Ludlow Engineering and Land Survey

Premium residential prices are increasing month on month and the demand is only investor driven. It is amply clear that there are few end users these days. Read on to know more about this trend
A well-known developer has towers on Golf Course road in Gurgaon. In May 2010,the capital value was Rs 7,000/sq ft, in June it was hiked to Rs 7,500/sq ft and they seemed sure that this would touch Rs 8,000 from July onwards.
An industry insider, on condition of anonymity, reveals that they release inventory of 100 odd flats at say price x and when the next stock is released, the prices are always beefed up to x + some percentage. How much the price hike will be,is guided by the market dynamics the demand supply situation. So, some projects at the launch stage witnessed a price hike from Rs 5,250 to Rs 5,500 in a time frame of two months while others nearing completion saw a 500 Rs/sq ft price hike month on month, says a Gurgaon based property broker adding that the difference is primarily in location and the stage at which the project is just launched, completely constructed or a ready to move in!
Everyone associated with the real estate industry agree that premium residential projects have seen the maximum price hike. Some attribute it to paucity of good housing projects and others to a general ‘feel good’ factor making people regain deep pockets, thus enabling them to invest and spend.
Since the revival of the market, the prices of luxury homes have gone up by approximately 20% on a pan-India basis. According to Sachin Sandhir, MD of RICS India (Royal Institution of Chartered Surveyors ),”In the Delhi region,capital values have risen by 5-10 % on a q-on-q basis in areas like Greater Kailash, Maharani Bagh,Vasant Vihar, South Extension, etc as a result of limited supply and improved market sentiment.”
Real estate is the only industry where the product doesn’t have a fixed MRP and changes from month to month depending on uptake, adds Sandhir. At this point of time, when the market is fairly vibrant, developers typically do a soft launch of the project at a test price (presale price),which if the market receives well, is then increased by about 10-15 % when they come up with an advertisement for the larger market.
So, the first few units in a scheme could be launched at x price followed by the sale of another batch of say 100-200 units at x+(10-15 )% followed by another increase of 10-15 %. This is typically the trend for most developers and this price increase is carried out till the market can absorb this increase. Given the current market, the prices have continued to increase and have now gone up substantially above the price points which the market had reached in the previous peak of early 2007, especially in Mumbai and the National Capital Region.
There is no doubt that mindless trading is at work in premium residential projects and real estate is just a commodity that investors are trading, just as they would with stocks or gold or mutual funds. In fact, the majority of people who are booking property in upscale residential projects comprise the local investor/financiers. Consultants indicate
that there is data that suggests that the local investors comprise a majority of the segment which makes bookings in property.
Surely the end user seems to be a minority in the market and according to real estate consultants, an approximate composition of buyer will be: NRIs 10%,local investors/financiers 50%,end users 20% and others 20%.The miscellaneous category refers to a rising neo-rich community growing at approximately 20% annually, comprising of CEO’s,top management professionals, young entrepreneurs and businessmen who are keen for a change in lifestyle and looking at boutique and super luxury abodes as a medium to make that transition.
NRIs are also keen to park their funds in India given the stability and growth that the country offers as compared to most western countries, which are still dealing with economic volatility. Whatever the composition of the overall matrix, the end user is clearly a smaller percentage of the total uptake in the premium housing segment. According to Bhasin, “The premium segment is being driven by high net worth investors, both local and NRI. Financiers are driving the direct land prices in Delhi and the NCR, which automatically rubs off in increasing the prices of such premium residential projects.”
The result is an artificial escalation in values borne not by real demand for housing but only a result of speculative trading in real estate. The prices for premium housing in Delhi and the NCR have gone up and the trend continues even now. Developers encourage this trend as they are getting their properties financed through these investors. In fact, a joint venture company even flew a bunch of investors to showcase their foreign projects to the Gulf where each investor booked around 40 flats each.
The fact is, developers do not have deep pockets in fact, most of them are into heavy debts. The question is, are we headed for a downturn again, a bust in real estate prices with real estate buyers outstretching their financial resources, blindly buying into the market under the mistaken notion that property prices only go up.
Analysts reckon that we are not headed for a Dubai-like situation at all. And the price correction may happen in six months or so. Sandhir says, “The intrinsic demand in the Indian real estate markets will carry us through any period and will keep us insulated from any real long term slow down. However, a word of caution for the developers is that in case of a slow down again (which could happen in Mumbai and the NCR) they will have to be quick to react to make prices more realistic again.”
This situation of excessive increase in prices is especially true in Mumbai and the NCR and this trend will continue till the stage where investors/end users stop paying and demand gets affected. So, there isn’t an imminent bubble in the market, but a situation where the markets may become overheated. Developers are smart enough to realise that the moment the market stops paying for the products launched, they will correct prices, like it was witnessed in the last slow down last year, which did not last more than 4-5 months.
FOCAL POINT
The real estate industry agrees that the premium residential projects have seen the maximum price hike. The prices of luxury homes have also gone up by 20%. The experts say that the trend will continue till the stage where investors/ end users stop paying and the demand gets affected. There wont be an immediate bubble soon.
Courtesy by: ET REALTY Dtd: July 23, 2010
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Courtesy by: ET REALTY Dtd: July 23, 2010
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I am Neetu Tiwary.
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Please see an interview with Charles Dixon a RICS surveyor with over 26 years of experience in the industry. Charles provides some in-depth information of much relevance to UK property investors including a definition of what value’ means today; modern day valuation techniques; due diligence tips; his own thoughts on the property market; regulation of the property industry and much more

