EMIs on home loans rise

March 4th, 2011 No comments »

In a high inflationary economy, the interest rates regularly move up, giving home loan borrowers the shivers. The equated monthly instalments (EMIs), comprising up to 50-55 per cent of the earnings of a family, are steadily going up, making family finances go haywire.

The interest rates which were hovering around eight per cent two years ago have almost touched 10 per cent, making EMIs increase significantly. If one has opted for ‘teaser loans,’ the effective hike in interest rates would be much higher, after the initial period of discounted interest rates.

Let us analyse what happens when interest rate charged on home loan is increased or decreased. If a loan were obtained at fixed rates, there would be no change in the EMIs throughout the loan tenure. Since home loan repayments stretch up to 20-25 years, lenders normally push variable (floating) interest rate schemes or at the maximum, offer fixed rate for a term of say five years. Hence, more than 90 per cent of existing home loans are at variable interest rate schemes.

Mr. Anand has a home loan of Rs.25 lakh at 10 per cent for a tenure of 20 years (240 months) and the EMI is Rs. 24,126. If after two years, the interest rate were reduced to nine per cent, then the EMI works out to Rs.22,596 for the balance 18 years tenure.

In such a case, since post-dated cheques (or standing instructions/electronic clearance system mandate) are taken in advance for EMIs of Rs.24,126, normally the lender will continue to collect the old EMIs. The difference between the old EMI and new EMI (Rs.24,126 – Rs.22,596 = Rs.1,530) would be adjusted towards extra loan recovery (principal amount) or prepayment amount.

In the same illustration of Mr. Anand, if interest rate were to go up gone by 1 percentage point to 11 per cent after two years of repayment, the EMI increases to Rs.25,699.

In case, the borrower continues to pay old EMIs, the shortfall in the EMI (Rs.25,699 – Rs.24,216 = Rs.1,573) is practically considered short collection in the principal amount of the loan. This will increase the repayment term to 296 months (24 years and 8 months).

When interest rates go up marginally, normally lenders may continue to collect old EMIs. If interest rate increases more than 2 per cent or the increased repayment tenure goes beyond the retirement age of borrower, the lender will force the borrower to pay higher EMIs by collecting fresh post-dated cheques/ECS mandate with increased EMIs. Another issue would be that even the interest portion may not be covered in old EMIs and hence, lenders will have to seek revised EMIs from the borrowers.

When the interest rate comes down, it is advisable to continue to pay old EMIs as the loan tenure gets reduced. In the above illustration, if old EMIs are paid, then loan gets repaid in 210 months, instead of 240 months. In other words, the borrower not only gets rid of a long-term loan much earlier, the total interest paid on the loan also decreases from Rs.32,89,800 to Rs.25,55,950, a savings of Rs.7,33,850.

When interest rate goes up, it is advisable to arrange to pay higher EMIs, even if it is a bit burdensome, otherwise the debt becomes a life-long affair.

In the above illustration, where only 1 per cent interest has gone up, the repayment term increases to 296 months (24 years and eight months). If interest rate goes up by 1.5 per cent (11.5 per cent), the tenure increases to 357 months — 29 years, nine months. For a loan of Rs.25 lakh, the borrower ends up paying total interest of Rs.61.25 lakh.

In the present scene of increasing interest rates, some new generation banks have even allowed repayment tenure to go much beyond retirement age (even up to 80-85 years of borrowers), which is a dangerous trend.

Such a move will not only make the debt a life-long burden but also make the interest payment two to three times of the loan amount availed.

News Published Under:  The Hindu

A new master plan for Kochi

August 1st, 2010 No comments »

A new master plan for Kochi city, thought about 10 years ago, is only now beginning to take shape. But there are doubts if the plan will be able to deliver the goods. An important question is how the plan is supposed to help a city saddled with congested roads and haphazard growth.

“The growth of the city has been unimaginable,” says K.J. Sohan, Chairman of the Standing Committee on Development of the City Corporation. Had the plan taken shape 10 years ago, public transport and housing would have got an impetus.

Water-supply is a major problem facing the city now, he says. Water sources should be public property. A good portion of the waterfront areas in Kochi is in the hands of private developers, he says.

The councillor says the topography of the city will help evolve a wonderful waterway, which, if integrated with the road and rail transport systems, will decongest the roads.


Mr. Sohan speaks of transit-oriented development in his report on the “Transport system for the people of Kochi.” The transport corridors should back high-density growth in a city area. There should be a surcharge on such type of growth to meet the transport costs, he says.

