmos and Marathon Max) is under construction on a 200000 sq.ft area by Marathon Group. The commercial property rates are in the average range of Rs 2000 to Rs 3500 sq.ft., while rental rates are in the average range of Rs 20 to 45 per sq.ft.pm.
PROPERTY MONITOR – SION
Sion, the strategically located suburb of Central Mumbai, has been witnessing a steady growth in residential and commercial real estate markets. Sion West is considered a good residential area, while Sion Circle is principally a commercial area. Sion’s biggest advantage is its centrally located railway stations, viz., Sion Station, King Circle and Guru Tej Bahadur Nagar Station. This offers easy access to Sion from allover Mumbai. An additional advantage of Sion is Flyover, which has helped reduce the traffic problem and also the pollution levels. One more plus point of Sion is the excellent service offered by the BEST. In addition, Sion also has a benefit of modern hospitals, educational institutes and shopping complexes and entertainment facilities. Sion Talao (Sion Lake) adds to the beauty of Sion. Sion Circle has all the major and retail shops. Other markets are also very close to this Sion Circle. Well known Lokmanya Tilak Municipal General Hospital (Sion Hospital) is here. Sion Fort is a great place for picnic.
The rapid development of this area has attracted the builders. Sion is one of the best emerging places for both residential and commercial sectors. All the major banks like HSBC and corporation bank have opened ATM centres here, while the few banks like HDFC, are planning to open ATMs in Sion. Barista has opened their branch here. Dominos Pizzas is present. In educational sector also, Sion is a head with colleges of South Indian Education Society as well as Guru Nanak Vidyak Society. A number of reputed schools are located here. While a multiplex cinema, Cine Planet 1 and Cine Planet 2 are offering entertainment. In addition, Reliance Webstore is opening soon in Sion Circle. All these facilities and advantages are attracting buyers and builders.
Residential:
Sion east is mainly a residential area. The property rates are affordable here. Kalpataru builder is coming up with an excellent project there. The residential property rates in Sion are in the range of Rs 2800 to Rs 4000 per sq.ft, depending upon exact location, amenities and reputation of the builder. While the residential rental rates are in the range of Rs 8 to Rs 30 sq.ft.pm.
Commercial:
Sion Circle, the major commercial area of sector has seen tremendous development in last few years. The commercial rates in Sion are in the range of Rs 3500 to Rs 5200 sq.ft depending upon exact location and rental rates are in the range of Rs 20 to Rs 65 sq.ft.pm.
PROPERTY MONITOR – VASAI
Vasai is town located on the outskirts of Mumbai, in Thane district. Vasai lies about 50 km away from Mumbai and 20 km from Borivali. As a famous picnic spot, Vasai attracts people from Mumbai and its neighbourhood. A number of historical temples are also present in the vicinity of Vasai. Vasai has green surroundings and many beautiful sea beaches. The famous Vasai fort, built by the Portuguese, is another tourist attraction here. Vasai is also famous for bananas. In addition, Vasai is a major supplier of food products, green vegetables, fruits fish and milk to Mumbai.
The fast expansion of Mumbai urban conglomerate has seen Vasai grow rapidly. Vasai’s growth potential is attracting Mumbai builders and businessmen. Another most significant advantage of Vasai is the industrial belt in Vasai [e]. Many large and medium industries are operating here. Builders like Evershine builder, K Raheja Corp. . KT Builders, builders Mittal builders and a few others are engaged in development facilities such as shopping centres. Vasai is also ahead in education and entertainment. Scores of reputed schools and colleges are here.
Residential:
Vasai [w] is more known as residential area. While Vasai [e] is a commercial area. Vasai [w] is greener and busy with construction activities. The residential property rates are in the range of Rs 950 to Rs 1200 sq.ft. Vasai [w], while in Vasai [e] is Rs 800 to Rs 1000 sq.ft.pm. Approximately. The residental rental property rates are in the range of Rs 2 to Rs 8 sq.ft.pm. The projects like Vasant Nagari by K Raheja, Evershine City, Evershine Estate by Evershine Builders are some of the projects in Vasai. Industrial area in Vasai [e] and easy access to Mumbai have contributed to Vasai’s Growth.
Commercial:
The activities are also booming here. Easy access, availability of land and the low property rates support the rapid development in commercial sector. The industrial belt in Vasai [e] and KT industrial estate developed by KT builders also encouraging the growth. The builders such as Evershine & KT builders are providing commercial facilities like shopping centers in their residential projects. Mittal builders also has provided such facilities. Vimal shopping centers and Vardhaman shopping centers are the busy shopping centers in this area. The commercial property rates are in the range of Rs 1500 to Rs 2500 sq.ft., while the rental rates are in the range of Rs 10 to Rs 35 sq.ft.pm.
PROPERTY MONITOR – WORLI
Worli is the second largest commercial area in South Mumbai. Worli is also a posh residential area. Worli is emerging an attractive destination in South Mumbai and getting prominence over Nariman Point. Worli has several key institutions; for example, National Stock Exchange (NSE) and Nehru Science Centre. It also has a famous Worli Dairy. Worli has good connectivity. All business areas of Mumbai can be easily accessed from Worli. Big shopping centers such as Cross Road, West End and Heera panna are very close to Worli suburb. A well known Hypermarket by S.Kumar’s is in Worli on a 50000 sq.ft area. Another advantage of Worli is the sea face, which is an ideal spot for outings in the evenings. Haji Ali and Girgaum Chowpatty are also very close to Worli. Poddar hospital, reputed medical institution is in Worli.
Residential:
The residential property rates are in the average range of Rs 4500 to Rs 11000 per sq.ft., while rental rates, Rs 20 to Rs 50 per sq.ft.pm, depending upon exact location, amenities, parking space, etc. Sterling Sea Face by Shapoorji Pallonji & Co. Ltd., DSK Durgamata Towers by DSK group, Marathon Concord & Marathon heights by Marathon group are some of the major upcoming residential projects.
Transactions:
Worli has seen a number of transactions in last few months. The following are some of the transactions.
A high commission leased a large four-bedroom apartment, measuring approximately 3000 sq.ft. on Pochkanwala Road for an effective rent of Rs 300000 per pm.
Apartments of 2566 sq.ft and 4011 sq.ft area in Godrej Bay View, were sold for Rs 16000 per sq.ft and Rs 18500 per sq.ft, respectively.
