Reverse mortgage is a blessing for the elderly as it allows them to generate good income from their homes after retirement. What’s more, they can still continue to live in the same house till past the tenure of the reverse mortgage. Read on to know how this concept works

Reverse mortgage was introduced in 2007 here. The concept is aimed at senior citizens who can generate income from their homes in their retirement years.

HOW IT WORKS

If a senior citizen owns a house, he can avail a loan from a bank by mortgaging his house. In a conventional home loan, the borrower receives a lump sum at the beginning of the loan tenure. He has to repay the loan through monthly EMIs where a portion goes towards the interest component and the remaining towards principal repayment. The house is pledged with the lender during the debt tenure. In the case of reverse mortgage, a senior citizen pledges a property he owns for which the lender gives a series of cash flows for a fixed tenure.

THE ADVANTAGES

Consider the case of Prakash, a retired person. Prakash purchased a two bedroom house in the heart of the city with his life's savings. With no pension and any other regular sources of income, he is finding it difficult to meet his regular monthly expenses after retirement. The thought of selling his property and moving into a smaller rented accommodation seemed to be the only alternative to free him from financial distress. Reverse mortgage is a product designed for senior citizens like Prakash. Here, the property owned is pledged and for a fixed tenure (say 15 years) the senior citizen gets periodic payments. Senior citizens don't have to sell their assets to meet their living expenses. They can continue to live in the house till past the tenure of the reverse mortgage.

QUANTUM OF INCOME

Loan-to-value ratio means the percentage of loan that one will get for the value of the property that is pledged. The typical loan-to-value ratio is in the range of 60 to 80 percent. If one pledges a property worth Rs 40 lakhs, the loan amount that he can get is Rs 32 lakhs, if the loan-to value ratio is 80 percent. The income generated from reverse mortgage can be in the range of 12 to 15 percent.

REPAYMENT

In the event of demise of the senior citizen, his spouse is allowed to live in the house. After the demise of both, the banker will provide the legal heirs the opportunity to clear the outstanding loan and take possession of the property. If the heirs are not interested, the bank sells the house, and settles the outstanding loan. Any excess amount from the sale of the property is duly remitted to the borrower's heirs.

POPULAR ABROAD

Reverse mortgage is a popular in the West among senior citizens who want to tap their property for cash. Ashish Gupta outlines some legal aspects of reverse mortgage:

In the present day circumstances of cash crunch, property can be a valuable source of getting funds, without physically disposing off the property. As a concept, reverse mortgage is of immense use in unlocking the otherwise illiquid asset of property. Hitherto immovable property has been treated as one of the most illiquid assets. Reverse mortgage unlocks the liquidity potential of this asset. It helps the owner get a return from his immovable property, without having to part with it. The owner can continue with the possession of the property during his lifetime.

WHAT HAPPENS TO TITLE?

In case of a reverse mortgage, the property owner surrenders the title of the property to a financial entity. The financial entity doesn't pay the entire amount to the owner upfront. On the contrary, it pays out a regular sum each month for the agreed time.

HOW IS IT DIFFERENT FROM MORTGAGE?

Reverse mortgage is different from mortgage. Mortgage is a form of hypothecation of the property to a bank, as a security for a loan. A common form of security which a bank insists on is the mortgage of the house for which the loan is being availed of by the borrower. Mortgage refers to the transfer of interest in a specific property for the purpose of securing either the payment of money advanced or to be advanced by way of loan, or an existing or future debt. The transferor is called a mortgagor, the transferee is called a mortgagee, the principal money and interest that are secured by the mortgage are called the mortgage money, and the instrument by which the transfer is affected is called a mortgage deed. A reverse mortgage is available to those above a specific age. The aim is to use the property and make it generate a return while in use by the owner. The amount is paid out each month is for a specific period of time.