There is no city in the country that has such a network of waterbodies as Kochi does. These link the suburbs to the city, Mr. Sohan says. In fact, Kochi boasts three national waterways, which, however, remain unutilised for public transport. The National Waterways Authority of India promotes only cargo transport through these waterways, he says. Boats are so obsolete and the water-transport infrastructure so crude that people find road transport much safer and faster.

He says the master plan, for projected growth up to 2025, can give a direction to the city’s development, especially with focus on transport mechanisms and infrastructure.

Over the past 10 years, nearly 25 apartment complexes with over 10 storeys each have come up in the city, he says. A master plan would have gone a long way in determining the water-supply and power requirements of the city. Zoning of residential, commercial and industrial categories help specify the needs of water, power and transport facilities in a given area.

The development of the city has taken place along the railway line from north to south, but with only two over-bridges connecting the two areas separated by the tracks, the entry points into the city has become choked. This points to a lack of spatial planning, Mr. Sohan says.

The recent changes in the building rules have been good in limiting the built-up area according to the road width. Huge constructions will now move out of the city area, he says.

The blueprint of the master plan will be notified for the people to raise objections.
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Commercial realty on the rebound?

August 1st, 2010 No comments »

The commercial office space sector is looking up in Chennai. Buoyed by stronger economic fundamentals, the Chennai office market has seen a fair amount of activity over the last two quarters. In a sign of the improving sentiment, take-up of space has increased and rental values have bottomed out in most markets. The worst may be behind us.

Net absorption totalled 1.8 million sq.ft in the first two quarters of 2010. This is a growth of over 38 per cent compared to the first two quarters of 2009 which saw an absorption of only 1.3 million sq.ft. This increase is primarily due to the demand arising from companies expanding and upgrading to better quality premises. Grade A office rentals levelled out for two consecutive quarters, suggesting that the market is at the bottom of the cycle. The first two quarters of 2010 saw increased market activity, although due to high vacancy levels, rentals remained stable.

The sluggish leasing, uncertainty and falling rentals seen in 2009 have been replaced by a more stable office market. Many buildings with significant vacancies recorded improved occupancy rates. The office vacancy rate increased to 28 per cent marking nine consecutive quarters of increased vacancy. Total stock in the market stands currently at 38 million sq.ft., with 11 million sq.ft. of vacant space.

Major transactions included TCS e-serve, Igate, CTS and IBM expanding in DLF IT SEZ, Tata Teleservices buying space in Prince Infocity 2, Reliance Communications leasing space in India Land Tech Park, Nokia Siemens Network leasing space in Pacifica Tech Park, Neptune and Force 10 leasing space in Olympia Tech Park, Franklin Templeton leasing space in RMZ Millenia, Iopex leasing space in Ambit IT Park and Hapag Lloyd and Amazon leasing space in S P Infocity.

The self-correction phase has started with developers slowing down construction and changing usage of their office projects. IT Park developers who offered aggressive terms such as lower deposits and more rent free periods were able to attract prospective tenants. With rentals having corrected by 20 per cent to 30 per cent in most micromarkets from the peak seen in first quarter 2008, many corporates and IT/ITES companies are using this opportunity to

consolidate or relocate to better quality buildings at lower rentals or sale values. This window of opportunity for corporate occupiers is likely to be extended till end of 2010.

The yield levels stabilized at 10.5 per cent to 11.5 per cent.

The overall outlook is positive for the next two quarters and should see rentals further stabilising across micromarkets.

A continuing improvement in the economy suggests that demand for office space will increase in the next 12 months, but the huge vacancy will keep prices in check. Leasing is expected to see an upward trend in the next two quarters with both enquiry levels and transaction velocity picking up. The absorption for office space in Chennai in 2010 is expected to be around 3.5 million sq.ft.

Demand for SEZs

The stability in rents and low operating costs should help Chennai regain its position as one of the most preferred IT destinations in India. The demand for SEZs is expected to go up considerably in the next three quarters given the uncertainties arising out of the implementation of the Direct Tax Code. Major IT SEZs such as DLF IT SEZ and Tata Realty’s Ramanujam IT SEZ in

Taramani are expected to see significant interest from occupiers.

The cost of project finance has increased dramatically, so there won’t be much speculative office development happening in the near future. Until the gap between buyer and seller expectations is narrowed, sales is not expected to pick up. Prominent new buildings due to be completed in the next six months include ASV Chandilya (500,000 sq. ft), TVH Agnitio Park (600,000 sq.ft.), Ascendas Phase 3 (740,000 sq.ft.) and Prince Infocity 2 (770,000 sq.ft.).