Commercial:
The commercial market in Worli is looking bright. According to a survey conducted the market is very active in Worli and Prabhadevi. Taking the advantage of comparatively low rental rates, a large number of corporates are moving to Worli. The commercial property rates in Worli are in the range of Rs 7000 to Rs 11000 per sq.ft., while the rental rates, Rs 50 to Rs 90 per sq.ft.pm. Hyundai has taken space in Siemens building. Mercedes Benz has opened a showroom in Worli. Landmarc Citi, a retail shop by S.Kumar’s, is coming up on 200000 sq.ft. area and is expected to completed in the end of 2003.
Transactions:
IDBI has taken up a 45000 sq.ft space at Victoria Mills, Worli.
HSBC has purchased approximately 59000 sq.ft office space in Worli from Glaxo.
Wyeth Lederle leased an office space measuring 26000 sq.ft in an A-grade commercial building.
PROPERTY MONITOR – BORIVALI
Borivali lies between Kandivali, a well developed western suburb, and Dahisar, a small, growing suburb. Borivali has been bustling with residential and commercial activities in recent past. It has the well known Sanjay Gandhi Park or Borivali National Park at Borivali, which attracts people from all over Mumbai. The advantages of Borivali includes comparatively lower property rates. Hence it attracts lot of people. The residential complexes at Charkop and Lokhandwala projects have contributed to the growth of the commercial market in Borivali. Borivali has two big shopping malls, while one more is under construction.
Residential Market:
The residential property market in Borivali is developing rapidly. The property rates are here are reasonable as compared to the other suburbs. All the reputed builders in Mumbai have their projects in progress or in ready possession in Borivali. The residential property rates are in the range of Rs 2300 to Rs 3000 per sq.ft. for Borivali [e], while for Borivali [w] they lie between Rs 2500 to Rs 3500 per sq.ft. (approx.). On other side the rental rates are in the average range of Rs 5 to Rs 25 per sq.ft. per month for both Borivali East and West.
Residential Projects:
Raj Valley, Raj Umang 2, Raj Sunflower, Raj Sarovar, Raj Sagar, Raj Heritage, Raj Anmol and Raj Anand are the major projects coming in Borivali East and West. These projects have 8 to 13 floors with all the modern amenities.
K.Raheja constructions also have big projects like Raheja Estate and Raheja Green in Borivali East. Raheja Estate is a 14-storey building with 2BHK flats. While Raheja Green project has 20 floors with 1 & 2 BHK flats.
Commercial:
The commercial market in Borivali is also looking up thanks to the growth in residential market. Indraprastha and A to Z shopping malls are located in Borivali. One more shopping mall is also under construction. The commercial rates in Borivali (e) are in the range of Rs 3000 to Rs 4500 sq.ft., while at Borivali (w) they are in the range of Rs 3500 to Rs 5000 per sq.ft. The rental rates are in the range of Rs 15 to Rs 70 per sq.ft. per month, depending upon the exact location of property and other factors.
Locality Outright Purchase [Rs/sq.ft] Rental Rates [Rs/sq.ft pm]
Min Max Min Max
Borivali [e] 3000 4500 15 50
Borivali [w] 3500 5000 15 70
Dahisar 2200 3500 15 45
Kandivali [e] 2500 4000 20 50
Kandivali [w] 3000 4500 20 60
Commercial Projects/Transactions:
Gautier, the retail of French designer furniture chain, has opened up its outlet Borivali on a 4000 sq.ft area. It is one of its 20 outlets all over India.
Industrial Estate project is coming in Borivali(e).
PROPERTY MONITOR – POWAI
Powai has emerged as a new hub of construction activities in the suburbs of Central Mumbai. Powai has plenty of greenery and has a famous lake. Powai is about 20 miles south of Mumbai city. The location of Powai is its major advantage. All the commercial areas such as Andheri, Bandra-Kurla complex, Maharashtra Industrial Development Corporation Complex, New Mumbai and Santacruz Electronic and export promotion zone are very close to Powai. It also has the famous Indian Institute of Technology. Powai is deal for both residential as well as commercial purposes.
Many reputed builders are developing residential and commercial complexes with excellent amenities and facilities. Hiranandani and K.Raheja are providing not only state of the art amenities, but also at affordable rates. several MNCs, e.g. Colgate, Bayer and FedEx, with few other well known software companies have moved in. a few companies have also shifted their offices from Nariman Point to Powai.
Powai is like other best suburbs, is seeing the arrival of a few multiplexes. Hiranandani Constructions are coming up with a huge multiplex, which will include commercial offices, a family entertainment center, a shopping complex, restaurants, banks, etc. transportation facility is excellent at Powai. Flyovers are also coming up in Powai. Definitely, this will be a plus point to attract more buyers in the residential sector.
Residential:
The residential market in Powai has seen massive changes in the last few years. A host of huge projects are ready for possession, while a few others are under construction. The residential property rates in Powai are in the range of Rs 2500 to Rs 3500 per sq.ft. depending upon amenities, exact location and other facilities, while rental rates vary between Rs 20 to Rs 35 per sq.ft. pm.
Commercial:
The commercial market here is also growing very rapidly. Reputed builders like Hiranandani, K.Raheja are coming up with different schemes, while few multiplexes are in the pipeline. The commercial property rates are in the range of Rs 3000 to Ts 4000 per sq.ft, whereas the rental rates are in the range of Rs 35 to Rs 50 per sq.ft pm.
PROPERTY MONITOR – VASHI
Vashi, located at a comfortable location in Navi Mumbai, is just 45 minutes away from Mumbai. Vashi with its multifunctional nature has emerged as an ideal residential-cum-commercial destination in Navi Mumbai. It is well planned and has all the modern facilities and infrastructure, which attract businessmen and individuals. Beautiful green areas and lot of open space are the biggest advantages of Vashi. Several software companies and large and medium companies have already moved in here. Reputed builders have chosen Vashi as their preferred destination. A major advantage of Vashi in terms of residential needs, is the reputed schools and colleges. Excellent infrastructure with good transportation facility is the other major plus point.