1) Can you explain a bit about your background?

I have worked in the property world since graduating from Reading University in 1976 initially in the South Midlands and East Anglia, but for the last 26 years in the West Country counties of Cornwall, Devon, Somerset and Dorset.

2) What is your definition of value in the current UK property market?

Here is the non technical answer: the UK property market is a largely open and free market made up of thousands of individual transactions made by people and organisations with wide-ranging objectives. A free flow of information in the market is essential in informing the decisions behind those transactions. The internet has revolutionised the availability of information on transactions and has made it accessible to everyone; whereas before only people in the industry had such information. This has enabled many more people to join the property owning community. Value is what one person will pay to another for a property and, if value is not to be distorted, both parties must be well informed and acting in an arms length relationship.

3) Would it be fair to say that most surveyors are taking a conservative view on the valuation of property due to the uncertainty of the market?

Surveyors base their assessment of value not only on comparable evidence of similar transactions but also on their assessment of current market sentiment from the general public, the volume of properties available and being traded and of course many external factors that bear on the individuals undertaking a property transaction for example: the general state of the economy, interest rates , taxation policies etc. If surveyors are taking a conservative view, this should reflect a conservative approach that parties are taking in actual negotiations and transactions and reflecting the uncertainty of the market of which they form part.

4) The majority of investors reading this are residential property buyers one difficulty that has emerged as a result of the low market activity is the ability to obtain comparable sold data. What can be undertaken from your point of view to assist with this issue?

Data on property transactions is available through many free websites and through the Land Registry. Statistics on trends are also available free from the Department for Communities and Local Government and indices on house price movements from Halifax Bank and Nationwide Building Society. There are also subscription websites giving additional data which further knowledge about local markets (such as Hometrack’). Agents are, generally speaking, willing to help with information on transactions in their area provided they are approached tactfully and they are not restricted from giving information on a transaction by confidentiality. The current situation is dramatically better for individual investors than it has ever been and over time it is likely to improve further with the further development of the internet. However when there are so few transactions as we are currently experiencing, it is difficult find comparable evidence. This is a difficulty for professional Valuers as much as the general public. It needs deals to be done to establish the market. In these conditions investors may be taking greater risks as their decisions are less well informed. Property transactions have never been risk free and it may be that, after a long period of a rising market before this recession, some people became too complacent and assumed that their property transactions could not fail.