The State government needs to send out positive signals by marketing Chennai more aggressively across the world as a low cost outsourcing and manufacturing destination.

Although it is still early to say if the market is seeing a full fledged rebound, it definitely looks like a market recovery in terms of demand as developers and real estate consultants get busier. However, the basic problems such as high vacancy, low rent and low liquidity continue.


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To buy or not to buy property?

July 22nd, 2010 No comments »

In India, small real estate investors do not have as much scope as institutional investors at the moment. They can hold multiple properties, but banks will generally not fund beyond a second home loan. That does not mean that they cannot invest beyond that from their personal accruals, however. They certainly have the option of investing in rent-generating assets, which can fetch decent returns if they have been purchased wisely.

Despite the present limitations for small investors, a property investment can give the buyer protection against inflation. Like gold, real estate tends to retain its intrinsic value. However, unlike with gold, it is possible to earn a regular income on it.

Depending upon various economic factors, a property owner can increase rent in times of high inflation. Also, real estate is always good investment option because of the possibility of capital appreciation.


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Mixed response to building rule modifications

July 22nd, 2010 No comments »

The decision of the State government to modify some of the amendments made to the Kerala Municipal Building Rules, 1999, a few months ago has brought some relief to property developers in Kozhikode.

A few restrictions on constructions of buildings close to roads have been relaxed indicating that builders will revive some of their stalled projects as well as launch new ones in the city. The revisions have been in the access width for high-rise buildings, which normally is more than 15 metres from the ground (or over four floors).

The required access width of roads to multi-storey buildings, both residential and commercial, in the past was only five metres. But it was amended based on number of the units — a building with 25 flats should have a minimum access width of seven metres; 50 flats, nine metres; 75 flats, 12 metres; and 100 units or more, 15 metres.

Now the access width has been reduced on all categories and the total space of the buildings, whether small, medium or industrial, will also be considered.

The parking areas have also been reduced considerably by 15-30 per cent. “The revised rules are quite reasonable enabling the builders to go ahead with projects,” says M.A Mehaboob, secretary, Confederation of Real Estate Developers Associations of India (CREDAI), Kozhikode chapter.

A parking lot for two flats each below 100 sq.m and one for each unit above 100 sq.m is acceptable. Earlier, the rule insisted on having two parking lots, one for guest parking, for any single unit in an apartment.

Another is concerning the digging of ground for construction of basements. The amended rule maintained that a builder should obtain a no-objection certificate (NOC) from the neighbour if the depth is 1.5 metres or more or the measurement exceeds the length from the boundary wall.

Mr. Mehaboob says the rule of getting an NOC for digging purpose has been dropped and instead a committee constituted by the Corporation or civic body will look into complaints, if any.

However, a new provision has been brought in regarding the construction of a dedicated road inside the premises of high-rise apartments for fire tenders. The rule, applicable for commercial and housing buildings, has to be enforced even if a public road exists. Besides at least five metres should be left vacant on all sides of the high-rise buildings.


The Floor Area Ratio (FAR) has been left unchanged (If the floor area of a house is 2,000 sq.ft and land area is 3,000 sq.ft, FAR is 0.66).

The new rule says that builders can increase the FAR only up to 2.75, after remitting an additional fee. It will be Rs.500 per square metre for FAR between 1.5 and 2, and Rs.1,000 per square metre for between 2 and 2.75. Earlier, FAR for residential buildings was 3, giving property developers a wide option in planning buildings.

The coverage of high-rise apartments has also been considerably reduced.

Only 60 per cent of the land available should be covered by buildings having six to 50 units. Only 55 per cent of the land can be used for building having units between 51 and 100; 50 per cent for buildings having 101 and 200 units. The construction should be restricted to 45 per cent for apartments having 200 units and above.

Builders say that overall the new rules will support the construction industry but only to a limited extent as the amended FAR has been left untouched.

Several new projects in the city and the suburbs have been put on hold following the new rules. “The concept of affordable housing will only remain on paper if the government does not further revise the FAR rules, ” Mr. Mehaboob says.

Already builders are thinking of increasing the rates by Rs.250-500 per square foot from the existing rates. The new rule will increase expenditure for builders.

Even so builders can rejoice as the government has reduced the stamp duty. The effective rate of stamp duty, surcharge and registration fee in Corporation areas is now 11 per cent; in municipality, township and cantonment areas to 10 per cent; and in grama panchayat areas to 9 per cent.