Vashi station complex, built on a 7,57,289 sq.ft area, at the entrance of Vashi node is a top class railway station. The complex can be easily accessed from Mumbai – Pune highway. The complex has office premises covering an area of 5,91,800 sq.ft, while the shopping arcade is on a 1,63,552 sq.ft area. The Sprawling Arcade is an excellent shopping center at Vashi. This arcade has open restaurants, kids center banks, etc. a huge Millennium Tower by Shirke Group is located at sector 9. The software park, called international Infotech Park lies close to the Mumbai-Pune highway. Mastek, Datamatics, and Aptech are the few of the software companies that have taken offices in Vashi and Sanpada.
With all these facilities, Vashi is also a head in other services like hospitals, entertainment, etc. reputed hospitals like NMMC hospital, New Bombay hospitals are providing medical facilities here.
Residential:
Vashi has emerged as the best residential option in Navi Mumbai. Vashi is pollution free and the rates are affordable as compared to Mumbai. In addition, the excellent infrastructure here is attracting a lot of people. Reputed builders like Blacksmith developer, Kukreja construction group and National Builder Nishant have various projects in Vashi, while many constructions are in the pipeline. The residential property rates in Vashi are in the range of Rs 1500 to Rs 2500 sq.ft, while rental rates are in the range of Rs 3 to Rs 15 sq.ft pm.
Commercial:
The commercial market in Vashi is also becoming. Several companies are shifting to Vashi from various locations while a number of commercial complexes are already present, more commercial projects are coming up. In the commercial sector also. All the reputed builders are involved in many projects. The commercial rates are in the range of Rs 15 to Rs 60 sq.ft pm.
PROPERTY MONITOR – GOREGAON
Goregaon, known as Land of Tabelas, is located between the well developed suburbs of Andheri and Borivali. Goregaon is witnessing a boom in both residential as well as commercial developments. Goregaon enjoys the distinction of being the greenest suburbs of Mumbai, which is one of the reasons for its fast development. Several residential and commercial projects have come up in Goregaon-Borivali belt within the last two years. Due to its proximity to Bandra-Kurla complex and the low property rates as compared to Andheri and Borivali, residential demands have always been high in Goregaon.
Goregaon is also one of the most developed industrial areas in Mumbai with many small, medium and large-scale industries in different segments like steel, engineering goods and plastic.
Residential:
Goregaon is growing very rapidly as a residential area, especially the Goregaon-Borivali belt. Several residential projects by builders like Evershine Builder, Sales Gesco Corporation and Conwood Group are coming up. Other important facilities like retail markets, schools and colleges, reputed hospitals and restaurants are attracting the middle class segment. On the other hand, builders are also providing quality 2BHK apartments with essential amenities at affordable rates.
Residential Property Rates:
Locality Selling Rates [Rs /sq.ft] Rental Rates [Rs /sq.ft]
Min Max Min Max
Goregaon [e] 1800 2700 10 25
Goregaon [w] 1800 3000 12 25

New Projects:
Evershine Aangan, an 8-storey building, is coming up in Goregaon [w]. it is expected to be reay for possession by August 2003. The project, developed by Evershine Builder, has 2/3 BHK flats with modern amenities.
Vrindavan by Conwood Group of Companies is coming up in Goregaon [e]. it has 8 floors with 2 BHK flats and modern amenities.
Greater Eastern link by sales, Gesco Corporation Ltd., is located in Goregaon [w]. this is also an 8 storey building with 2 BHK flats and other amenities.
Commercial:
Due to fast developing residential areas, the commercial demand is also very high in Goregaon. The shopping malls like City Center & Washington Plaza are located in Goregaon [w]. A shopping mall, Dynamix SHAGUN, is coming up in Goregaon.
Commercial Property Rates:
Locality Selling Rates [Rs /sq.ft] Rental Rates [Rs /sq.ft.pm]
Min Max Min Max
Goregaon [e] 2500 3500 20 50
Goregaon [w] 2500 3500 20 50

New Commercial Projects:
Shagun shopping (Dynamix) offers 62000 sq.ft for retail market in Goregaon and is expected to be completed by December 2002.
Dhreej Consultancy is coming up in Malad on 72000 sq.ft & is expected to be complete in December 2002.
Mindspace by K.Raheja is another retail shopping complex. It is expected to be complete by 2003. It offers 3,50,000 sq.ft in Malad.
PROPERTY MONITOR – KANDIVALI
Kandivali, the western suburbs of Mumbai, has seen tremendous growth in residential sector in the past few years. Most of the real estate growth here has taken place to the east of the railway tracks. One of the biggest plus points of Kandivali is that it has adequate infrastructure facilities. Also exist here are facilities for shopping, entertainment, education and so on. Another reason for the fast development in Kandivali east is ample land availability.
In Sharp contrast, the construction activities in Kandivali West have been at a relatively slower rate, with a few projects coming up at scattered locations.
Thakur village locality adjacent to the Western Express Highway is becoming a preferred destination. This area has witnessed the maximum construction activities in recent times with over 1.5 to 1.6 million square feet of developed properties are likely to come into the market by the end of 2002. Experts are of the opinion that this the best time to book a flat at the stretch between S.V. road and the link road.
The commercial sector is also picking up due to the effect of fast residential development. a multiplex is coming in Thakur village near Challenge tower.
Rental Rates [Rs/sq.ft pm]
Locality Min Max
Kandivali [e] 4 16
Kandivali [w] 8 12
Malad 10 18
Dahisar 3 10
Thakur Village 2.5 8
Projects:
RNA builder launched RNA Millennium Township in October 2001 in Kandivali [w]. project is spread over 20 Lac sq.ft of land, with 4000 flats of 1 & 2 BHK with different amenities.
Raj Residency 2, by Rajesh Builder, is coming up in Mahavir Nagar.
Trishul Tower by Trishul Group at Asha Nagar, Pancheel Enclave by Conwood Pvt. Ltd., Vasant Aradhana by Seth Group, Gorav Geet by Ravi Developers, Pradtik garden by J.N.J. group and RNA Royal by R.N.A builders by are some of the projects coming up in Dhanukarwadi and Charkop.
Rental Rates [Rs /sq.ft pm]
Locality Min Max
Kandivali [e] 5 25
Kandivali [w] 15 50
Malad 10 45
Dahisar 3 25
Thakur Village 10 20
Transactions:
Fulford India has taken 20000 sq.ft of space in Mindspace building at an approximate rate of Rs 42 /sq.ft pm in Malad.
ICICI Oneserve leased an office space of 45000 sq.ft in Mindspace at an approximate rate Rs 38 /sq.ft pm in Malad.