5) Can you talk through the processes that you would undertake prior to visiting a property in terms of your own due diligence?

Terms of business must be agreed with the client before visiting the property. Very often the client is pressing to have the advice/ survey/valuation as quickly as possible so that office based research sometimes happens after a visit rather than before. In any case, the Surveyor can target his research more efficiently if he has first visited the property and actually analysed its location. Depending on the purpose of the report, the Surveyor will want to consider most of the following:

- planning consents;

- short, medium and long term planning issues in the area;

- recent works of repair / improvement to the property;

- available consents guarantees;

- boundaries and related responsibilities;

- location and routes of utilities;

- environmental issues;

- contamination issues;

- presence of mines;

- flood risks;

- subsidence risks;

- details of construction if it is non-standard;

Much of this information and more is available through a local Authority search and website enquiries from various organisations.

6) Similarly, if you are requested to undertake a desktop valuation what steps would you take?

Surveyors should be very wary of desktop valuations which can be misleading to the recipient if the basis of the valuation is not properly understood. In general, such valuations should only be undertaken when the property has been previously inspected and preferably not too long before. Such valuations must clearly state the assumptions on which they are made. They are best avoided when a surveyor is dealing with the general public who will probably expect the same level of knowledge of the property as if it had actually been inspected and may feel let down if they subsequently find changed conditions which had not been identified through the lack of an inspection.

7)On the back of the last two questions, do you think residential house prices in the UK are still over-valued?

In my opinion, residential house prices are too high in relation to salary levels particularly if as a society we wish to encourage a home ownership culture. This is not a fault of the property market, but of external factors that bear on home buyers such as a lack of new homes available to buy thus restricting supply. In an open market such as the property market in the UK, home buyers are competing for the available homes to buy with other types of purchasers such as foreign investors, buy to let investors, holiday home buyers etc. Unless the government intervenes to disadvantage these other types of purchasers (which I would not advocate) they key to reducing prices is to increase the supply of homes on the market.

Should residential property investors take more of a value based approach as is what is more common in commercial property?

If the motive for purchase is property investment then yes, a value based approach is the best advice. However, when people buy for their own occupation and use they apply many different subjective criteria and will sometimes ignore the rational behaviour of the market and pay in excess of what the property could be resold for. This is a valid part of a diverse open market that sometimes makes it unpredictable for those observing it from a distance.

9) You are a major advocate of regulation of the property industry and your book discusses this in detail what kinds of measures do you think should be in place?

I am an advocate of the proper regulation of individuals working within the property industry particularly to protect the inexperienced general public who occasionally participate. I do not particularly advocate regulation of property itself unless there is a clear need . In many parts of the property industry there is a clear need and obvious benefit from various types of regulation, however in general I feel that there has been excessive and too complex regulation in recent years to the extent that some people ignore areas of regulation or the regulation restricts the market. Regulation should be proportionate to the benefit achieved as well as being simple and straightforward.

10) Is there a difference, in your opinion, between regulation to install professional principles into the industry and the government just sticking their oar in?

Governments are motivated to regulate where they feel that consumers are adversely affected or if the market is acting imperfectly or against policy objectives. Governments are also motivated to find ways to tax property which is a good store of private wealth and an easy target for the raising of public finance. Occasionally, governments will regulate in pursuit of social policy objectives. In general, the government in the UK has not regulated much in pursuit of encouraging professional principles, but rather has relied on the industry self-regulating itself through its professional bodies such as the RICS and NAEA. The Government has resisted the temptation to statutorily regulate Estate Agents which it could have done at any time by using powers in the Estate Agents Act of 1979. This means that the professional bodies need to be constantly looking at themselves critically to ensure that they are reflecting public opinion and public concerns by adapting their regulatory arrangements to keep up with best practice.

About the Author:
For more interviews like this and to keep up-to-date with the latest news broadcasts, hints, tips, strategies, please see the ‘Property Investor Hub Blog’: http://www.propertyinvestorhub.co.uk/