A further reduction in stamp duty has been provided for environment-friendly housing projects.
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CREDAI seeks stress on infrastructure development

July 12th, 2010 No comments »

Infrastructure is a key issue that has to be addressed if urban gridlock is to be avoided, says Kumar Gera, chairman, Confederation of Real Estate Developers’ Associations of India (CREDAI).

He says that according to reports, the population in cities will grow by 60 per cent by 2030.

In five States, the urban population will be larger than in rural areas. By 2030, an estimated 70 per cent of the country’s GDP will come from cities. In such a scenario, infrastructure is hugely important and if it is not addressed, there would be a gridlock. Hence, “greater focus is needed on infrastructure.”

In India, unlike in developed countries, real estate is not part of infrastructure development, which includes roads, power and water.

Affordable housing, play areas and institutions were also real estate-related infrastructure.

Typically, in Indian cities, infrastructure comes after development and thus pushes the prices up in those areas. Those who are unable to afford the cost, had to look to areas with less infrastructure where prices were lower.

In States such as Maharashtra and Rajasthan, developers are encouraged to go in for townships that include infrastructure. On demand in the real estate sector, Mr. Gera says there was a slowdown about a year ago. Real estate came to a standstill in terms of sales and prices did come down by 10 per cent to 40 per cent. Prices had not returned to the earlier levels yet. They have started moving up. Demand for residential units is buoyant in most places.


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A budget push for affordable housing

March 16th, 2010 No comments »

It is official. The Union Budget 2010-11 has explicitly sent a message to the building sector in the country to focus more on building houses for the low-income groups.

It is an idea born out of necessity. The worldwide economic recession drew down property prices across the globe. Initially, it appeared that the property market in India, particularly in Kerala, would remain insulated from the global development. However, prices came down in India too, more significantly in some cities than in others.

For the less affluent

Under these circumstances, the idea of affordable homes caught up in the market. Housing for the less affluent and housing projects away from urban centres continue to hold the imagination of the public.

The Union Budget has just thrown its weight behind the concept and some analysts have interpreted it as an attempt to drive real property development into rural areas also where affordability is a must and housing requirements are high. The budget’s attempt is to invite the builders to the smaller towns in the country.

One of the key reasons for this view of the budget provision is the extension of the interest subvention scheme. The scheme for one per cent interest subvention for housing loans up to Rs.10 lakh, where the total cost of the house does not exceed Rs.20 lakh, was announced in the Union Budget 2009-10. In his budget speech, Union Finance Minister Pranab Mukherjee said the budget had provided Rs.700 crore for the scheme.


It is a clear signal that housing for the poorer sections of society will get government consideration even in the future, said an official of a leading housing finance company. He said that affordable homes were a concept that had to be pushed more widely if housing requirements were to be met in the country.

However, considering it in the Kerala context, builders may not be so confident. One of the major reasons for this apprehension is the price of land, which is high almost on a uniform basis across the State, said a leading builder in Kochi.

Rural development

The increased allocation in the budget for rural development and rural housing are the other signals that moving away from urban centres will be advantageous to the builders in the long run.

The Indira Awas Yojana, a rural housing scheme for the weaker sections, has got an upward revision in allocation as the Finance Minister conceded increase in the cost of construction.

And so, the unit cost under the scheme has been raised to Rs.45,000 in the plain areas and to Rs.48,500 in the hilly terrains. The scheme has been allocated a total of Rs.10,000 crore for the financial year.

The budget reiterated that the government continued to focus on rural infrastructure development. The Finance Minister said in his budget speech: “For UPA Government, development of rural infrastructure remains a high priority area.”

The allocation for rural development is Rs.66,100 crore.


The focus on rural uplift is seen in the increased allocation of Rs.40,100 crore for the Mahatma Gandhi National Rural Employment Guarantee Scheme, which has completed four years.

The Bharat Nirman programme for upgrading rural infrastructure has received a substantial allocation of Rs.48,000 crore.

Sources in the housing finance industry predict that housing interest rates are likely to harden. Though institutions such as HUDCO are offering loans at eight per cent with a two-year fixed period, the trend is likely to change in the near future.

Private banks have already started raising rates and it is possible that their counterparts in the public sector too will take the cue, though it may not be until the July quarterly announcement from the Reserve Bank of India, sources added.

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Stamp duty cut wins wide applause

March 16th, 2010 No comments »

Property developers in Kozhikode city are happy about the proposals in the State Budget presented by Finance Minister T.M. Thomas Isaac in the Assembly last week.

One of the major proposals is to reduce the stamp duty and abolish the surcharge on stamp duty. “It is generally felt that stamp duty prevailing in Kerala is on the higher side,” Dr. Isaac said in his speech.