Ocwen Financials leased an office space of 50000 sq.ft in Mindspace, at an approximate rate Rs 50 /sq.ft. pm.

Real Estate generally provides for steady returns. This is shown by the graph given below which shows the performance of Dow Jones Industrial Average (DJIA) an equity index and Dow Jones REIT Index (DJREIT) a real estate index over the period of 2000 to 2004.
Real estate investments can provide for an effective inflation hedge as investing in real estate involves investing in a real asset and thus the property prices tend to increase with increase in inflation and also the rent or lease payments can be increased with increase in inflation.
Protection from legalities: With legal expertise in the hands of REMF, it can save investors from legal hassles, such as duties, documentation, etc. and going through the nitty-gritty of real estate.
Affordability: Individual investor may not have the financial strength to invest in real estate properties. REMF will allow investor to invest in real estate property by holding units of REMF.
Liquidity: When an investor invests directly in an individual property, buying and selling is a complex, time-consuming and lengthy process. By contrast, his invest in a real estate mutual funds can be brought or sold just like any other mutual fund. Because many REMF shares would have traded on the major stock exchanges and they would be more readily converted into cash than direct investments in properties.
The introduction of Real Estate Investment Schemes in Indian seems to be pliable option, which would result in increase in rental housing generation.
In India these schemes would provide enough support to the local corporations and municipalities through the payment of the house tax and water tax.
Benefits to the real estate sector
Flow of funds in the sector
Sector will become more organized
REIS will also help to tap the investments from larger section of Indian Market
More credibility to the sector
Availability of foreign investments
Economic and social benefits
Growth of real estate sector can boost the GDP
Opportunities of employment
Growth of ancillary industries
Help in the process of slum development
Availability of funds to the government for infrastructure development
It can also help in improving the penetration of mutual funds in India. There is a general acceptance in India for investment in Real Estate
Help in development of tourism
Funds for the development of B & C grade cities
Now since we are sure of the attractiveness of the real estate markets let us now look at the framework under which a real estate mutual fund (REMF) is likely to operate.
Here,
Investor is one who has an affinity towards realty investments. Investor profile can range from Insurance Companies, Corporate bodies to retail investors. The investors are the source of funds in the whole framework.
Real Estate Mutual Fund or the REMF acts as a conduit or a link between an investor and real estate and helps manage the funds of the investors and invest them in the real estate sector.
Investments: REMF can invest in a developed property, and as the value appreciates over a period of time, it can offload its investment to make capital gains. It also has an option of developing the property on its own and then selling it at an appropriate time ensure adequate returns. Furthermore, it can realize regular stream of returns through leasing, financing to developers and mortgage backed financing. The investment avenues are the users of funds in the whole framework.
The functions, which REMF performs, includes entering into real estate transactions on behalf of its investors, performing valuations of the properties either internally or through external agencies. The REMF is also responsible in maintaining liquidity in case of any redemption pressures or to fulfil any financial obligations or to undertake trades. The REMF is also responsible for maintaining the properties, which it has bought or are under its control.
The regulatory bodies involved in the working of the REMF include the finance ministry, the SEBI, the RBI and any other body as per the rules formed by the concerned authority.
After understanding the framework under which one can expect a potential Real Estate Fund to work we now need to determine the structure under which such a fund might follow.
REMF Structure
Internationally there are two structures, which real estate funds follow. These two structures are:
Real Estate Investment Trust (REIT) structured followed in America and Canada.
Pooled Managed Vehicle (PMV) or the Mutual Fund Structure Followed in United Kingdom.
But these structures are explained below:
REIT Structure: REIT is a corporate structure, which collects money from the investors and invests in real estate assets to earn money in the form of rentals and lease. It also earns money on the profit from the sale of any assets. In the USA, by law REITs need to give at least 90% of their net income as dividend to its investors every year. An REIT is a closed ended fund, which does not accept fresh investment after its Public Offering, is over and also does not allow everyday redemption. To provide for liquidity to its investors it gets itself listed to an exchange and the REIT certificates are then freely traded on the exchange. To fund fresh investment REIT can raise debt from banks and financial institutions just like any other corporate.
PMV or mutual fund structure: In this structure, which is prevalent in UK, the funds is in the form of a trust and operates just like an open ended mutual fund. Such funds are not allowed to use leverage in the form of institutional loans or bank loans. The fact that they are open ended helps them provide liquidity to the investors as redemptions are possible but at the time of the heavy redemption pressure they have the power to suspend redemption till the next valuation of properties it holds takes place. Since it provides for liquidity there is no need to list them on exchanges and that’s why most of them are not listed on the exchanges.
Thus we see that there are three fundamental differences between these two structures, which are listed in the table given below:

REIT Structure (USA)
Mutual fund structure (UK)
Close ended fund
Open ended fund
Uses leverage
Does not use leverage
Are listed on the exchanges
Not listed on the exchanges

Real estate mutual fund in India
There is a hot discussion floating in India about which model the Indian market should adopt. Should it adopt the Us structure or the UK structure or follow an altogether new structure for a fund, which invest in Real Estate. There are proponents of close ended mutual fund and of open ended mutual funds.
The proponents of close ended mutual funds argue that the Indian real estate markets is highly illiquid and require long term investment horizon which might create a problem for open ended mutual funds are there wont be enough liquidity to enable smooth redemption as in the case with equity investments.
The proponents of open ended mutual funds state that the fund is not project specific and thus it cannot be a close ended fund and they feel that it is easier for an open ended fund to get funds for investing in new properties in the absence of ability to raise debt, which could be dangerous for the investors. They also feel that the problem of heavy redemption can be over come by the ability of the fund to suspend redemption till the next valuation date.
A study conducted by the sub-committee called Satwalekar Committee constituted by AMFI to appraise SEBI about the product studied the two structures and recommended using the open ended mutual fund route which is prevalent in UK. This structure they noted needed certain modification based on the prevailing market condition in India.
Real estate index
In USA there are funds, which invest in different REITs based on certain Index, which are formed as a benchmark. US has a few of these indices based on the REIT prices in the stock exchanges in which these REITs are listed. The index weightage of those REITs is based on the total market capitalization of each REITs. Some of the examples of such indices are Dow Jones Composite all REIT index, Morgan Stanley REIT index, S &P/TSX Capped REIT Index.