RISK OF FINANCIAL INSTITUTION

The financing institution has to bear the risk of the individual outliving the agreement. At the expiry of the agreement period, the monthly payments to the owner stop. The monthly payout depends on the value of the property, the term of the agreement and the rate of payment. The valuation of the property is to be done by experts. The entire payout mechanism calculation and computation depends on the law of probability.

Courtesy:- ET dt:- 30-10-2009

Buyers, it is time to rejoice as affordable housing projects are here to stay. While recession had developers reducing prices of their housing units, their rising debts are forcing them to continue with it

The market may witness an oversupply like condition in the affordable segment of residential real estate making prices range bound in times to come. Though the global financial crisis affected developers badly, it brought cheer to the middleclass end users as builders were forced to bring down their units prices to the affordable range of Rs 5 lakh to Rs 30 lakh.

In fact, the crisis led to emergence of a new segment of affordable housing in residential real estate in the country. This helped revive realty market and instilled a new confidence among developers and end users, according to Samir Jasuja, founder CEO of PropEquity Research.

In order to bring down prices to drive sales, developers cut the rate by lowering specifications and also by reducing the size of units. The combined effect of cutting the rate and reducing the size led to a steep fall in prices of two and three-bedroom apartments, by as much as 30% to 40% from their peak level of early 2008.

The fall in prices spurred demand. Many developers even sold their entire projects in only a couple of days. This is mainly because developers could successfully convey the impression to buyers that availability of apartments at prices at which they off e re d would not last long. This made the buyers queue up to buy these apartments.

But as demand rose sharply in this category, more and more developers launched apartments in the affordable segments and supply increased manifold. According to Jasuja, this category is now beginning to get overcrowded with a rapid increase in supply, which is outstripping absorption and leading to an inventory pile up. According to the accompanying chart, absorption rate or sold-out rate in the last one year in apartments in the price range of Rs 5 to Rs 15 lakh is much better than that in the Rs 15 to Rs 30 lakh range. This is also because of the number of apartments launched in the Rs 5 to Rs 15 lakh price range is much smaller than that in the Rs 15 to Rs 30 lakh range in the National Capital Region (NCR).

Gurgaon saw the launch of maximum number of apartments in the affordable range. But the sold-out rate here is the second worst at 37%, next only after Greater Noida, where it is only 25%. As sales in affordable range of apartments picked up, many developers jumped onto the affordable housing bandwagon to bail themselves out of the global economic crisis. Many of them treated affordable housing category as the new mantra in marketing and launched several projects in this category resulting in an oversupply in the market, Jasuja says.

Interestingly, as demand picked up and number of transactions increased, many developers’ revised prices upwards, by around 10%. However, consultants feel price hike is more cosmetic in nature as developers are giving discounts over quoted prices. Some developers increased the quote prices, but the discount was also suitably hiked. Data collected by PropEquity from 13 cities suggests that rate of sales (absorption) of affordable units have slowed down in the September 2009 quarter. In the early phase, the euphoria was mainly due to a huge pent up demand in the category.

Falling absorption velocity coupled with an oversupply in this category has now resulted in an inventory pile up. As cost of carrying inventory in real estate sector is very high, developers will resort to price correction at the cost of profits.

But developers argue the prices are at rock bottom. In most of the areas of NCR, developers are selling apartments at 30% to 50% discount to the average price of apartments in the area. In most of the cases, they are working on a very thin profit margin. Therefore, a further cut in prices will be a big disincentive to launch the project itself. However, bankers and consultants feel that most developers are under a huge debt. As they are not able to raise funds through equity-sell, they have no choice but to launch projects for the purpose.

Courtesy:- ET dt:- 30-10-2009

The Rajasthan government has rolled out new urban housing policy, which promises 1.25 lakh dwellings over next five years for economically backward section.

As per the policy, the state government would rope in private developers under the public-private partnership PPP model for developing low cost housing with Awas Vikas Limited as the nodal agency. The state urban development and housing minister Shanti Kumar Dhariwal said that the policy would have five models.