Repeatedly, builders have been demanding a cut in the stamp duty, which was the highest in the country. Now the proposal is to bring the effective rate of stamp duty, surcharge and registration fee in Corporation areas to 11 per cent; in municipality, township and cantonment areas to 10 per cent; and in grama panchayat areas to 9 per cent.

The existing stamp duty in Corporation areas is 13.5 per cent; municipalities, 12.5 per cent; and in the grama panchayat limits, 10 per cent. This apart, a 2 per cent charge is levied for registration.

Builders are also elated over the prospect of bringing down the stamp duty charge on flats and apartments to five per cent. “Surely, this is a radical proposal that will benefit the end-user. Moreover the budgetary proposal will give an impetus to the construction industry,” says Nityanand Kamath, Chairman, Confederation of Real Estate Developers Associations of India (CREDAI), Kozhikode chapter.

Clients who booked apartments and flats in Kozhikode have not registered the units because of the high stamp duty rates prevailing in the State. Many had kept in abeyance the registration even after occupying the flats. The proposal will make them register their property and bring revenue to the State exchequer, he says.

Reduction in stamp duty has been provided for environment-friendly housing projects. Apartment complexes having facilities for harvesting rainwater, energy- saving electrical appliances and solar panels for lighting and water heating will need to pay four per cent stamp duty. A chartered engineer should certify such projects. This concessional rate shall apply only if the transfer takes place within six months from the date of allotment of house number by the civic bodies.

Dr. Isaac said, “I feel that the construction industry, which is being badly affected by recession, needs a helping hand from the government.”

However, realty experts feel that the stamp duty needs to be reduced further in the range of 7-8 per cent to make the rates uniform with other States. Eventually, future governments will be compelled to buy this argument in the wake of the implementation of the fair value of land in the State, Mr. Kamath says.

The budget has already made a proposal that the fair value of land fixed on the basis of 15 categories will come into effect on April 1, 2010. “It was insisted that the fair value of land should not exceed 50 per cent of the market value. There may be some practical difficulties in implementing fair value. In order to resolve such difficulties, District Collectors will examine and redress such anomalies relating to valuation,” Dr. Isaac said.
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A ‘plateau’ for property segment growth

February 11th, 2010 No comments »

The year that has gone by belied the expectations of property buyers, mainly due to the reluctance of promoters to reduce rates significantly

The slump in the Indian property market as a result of the global economic meltdown was, in fact, a product of the year 2008.

Despite the revival measures implemented by the Union government and the Reserve Bank of India, such as reduction in interest rates and special treatment for loans up to Rs.30 lakh sanctioned to affordable homes, in real terms, the demand from buyers remained low throughout 2009.

At the same time, property development did take place, especially in the small segment.

The year saw Tata Housing, Godrej Properties and a few others going in for development of one-room apartments, especially on the outskirts of metros and in tier-2 and -3 cities.

Another trend was new marketing strategies such as offering modular kitchens and furniture to lure the low and middle income group.

We have seen plenty of ads projecting eco-friendly habitats, nil interest for the start-up period and longer/lower repayment schedules.

High prices

Prices remained high, mainly due to the reluctance of the promoters and developers to reduce the rates, maybe for reasons such as high cost of land paid earlier, cost of materials and labour and so on.

In Karnataka, one factor was the high level of ‘guidance value’ fixed by the State government about two years ago when property prices were at their peak.

Of course, there has been some talk in the State government corridors about revising the guidance value downwards in line with the market, but nothing has materialised so far. All said and done, 2009 was rather a ‘plateau’ for property segment growth.

Many authorities feel that the recession is almost over and the economy is looking up. Industrial indexes have gone up in a couple of months.

There is even a talk that it is time to withdraw the support measures provided by the government and the RBI. The recruitment activities reintroduced by some software companies also has given optimism of economic revival followed by sectoral growth. All these are likely to push up demand for housing in the first quarter of 2010.

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IIA slams new building rules

February 11th, 2010 No comments »

The Indian Institute of Architects have slammed the recent Government Order on amendments to the Kerala Municipal Building Rules, 1999, describing it as something that will sabotage the State’s development and adversely affect its economic development.

A recent statement from the institute said that it was with shock that the new notification was received by the community of architects.

Most of the revised rules were impractical and full of incongruities.

They were framed without consulting any of the stakeholders, such as architects, builders and the public.

One of the most striking feature of the Government Order was that about 80 per cent of the building permits could be issued only by the Chief Town Planner in Thiruvananthapuram, a return to the old regime, said Lalichan Zacharias, chairman of the Association, in the statement.

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