The mutual funds, which invest, based on this strategy aim to match these benchmark indices if not outperform them. Such indices are non-existent in the UK market because there are no listed Real Estate Funds. this might also be the case in India few years from now.
Investment Avenues for the Fund
It is important for us to know what are the investment avenues, which an Indian fund can look at while investing in real estate assets. Some of the avenues are given below:
Equity Shares / Bonds / Debentures of the listed companies which deal in properties and also undertake property development. however, at present, in India there are very few such companies, which are listed.
Mortgage backed securities i.e. the securitisation of housing loans. At present, these are not yet available. However, one expects that this avenue will be open once the bill seeking amendment is passed in the next budget session.
The real estate investment schemes can undertake or finance the properties i.e. ready buildings with a view to lease where the lease rentals will be a regular income to such mutual funds, which can then be distributed as dividends to the investors in the fund.
Direct estate project finance, construction finance, purchase / option to purchase of buildings under construction with a view to sell it again; investment in debt securities issued by development and construction companies (placed privately).
Along with other avenues a part of the funds assets should be invested in call and money market instruments to ensure required liquidity.
Risk associated with property investments
There are certain risks associated with investing in Real Estate, given below:
Liquidity risk
Risk because of high maintenance burden
Risk due to high government controls
Risk due to real estate cycles
Risk due to legal hurdles and complexity
Risk due to high transaction cost thus forming barriers to entry and exit.
Risk due to lack of information.
Some of these risks are natural and inevitable but a lot of these risks can be controlled to some extent. A real estate mutual fund should work in such a way that the overall risk is optimized and matched to the investors needs. Regulations in this direction will go a long way in reducing the risk levels.
Risk management would be addressed in the following way:
Amendment in SEBI – As recommended by the Satwalekar Committee, a amendment in SEBI regulations is suggested enabling the SEBI to regulate the establishment and functioning of the real estate mutual fund schemes with all the existing regulations applicable to such mutual funds pertaining to net worth of AMC; existing fee structure; initial launch expenses restricted at 6%; maximum limit of expenses; etc. as already provided in the mutual fund regulations.
Investment restriction – That present regulations have a restriction on investment where any investment in one corporate should be restricted upto 10% of the corpus and similarly, any investment in the properties and owned and managed by sponsor should be restricted upto 25% of the corpus.
Restriction based on project, Promoter Group and geographical area – The Satwalekar Committee has recommended investment restrictions based on a project, a promoter group and a geographical area. With these restrictions appropriate to mitigate the concentration risk of the investment portfolio of real estate scheme. Details of the investment restrictions proposed in the report of the Satwalekar Committee can be found on Page 24 of that report.
Valuation – At present, we have registered valuers as approved by government of India / Income tax departments / insurance regulatory development authority. Thus it becomes imperative for SEBI to use them and approve these registered valuers for the purpose of valuing properties held by real estate investment schemes. the funds should appoint two valuers to value the properties and if the difference in the valued price is more than 10% then a third valuers should be appointed and his valuation should be considered.
Legal aspects that need change
Along with the regulatory issues, there are some legal issues that are caused by our antiquated laws and which will hamper the smooth and profitable functioning of the real estate mutual funds. thus these laws need to be reformed since they also increase the risk level of a real estate investment. Some of these laws and proposed changes are given below:
Stamp Duty – This a state subject and unless the central government decides to make it uniform, it will be difficult and time consuming to expect any changes in the stamp duty framework. It is recommended that either there should be no stamp duty for a SEBI registered REMF or even if a minor stamp duty is imposed it should take the form of value added stamp duty structure and thus double stamp duty will be avoided in case of frequent transfers of the properties.
Property taxes – This is a state/city subject. It is recommended that the relevant authorities provide exemption from annual property taxes to real estate investment schemes. This would help real estate schemes to provide better returns to investors.
Records – A significant issue in dealing with properties is the custody of title and paper form of transaction. It would be very helpful to the REMF if all the property records are computerised and the properties be transacted in a dematerialised format, exactly how the securities are traded right now.
Rent control act – The provisions of the rent control act have been amended in some of the states. since, several states continue with the ancient rent control provisions and it is believed that the rent control act is one of the main reasons why people are not very enthusiastic in building a house and giving it on rent.
Urban land ceilings and regulations act – This act lays a ceiling (generally around 500 to 2000 square meter) on the land which a person can hold in an urban area, the access land is either to be handed over to a competent authority or is to be developed by the owner for a specified purposes only. Here a person stands for an individual, corporation, firm, association or body of individuals etc. thus if the REIT has to come to any meaningful existence this law has to be scrapped.
Approval procedures
Another serious malaise affecting investment in the real estate sector and housing development in the tardy process of planning approvals. A system of deemed approvals for all planning permissions by registered architects operating on the basis of self-regulation much like chartered accountants do, would enormously speed up the entire plan approval process. This will ensure that far larger quantum of housing stock is supplied every year, at more reasonable prices than is the case presently.
All these issues are major hindrance to the real estate investment schemes in India. A country like India having ample of land and set of huge investors requires attention on these problems. A major step in these directions will benefit the society.
Potential players
India has very few listed companies that operate in the real estate sector in Indian context for the success of these schemes it needs the participation and willingness on the part of reputed construction groups as well as asset management companies. this combination of professional fund management and expertise in real estate will be an appropriate model for Indian market.
Conclusion
It can be concluded that there is a tremendous potential for a real estate mutual fund to be introduced in India. The proposed fund will mainly follow the structure already being followed in UK, which is that of a mutual fund with some changes. Though the demand for such a fund is huge there are lot of concerns, which are still to be answered in terms of the antiquated laws, which govern the real estate business, the existing laws of SEBI and regulatory mechanisms to be used. If these concerns are taken care off by the government then the proposed real estate funds are poised to have an exponential growth in India and thereby lead to greater economic growth and overall progress of the country. mutual fund houses should take an active interest in such a fund, as it can be a big money earner for it. but introducing such a fund and ensuring stable returns to the investors will be only possible after the regulations are more favourable for real estate mutual funds.