“Apart from government bodies like Rajasthan Housing Board (RHB), Jaipur Development Authority (JDA) and local bodies, private developers will also play an important role in providing affordable accommodation.

Out of five models, four involve active participation of private developers while the fifth model is meant for government-run urban agencies like RHB, JDA and municipalities,” he said.

The new housing policy is an offshoot of estimation by Planning Commission, which indicated that the shortage of housing units in the state would go up to 17 lakh in 2021 from 10.70 lakh in 2007.

Under the policy, the state government has made it mandatory for RHB to construct 50% of the total dwellings for Economically Weaker Section (EWS) and Lower Income Group (LIG). Similarly, JDA and other Urban Improvement Trusts will have to reserve 25% of land in any residential scheme for economically weaker section. The private developers too will have to keep aside 15% of the total constructed units or 5% of the total project area for EWS and LIG in any residential township or Group Housing Schemes.

Apart from providing low cost accommodation to LIG and EWS, the state government will also allot free accommodations to slum dwellers.

“Under this model, the state government will invite global tender and the successful bidder would have to develop residential units in the slum areas. The developers will have to hand over the houses to local bodies for the free allotment of houses to the slum dwellers. The developers, in return will get the remaining land as per the prescribed formula for commercial use with 1:4 Floor Area Ratio as against the normal 1:1.8 FAR.

Low-cost housing is likely to provide a great opportunity for battered real estate developers in the form of public-private partnership (PPP). According to a recent report by industry body Assocham PPP model is the most viable business model for such projects. “The model will help the cash-strapped developers, who are finding it difficult to fund their projects on a standalone basis,” the study says.

Courtesy:- ET dt:- 23-10-2009

Attractive Valuations A Big Pull Factor; Agrochem, Breweries & Mining Also Shine

DLF, Unitech and HDIL are the latest darlings of foreign funds expecting a quick buck, even as they slash holdings in companies such as Infosys Technologies and infrastructure builders due to concerns about order flows and high valuations, a study of latest filings shows.

The sudden fancy for real estate among those overseas funds were probably due to the surge in fund raisings by those debt-ridden companies in the recent bull run when most of them sold shares at less than a third of their peak 2007-08 valuations which overseas investors found attractive. “With interest rates expected to remain benign and stable, some dedicated funds might have bought on hopes of a significant upswing in high-beta sectors like realty,” said Tata Asset Management CEO Ved Prakash Chaturvedi. High beta stocks are those which rise or fall more than the benchmark indexes.

As of September 30, 2009, FIIs owned 25% of the aggregate equity capital of 36 realty companies, including industry leaders like DLF, Unitech, Indiabulls Real Estate and HDIL. That is higher than the previous year’s 9.6% and the year before’s 10.3%. Indian companies, including Unitech and DLF, have so far raised $12.3 billion through share sale this year and another $17.4 billion may be raised by fiscal year-end exploiting a record stock market rally which saw the benchmark indices more than double from their troughs earlier this year.

It was not just one sector that foreign funds who have invested $14.4 billion in the current calendar year so far have favored, but also raised stakes in sectors such as agrochemical, a key beneficiary in an agrarian economy like India, breweries which benefit from rising incomes in urban centres, and mining. Last year they pulled out $12 billion.

Overseas funds own 25.6%, 18.6% and 17.9%, respectively, in agrochemical, breweries and mining sectors. Companies such as United Phosphorus, United Spirits, Gujarat NRE Coke and Sesa Goa have large foreign holdings.

But the once that were favoured in the last bull rally — technology, capital goods, cement and retail — aren’t lucky this time. Combined FII holdings in all the listed IT companies fell to 12.1% as on September 30, 2009, compared to 15.6% as on September 30, 2008. Their exposure in capital good sector fell to 9.9% from 12.1% and to 15.1% from 18.5% in retail space. “FIIs have been underweight on IT companies due to outsourcing concerns,” said Centrum Broking MD Devesh Kumar. “Cement companies are adding new capacities and investors would wait for demand to pick up, which would also depend on the pace of infrastructure development in the country.”