References:
www.joneslanglasalle.com
www,sebi.gov.in
www.djindices.com
www,bostonproperties.com
www.nreionline.com
www.preit.com
www.planningcommission.com
C.B. Richard Ellis
Chesterson Meghraj
Business Standard
The Economic Times
Value investing in real estate by Gary W Eldred
Investing in REIT’s by Ralph L Block
Real Estate Investment Trusts by Richard T Garrigan, John F Parsons

REIT
Concept of REIT:
Real Estate Investment Trusts (REIT) is investment trusts the underlying assets of which are real estate properties. Income is generated by rents collected from those properties , and the proceeds from the sale of properties. This income is then distributed to investors in the form of dividends. Investors receive investment certificates (equivalent to share certificates), which can be traded on the TSE REIT market, just like stocks.
Classification of REIT:
There are two ways of classifying REITs:
Corporate and contract style, &
Equity REITs, Mortgage REITs, Hybrid REITs

Under this type of classification, there are basically two types of REIT, the corporate styles. Contract-style REITs can further be classified into intermediated and direct, depending on whether there is a fund manager acting as intermediary between the investment bank which manages the fund assets.
Corporate Style
Japanese REITs, or J-REITs, are of this type, and it is the corporate style that is expected to be most common.
The basic principal for this type of REIT is that a special corporation, established for the purpose of investing in and managing a real estate assets, uses investors money to buy real estate, in return for which investors receive investment certificates. These certificates can be bought and sold on the TSE market. Although the corporation is technically responsible for owning and managing the real estate properties, in reality this function is sub-contracted out to a third party.

Fig 1 Corporate Style Investment Trust
Investment Corporation
As mentioned above, investment corporations are special entities specifically established to own and manage real estate using investors money. Like any other company, these corporations have an executive board and hold share holder (investor) meetings. These functions are necessary for the corporation to own and manage real estate, and are the only permissible activities for such corporations.
Investors
Investors entrust funds to the investment corporation in return of investment certificates (equivalent to shares). Investors holding investment certificates at the end of the financial period are entitled to dividend payments, just like shares.
Tokyo Stock Exchange (TSE)
TSE lists and provides a market place for REITs. REIT investment certificates can be freely traded on the TSE market during standard trading hours, and are subject to the same trading regulations as stocks.
Investment trust Contractor
Investment trust contractors are responsible for managing the REIT assets on behalf of the investment corporation, in other words they act as fund managers, and consequently fulfil the most important role. Investment trust contractors are generally involved from the establishment of the investment corporation, and from then on manage real estate assets- buying and selling as necessary to get the best returns.
Asset Custodian/Administrative Contractor
Custody of assets, in reality custody of rights certificates, is carried out by trust banks on behalf of the investment corporation. Assets are held in segregated accounts. Other administrative duties, such as registration of investment certificate holders and issue of new certificates, are carried out by investment trusts and securities companies on behalf of the investment corporation.
Real Estate Management Company
Real estate management companies handle all aspects of the direct management of the real estate assets, including physical management of real estate properties and handling rental contracts and invoices, so as to provide long-term returns.
Contract style 1- Intermediated
Just as for ordinary (stock-based) investment trusts, specific contract style REITs are operated by fund managers/administrators who then select which assets the investment bank should own and manage. It is the investment trusts that fulfil the direct management function. Investors receive tradable beneficiary certificates.
Contract style 2 – Direct
Direct contract style REITs are those which where the investment bank owns and manages the underlying assets. Investors receive tradable beneficiary certificates.
Fig 2 Contract style REITs
Contract Style Corporate
Intermediated Direct Style
Asset holder investment bank corporation
Asset manager fund manager investment bank fund manager
Certificate beneficiary certificate investment certificate
Issue of bonds no corporate bonds
Loan by investment bank by corporation
Fig 3 Comparison of contract & corporate styles of REITs
Under this classification, REITs fall into three broad categories:
Equity REITs: (96.1%)
Equity REITs invest in own properties (thus responsible for the equity or value of their real estate assets). Their revenues come principally from their properties rents.
Mortgage REITs: (1.6%)
Mortgage REITs deal in investment and ownership of property mortgages. These REITs loan money for mortgages to owners of real estate, or invest in (purchase) existing mortgages or mortgage backed securities. Their avenues are generated primarily by the interest that they earn on the mortgage loans.
Hybrid REITs: (2.3%)
Hybrid REITs combine the investment strategies of equity REITs and mortgage REITs by investing in both properties and mortgages.
Earnings of REITs & distribution of dividends:
The following gives a brief overview of the process, right from the financing of a REIT to distribution of dividends by the REIT to its investors.
Financing
REIT A raises 30 yen billion by selling 100000 units (net asset per unit of 300000 yen) and raises a loan of 20 yen billion. This 50 billion is then used to purchase real estate.
Annual Income
The annual real estate rental income is 5 yen billion.
Costs & Profits
The initial loan of 20 yen billion is subject to the interest of 2%, which works out at 400 yen billion. The real estate properties incur management costs of 3 yen billion, 1.6 yen billion remains as profit.
Dividends
Unlike ordinary corporations, which are liable for corporation taxation on profits, REITs are exempt from taxation if they distribute over 90% of profits as dividends. Thus in example given above, 1.5 billion yen (or 93.75% of 1.6 yen billion) is available for dividends. This works out at 15000 yen per unit (1.5 billion yen 100000 units), or a return of 3% on a REIT valued at 500000 yen (15000 yen 500000 yen).
Fig 4 Earnings of REITs & distribution of dividends:
Benefits of investing in REIT:
Up until now, the real estate market has been an unrealistic option for individual investors because of the huge costs involved and the relative lack of liquidity. Equally, existing real estate based products have been aimed at institutional investors and have again lacked the necessary liquidity to attracts individuals.
However, now REITs offer individuals the opportunity to invest in real estate at affordable prices, and in form that can be readily trade on the exchange market, while leaving the management of the properties themselves to professionals. Dividends are paid to investors on the basis of income arising from the properties (rents, etc). This stable source of dividends and relatively high rate of interest, along with their inflation hedging ability is the key distinguishing features of REITs. Investment in REITs allows investors to diversify their financial assets, with all the attendant benefits.
The other benefits vis-a- vis stocks & fixed income products include:
Stable Dividends
Derived as they are from the regular rental income from underlying real estate properties, REIT dividends are generally stable and not subject to volatility.
Relatively High Returns
Unlike ordinary corporations, which devote most of their profits to future business development, investment corporations usually assign over 90% of their profits to dividends. This is because their only purpose is to hold real estate assets and they are not subject to corporation tax, so they only need to reinvest for future development.
However, although REITs generally offer relatively high returns compared to ordinary stocks, it goes without saying that rental incomes, dividends and REIT prices can be negatively affected by real estate and economic conditions.
Relatively Stable Prices
Unlike stocks, which are traded on the basis of estimated future corporate performance, REITs are traded on the basis of relatively stable incomes, which can readily be forecast and not generally subject to violent swings. Thus, prices do not generally fluctuate a great deal in either direction. However, this does not mean that REITs are not subject to market forces, and that it is impossible for REITs to suffer price volatility.
Inflation Resistant
Unlike bonds with pre-determined rates of interest, which lose relative value in times of high inflation, REITs are generally considered to be highly resistant to inflation. This is because rental incomes, which are the basis of dividend payments, adjust themselves in line with the cost of living, so are less vulnerable to inflation related devaluation. However, this is not to say that REIT dividends are totally immune to external influences. In times of economic depression rental fees may decline, and the relative cost efficiency of asset management may also have a negative impact on dividends.
Portfolio Diversity
It goes without saying that by investing in only one type of financial products, investors risk large losses if that particular product performs badly. Thus it is advisable to choose a range of different products, which dilutes risks and provides greater opportunity for consistent returns. (In other words, don’t pull all your eggs in one basket!) For example, government bonds offer security for the principal, but are vulnerable to devaluation in times of inflation. In contrast, REITs, whilst a higher risk product, offer higher rates of return and are relatively resistant to inflation. Equally, the performance of REITs generally bears little correlation to stock and bond performance, so unlike these products risk is diversified at times of market volatility rather than exacerbated.
Criteria to rate REITs:
Unlike stocks, which are an investment in a particular company, REITs are an investment in real estate via a token investment corporation. There are of course a variety of specialist analytical and evaluation tools and methods. However, the following are some simple guidelines as to what to look when choosing a REIT. ( it goes without saying that due attention should also be paid to disclosure documents, market and interest conditions).
Net Asset Value (NAV) per Unit
NAV is an important indicator, particular when the market is first established as it is difficult to compare with other products. As for stocks, it is always a good idea to compare the NAV and the market price. Thus foe example we might find that the NAV for a particular REIT is 500000 yen while the market price is 600000 yen. This indicates that there is the NAV is expected to rise, or that the market values the REIT above the current NAV. The PBR (price to book value), calculated by dividing the market price by the NAV, is also a good guide.
Rate of Return
REITs offer a relatively high rate of return as dividends are source from rentals and other income from the properties. Thus, the rate of return is another factor to be considered when selecting REITs. Investors should consider past and forecasted future dividends, as well as comparing with returns from other products. However, it is important to bear in the mind the different character of each individual product, rather than just making a simple comparison on the basis of rate of return.
Profitability
The more profitable the investment corporation, the higher the dividends. Just like when comparing stocks, it is a good idea to consider the PER. (For example, REIT A priced at 5,00,000 yen earns 4 billion yen on 200000 listed units, and REIT B priced at 700000 yen earns 3 billion yen on 100000 listed units. If we compare them we see that the PER for REIT A is 25.0 (500000 yen/ 200000 yen (4 billion yen/ 200000 units)) and for REIT B is 23.3 (700000 yen/ 30000 yen (3 billion/ 100000 units)). Thus REIT B offers higher returns per unit at lower price (lower PER).
The REIT market is already well established in US, so there are variety of sources of analysis available to investors since analysts offer independently calculation and analysis of NAV. We can expect the same to happen in Japan once the market establishes itself.
Risks while investing in REITs:
As publicly traded securities based on real estate, REITs are vulnerable to real estate market and macro-economic factors, which may adversely affect dividends and prices. For detailed explanation of the risks involved, please study prospectuses carefully. A brief outline of risk factors is given below.
Unsecured Principal & Dividends
REITs are subject to real estate and market forces, which may effect prices and dividends, so there is always a risk that investors will lose money when selling a REIT at a lower price than when they bought it. also, there is no guarantee that dividends will continue to be paid at the same levels as in the past. In other words, REITs are completely different from government bonds, which are secure investments with a pre-determined rate of interest and redemption of the principal is possible.
Prices affected by property values and management strategies
Real estate related valuations and rental incomes are subject to real estate market conditions, macro-economic and other external factors. Additionally, REITs may raise funds not only by issuing shares, but also by taking out loans on which interest must be paid. All these factors can cause REIT prices to fluctuate.
Dividends affected by rental incomes
REIT dividends are paid on the basis of income earned from rentals of real estate properties. This generally means stability, but also means that in times of adverse real estate market conditions the values of these rental fees may decrease. Alternatively, there may be times when the properties are left empty, thus producing no income. All of these factors can adversely affect dividend payments.
Risk of Natural Damage, Wear and Tear
Real estate properties are exposed to a variety of structural risks, arising from natural, environmental and man-made causes. All which can adversely affect the value of these assets and REITs based on them. In this respect, REITs differ widely from ordinary financial products, which are not based on physical/tangible assets.
Devaluation due to changes to regulatory/Tax frame work
There is always the possibility that laws and taxes may change, or be introduced, which adversely affect real estate property prices.
Market conditions
Unlike ordinary investment trust, REITs are traded in the same way as stocks, and are thus subject to the same factors (supply / demand, interest rates, real estate market conditions), all of which can adversely affect prices.
(G)Asset mix of REITs:
Individual REITs are able to distinguish themselves by specialization. REITs may focus their investments geographically (by region, state, or metropolitan area), or in the property types (such as retail properties, industrial facilities, office buildings, apartments or healthcare facilities). Certain REITs choose broader focus, investing in a variety of types of property and mortgage assets across a wider spectrum of locations.
The current REIT industry’s investment choices can be broken down by property type as follows:
Retail 20.1%
Residential 21.0%
Industrial/office 33.1%
Specialty 2.3%
Health care 3.8%
Self storage 3.6%
Diversified 8.5%
Mortgage backed 1.5%
Lodging/backed 6.1%

(H) Case Study: The Japanese REIT index
In November 2000, amendments made to the investment Trust & Investment Corporation law expanded the allowable use of capital by investment to include real estate, thereby making funds composed on real estate investment trust schematic possible. In March 2001, TSE created a listing system for REITs to be traded on its market, and the first two REITs were listed on September 10, 2001.