International companies stung by the economic slowdown have been cutting their spend on technology which the Indian companies depend upon. SAP, Europe’s biggest business software producer, on Wednesday cut revenue forecast for the year as companies held on to purse strings.

Indian infrastructure companies are also showing delays in executing orders and their valuations at more than 25 times in some cases such as Larsen & Toubro seem to have run ahead of themselves.

Courtesy:- ET dt:- 29-10-2009

The emergence of ‘affordable’ housing has revived the real estate market, but prospective buyers have found out that getting a home loan approved has just got a little more difficult.

For one, banks, wiser from the meltdown, are rechecking the installment to income rations(the figure that determines the EMI). Earlier, bank extended EMI(equated monthly installment) on the loan up to 50% of the monthly salary. Now this installment to income ratio stands between 30% and 50%. “It’s not advisible to have a single number,” says Renu Sud Karnad, joint MD, HDFC.

Moreover, many banks are taking into account only the recurring income of the potential buyer to compute the monthly EMI. “Banks are no longer benevolently at other sources of income such as performance bonus, variable pay, while computing the installment to income ratio,” says Praveen Kutty, executive V-P and head (retail banking), Development Credit Bank. “Our focus is on income sources that are consistent while arriving at the ratio,” says Karnad.

Kotak Mahindra Bank takes into consideration only the monthly income to calculate the EMI. “We don’t look at other incomes such as bonus because it may not be there every year,” says Kamlesh Rao, executive V-P , Kotak Mahindra Bank. Some banks are assigning sector-wise ‘installment to income’ ratios so that there is consistency in loan disbursals. Such ratios are determined on the performance and the credit rating of the industry.

Analysts say banks are taking the cautious route to improve their risk management. “Some time back, capital was hard to come by. Banks did not want to set aside huge amounts towards lending because if delinquencies arose, they would have had to make provisions for those,” says Clyton Fernandes of AnandRathi Financial Services.

Even when it comes to documentation, banks are some stringent before disbursing home loans. Apart from the pre-requisite documents like IT returns of three years, PAN card copy and bank statements of the last six months, banks are also scrutinizing details such as passbook entries to check withdrawal  patterns. “Banks like us are actively tapping the Cibil(Credit Information Bureau) list to check the credit card payment history. Such checking is now integral to the credit buying process,” says Rao.

In case of professionals who have shifted from hometown, banks are asking for title deeds of house in the native place even if it is registered in the name of the parents, to determine repayment capacity of the executive.

Courtesy:- BS dated 24^th Octber 09

To lure the Business Process Outsourcing and IT/ITeS industry, the Mayawati Government in Uttar Pradesh has showerd various sops. The realty sector , too, has been given many relaxations.

It majors and BPOs setting up units in UP will get full waiver on stamp duty. Those setting up call centres can now get a land-lot in UP on easier terms. In a meeting of the state cabinet chaired by the CM on Friday, all development authorities in the state have been directed accordingly. IT companies have been given big relaxations in the lease rent on land allotted to them. IT and BPO industries can now complete construction on the land allotted to them in five years instead of three years.

The government has decided to reduce the lease rent on commercial land by more than 60 per cent.

The cabinet also decided that those getting a commercial plot through open bidding by March 31, 2010, will have to pay just one per cent lease rent instead of the earlier rate of 2.5 per cent. In case the allottee is making a one-time payment, the lease rent payable will be 11 per cent instead of the existing 27.5 per cent.

Those realty companies which have failed to pay the cost of the land allotted to them have been given the option to reschedule their payment mode.

Defaulter realty companies can now pay the cost of land over 10 years. This facility will be available till the end of this financial year only.

Courtesy:- BS dated 24^th Octber 09

Real estate Property need not be an asset that has no liquidity. It is possible for senior citizens to live in a property they own and at the same time get a regular income from it through reverse mortgage. Kavita Sriram outlines how this concept works for the owner

Reverse mortgage was introduced in 2007 here. The concept is aimed at senior citizens who can generate income from their homes in their retirement years.

HOW IT WORKS   

If a senior citizen owns a house, he can avail a home loan from a bank by mortgaging his house. In a conventional home loan, the borrower receives a lump sum at the beginning of the home loan tenure. He has to repay the loan through monthly EMIs where a portion goes towards the interest component and the remaining towards principal repayment. The house is pledged with the lender during the debt tenure.

In the case of reverse mortgage, a senior citizen pledges a real estate property he owns for which the lender gives a series of cash flows for a fixed tenure.

ADVANTAGE OF REVERSE MORTGAGE   

Consider the case of Prabhunath, a retired person. Prabhunath purchased a two bedroom house in the heart of the city with his life’s savings. With no pension and any other regular sources of income, he is finding it difficult to meet his regular monthly expenses after retirement. The thought of selling his real estate property and moving into a smaller rented accommodation seemed to be the only alternative to free him from financial distress.

Reverse mortgage is a product designed for senior citizens like Prabhunath. Here, the property owned is pledged and for a fixed tenure (say 15 years) the senior citizen gets periodic payments.

Senior citizens don’t have to sell their assets to meet their living expenses. They can continue to live in the house  till past the tenure of the reverse mortgage.

QUANTUM OF INCOME   

Loan-to-value ratio means the percentage of loan that one will get for the value of the real estate property that is pledged. The typical loan-to-value ratio is in the range of 60 to 80 percent. If one pledges a property worth Rs 40 lakhs, the loan amount that he can get is Rs 32 lakhs, if the home loan-to value ratio is 80 percent.  

The income generated from reverse mortgage can be in the range of 12 to 15 percent.

REPAYMENT

In the event of demise of the senior citizen, his spouse is allowed to live in the house. After the demise of both, the banker will provide the legal heirs the opportunity to clear the outstanding home loan and take possession of the property. If the heirs are not interested, the bank sells the house, and settles the outstanding home loan. Any excess amount from the sale of the property is duly remitted to the borrower’s heirs.

Second homes, or vacation homes and flats, are emerging as lucrative investment options in real estate. These homes and flats , which generally come in villa formats, provide the essence of “a home away from home”, and can provide options for weekend getaway for the family. While scouting for real estate projects offering second home housing, the primary criterion is always the location. Its always beneficial if the house that you buy is located in a destination which has an aesthetic quotient, and hence has the potential to attract visitors. Secondly, it is imperative to understand the real estate or property development plan of the township in which you intend to buy the house and flats. The villa should be associated with adequate plot areas, and individual villas should be adequately spaced out within the township, to ensure privacy and serenity for all residents. Basic amenities like water, power and medical facilities should be provided. It is also essential to have cognizance whether the property developer has all clearances in place so that he can adhere to specified timelines. Some real estate developers do offer a rent back scheme, wherein you shall be guaranteed a minimum period of stay, and for the balance period, the house shall be rented out, generating additional rental income. In such cases, it is advisable to read the fine prints of the agreement, do a check on the prevailing rental rates and the premium you envisage for the township development, and also the tenants who shall be considered.

Unitech Ltd, India’s second-biggest real estate player by revenue, on Tuesday reported it has booked sales worth Rs 3,913 cr in the first six months of fiscal 2010, selling 10.11 million sq ft, which is almost the same space sold by it in each of fiscal 2007 and 2008—the boom years for real estate.

Out of 10.11 million sq ft, 8.16 million sq ft was booked in the residential segment, the company said in a presentation dated September 30, which was made public on Tuesday. It said that these figures did not cover PLC, parking and club charges.

In the last fiscal, Unitech had sold only about 3 million sq ft in 2008-09, as buyers shied away from the real estate sector in the face of global slowdown.