Tokyo Stock exchange, Inc. (TSE) has calculated and published the Tokyo Stock exchange REIT index from April 1, 2003, reflecting both further reinforcement of investment infrastructure for the J-REIT market, established in September 2001 on the TSE, and strong demands by users to introduce a benchmark for the market.
The Tokyo Stock Exchange REIT index is a capitalization weight index based on all REITs listed on the TSE and is calculated with the same methodology used for the calculation of TOPIX (Tokyo stock price index)
As of end June 2004, 13 REITs were listed. Twelve of these are listed on the Tokyo Stock Exchange (TSE) and one of the Osaka Stock Exchange (OSE). The REITs listed on TSE are:
Nippon building fund management
Japan real estate investment corporation
Japan retail fund investment corporation
Orix J-REIT
Japan prime realty investment corporation
Premier investment corporation
Tokyo REIT Inc.
Global one real estate investment corporation
Nomura real estate office fund Inc.
United urban investment Corp.
Mori trust Sogo REIT Inc.
Nippon residential investment Corp.

The growth in the market capitalization of the REIT index since its inception is depicted in the graph below:

Source : Tokyo Stock exchange, Jones Lang LaSalle
Graph 1 Growth in the market capitalization of the Japanese REIT index
The listing criteria for REITs on the TSE-REIT index are as follows:
Given that investors investing in REITs are doing so as a substitute for direct investment in real estate, the main focus of TSE’s REIT listing criteria is on the nature and proportion of real estate assets held within the fund, more specific details are set out below.
Assets under management
Real estate must make up at least 75% of total assets under management
Assets must be real estate related, cash or highly liquid cash equivalents
At least 50% of total assets must be income producing, and not likely to be sold within a year
Fund
Real estate must make up atleast 75% of total assets under management
Total assets of at least 5 billion yen
Net assets per unit of at least 50000 yen
Distribution
Atleast 4000 units listed
Atleast 1000 unit/shareholders/investors
Major unit/shareholders may hold no more than 75% of listed units
Graph 2 performance of the Japanese REIT index in comparison with Tokyo stock exchange index, TOPIX and its real estate sector index:
Real estate investment trusts (REITs) are an efficient way for many investors to invest in commercial and residential real estate businesses. As an investment, REITs combine the best features of real estate and stocks. They give an investor a practical and effective means to include professionally manage real estate in a diversified investment portfolio.
Bibliography
www.reitnet.com
www.tse.jp.or
www.investinreits.com
www.investopedia.com
www.realestatejournal.com

Low Leverage
One reason so many REITs (65% based on equity market capitalization) are rated investment grade is their moderate financial leverage. In fact, the average REIT debt ratio has generally been below 50% for much of the last decade.
Returns delivered by REIT
REITs Deliver Income & Long-term Growth
The special investment characteristics of income producing real estate provide REIT investors with competitive long-term rates of return that complement the returns from other stocks and bonds.
High Dividend Yield
REITs are required to distribute at least 90% of their taxable income to shareholders annually in the form of dividends. Significantly higher than other equities on average, the industry’s dividend yields generally produce a steady stream of income through all market conditions.
Share Price Appreciation
Approximately one-third of the total return from REIT stocks over the last 20 years came from moderate, long-term growth in share prices. This growth generally has tracked the consumer price Index over the last two decades, protecting shareholders capital from the ravages of inflation.
Advantages of Real Estate Investment:
In addition to the benefits of owing shares in a REIT, offer several advantages not found in companies across other industries. These benefits are part of the reason that real estate stocks have become popular investment vehicles over the past several years:
Predictable Revenue Stream
REITs’ reliable income is derived from rents paid to the owners of commercial properties whose tenants often sign leases for long periods of time or interest from the financing of those properties. In addition, the companies ownership of tangible assets with established values tends to reduce risk.
Earnings Transparency
Most REITs operate along a straightforward and easily understandable business model: By increasing rents or occupancy rates, higher levels of income may be generated. When reporting financial results, REITs, like other public companies, must report earnings per share on the basis of GAAP net income. Another way year-to-year financial progress can be gauged is by comparing levels of funds from operations (FFO). FFO, the industry’s supplemental performance measure, differs mainly from net income by excluding depreciation and amortization of real estate assets and gains and loses from most property sales. Given the broad range of real estate subsectors and business lines, there are also a number of additional earnings metrics, which are used by REITs in order to provide investors with a greater level of insight into their performance.
Total Return
The combination of income returns from dividend and capital gains from share value appreciation can result in healthy overall returns for REIT investors. Analysis by Ibbotson Associates demonstrates that the combination of dividend yield and share value appreciation has made REIT returns competitive with other major investments vehicles, including a broad range of large-cap stocks, small-cap stocks and fixed income securities. In short, REITs over time have demonstrated a historical track record of providing a high level of current income combined with long-term share value appreciation, inflation protection, and prudent diversification for investors across the age and investment style spectrums.
REIT Sectors
With a very diverse profile, the REIT industry offers investors many alternatives across a broad range of specific real estate subsectors, including:
Apartment communities
Office properties
Shopping centers and malls
Storage centers
Industrial parks and warehouses
Lodging facilities, including hotels, motels and resorts
Health care facilities
Natural resources
Regardless of specific business line, REITs most often acquire and develop their properties primarily to actively manage and operate them as income producing, ongoing businesses, while regularly exploring new opportunities for income growth, from new acquisitions or development, to provide income-producing leasing or tenant services. In addition, REITs that have a mortgage focused investment strategy invest in commercial mortgages (CMBS) and residential mortgages (MBS).

Sl. Name of scheme 7th plan 1985- 8th plan 1990- 9th plan 1991-
No. 90 91 92
1 2 3 4 5
URBAN DEVELOPMENT
I.D.S.M.T. 8800 2500 1500
2. Equity support to HUDCO 3500 200 450
(Infrastructure)
Contributing to NCR planning board. 3500 1000 1400
Research & Training in Urban &
Regional Planning 200 – 40
Development of displaced persons colonies 150 32 10
Urban basic services 500 2500 2300
Urban transport consortium fund – 200 500
Nehru Rozgar Yogana* – 12000 11300
Scheme for educated employment – - 200
Grants to urban local bodies through
Hudco/UD& UWS – - 200
Removal & Collection of cattle in
Calcutta 150 – -
Total 16800 18432 1790