“The target is to sell 20 million sq ft this year,” said a Unitech spokesperson. The average basic sale price of its projects though has dropped to Rs 3,234 per sq ft during March-September 2009 compared to an average of over Rs 4,000 per sq ft for its projects before September 2008, indicating that the company’s strategy to sell smaller units at lower prices drew response from buyers. Yet, the company has been able to sell less than 50% of the total space it launched between March-September 2009. It had launched a total of 21.3 million sq ft of space (residential and non-residential combined) of which it claims to have sold 10.11 million sq ft during the period.

In its presentation, Unitech said it has sold 6,788 units in its recent projects across nine cities which has generated Rs 2,639 cr. It has close to 60 projects under various stages of development and will be delivering close to 32 million sq ft over the next 3 years. It has launched over 30 new projects in the last 7 months. The company has increased its workforce on project sites in last six months, from 3,500 on April 1, 2009 to 15,600 on October 1, 2009, to deliver existing projects by March 2011.

Courtesy:- ET dt:- 14-10-09

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While there’s space for price rise in up market areas, suburbs may see a correction if festive demand fails

The festive season is considered an auspicious period for buying a new home. But, this time around, potential home owners in Mumbai are faced with the million-dollar question — to buy or not to buy — even as builders ramped up property prices in the city and its suburbs by 10-15% in the run-up to the festivities, and could raise them further.

However, experts recommend a ‘wait-and-watch’ strategy since they expect some clarity on prices to emerge by December. They are of the view that builders raised prices after the general elections in May this year on hopes of speedier economic reforms and that such an action may not be justified in the light of the poor monsoon, which could dampen growth prospects. They feel that prices are likely to bottom out by the end of the year and that even if the fall is as marginal as 5-10%, it may be worth a wait.

“Growth fundamentals are not in place and we are jumping the gun already. Lack of strong fundamentals clearly shows that the spike in prices is sentimental and not justified under current conditions,� said Gulam Zia, director, national advisory services, Knight Frank. “Most developers hiked property prices after the formation of a stable government and anticipation of economic reforms. However, the poor monsoon could play spoilsport.�

However, even if prices are to soften by the year-end, one of the important determinants that would influence the degree of fall is the supply-demand mismatch in the suburbs. “In Mumbai’s western suburbs, prices could stabilize at current levels or marginally correct in the Bandra - Andheri stretch, as the demand is much higher,� said Ashutosh Limaye, associate director (strategic consulting), Jones Lang LaSalle Meghraj.

“If one goes beyond Borivali up to Vasai or Virar, real estate consultants expect some correction in prices. Similarly, even in other central suburbs such as Mulund, Thane and beyond, potential buyers can afford to wait for better deals, as these still are upcoming suburbs.�

Big builders such as Nirmal Lifestyle and Lodha are entering newer suburbs such as Dombivali, Dahisar and Kalyan and are quoting higher prices. “These markets, however, are dominated by local developers who are still offering real estate projects at competitive prices. Hence, there is downward pressure on prices in these suburbs,� Mr Limaye adds. Chembur, which was once seen as a posh locality, has slipped in rankings since surrounding suburbs such as Deonar rose to prominence. However, its excellent connectivity to all key parts of Mumbai has kept prices there as high as Rs 8,000-10,000 a sq ft. There is a rising trend of buying used flats in Chembur, according to brokers in the suburb. “There is good demand for used flats in Chembur, because of the high premium on new constructions. Even redevelopment projects have begun in certain pockets within Chembur. So, it’s a sensible buy for potential owners,� says Rakshesh Shah, a Chembur-based agent.

Navi Mumbai is a well-planned suburb with superior infrastructure, but prices are expected to soften due to abundant supply. Hence, buyers would have an upper hand in negotiating with builders there. Usually, builders witness additional sales to the tune of 20-30% during the Navaratri - Diwali period, with most carrying out a bulk of their business between October and March. However, if they do not clock impressive sales growth this festive season, there would be a downward pressure on real estate prices.

Courtesy:- ET dt:- 14-10-09