G+2: An Emerging Real Estate Model

As we said in our earlier post that we went to the fields in Jaipur to explore this sector further, today we share with our readers a prevalent model in this space. During our visit to actual sites and meeting with various people closely associated with RealT, we came across a model that is highly prevalent in Tier 2 cities at present. Let’s share some insights on this topic.

What exactly is G+2?

Due to recent developments, Tier 2 cities have stringent land by-laws. These laws restrict unplanned and uneven growth of these cities which are on their way to become mega cities. One such by-law restricts the vertical growth of town to a certain limit, based on the size of plot and width of the road on which the plot is located.

A typical G+2 construction

Paying full respect the laws, Builders & Developers have devised an alternative to make optimum use of the available plot and have come up with the concept of Ground+2 floors. Now depending on the designs prepared by the Architect, Builder can erect 4-6 flats on that small piece of land. Generally these plans are designed in a way that there is ample space for parking of 4-6 vehicles alongside the building. If the dimensions of plot doesn’t allow ample parking space, Builder can even go for Stealth floor for parking. Even in this case, the next 3 floors will be counted as G+2.

G+2 with stealth floor

Benefits of G+2

• Ideal for mini-builders
• Cost of construction minimizes due to economies of scale (multiple constructions on the same piece of land)
• Pretty good profit margin
• Easy to sell
• Time-to-complete the project is small

Why is it lucrative for mini-builders?

Small Investors and new entrants prefer this model of RealT so much so that you would see hundreds of such projects going on in Jaipur all around. The reason being:

Low cost of Entry	These projects can be initiated with relatively small amount of money as compared to traditional huge projects.
Minimized Risk	Even if all the flats are not booked, the builder is safe as he is sitting on a valuable asset.
Funding Operational Costs	The operational costs of next floor can be funded by the bookings of previous floor.
Controlled Expansion	The builder is free to pull back from going deep into the project at any time.

Closing Remarks: Want to foray into Real Estate? – Go for the above model, but don’t forget to do a proper market analysis for demand side!

---- Thanks for reading. Your comments will help us improve our analysis. J ----

Risks in Real Estate Investments

In our earlier post – Real Estate for Small Investors, is it? [click here], we suggested various ways in which people can invest in this field.

But very often it is seen that a common man is reluctant to invest in real estate properties, owing to the perceived and prevalent risks in this sector. This reluctance is even more severe when an individual is asked to invest in the areas, located far from his/her current place of residence. Let us first have a look at the types of real estate investments that a common man generally makes.

• Buy a piece of land
• Buy a constructed property
• Lease a building
• Convert a far flung piece of land
• Book a property in an ongoing project by a builder

No doubt that these are all great means of investing and many a times provides handsome returns on the employed capital. In fact many individuals have made huge fortunes by simply following the above mentioned approaches of investing. But still, this sector seldom sees the confidence and faith among the investors as it is entitled to get. Reason? Well, here are few of them:

Major Risks

These are some of the most common risks that people believe can affect their RealT investments. Let us come to each risk one by one and the ways in which they can be mitigated to some extent:

Risk	Issues	Mitigation
Economic Risk	This is the first & foremost risk faced by any investment in any region. The fluctuating prices of land in some regions due to the mismatch between demand and supply tend to give rise to the fear of this risk.	This risk can be mitigated by setting a clear time horizon of investment. Moreover pre-investment background work of historical price movement in the region can give the investor some confidence.
Illegal Possession	This risk is most common in any investment made outside your hometown & mostly in metropolitan cities like Mumbai, Delhi etc. Rental investments face this risk as there have been cases wherein tenants have illegally occupied the properties.  Even the non-rented properties face this risk due to the presence of land-mafia (a person illegally claiming others’ properties).	Land acquisition laws have become stricter these days. Before renting a property, it is recommended to have a background check of the tenant & have a robust legal agreement of limited tenure. Landlords should increasingly ask for payments through PDC (Post Dated Cheques) to be on a safer end. Regular visits to the non-rented property and putting up your name board on the property can reduce this risk to a large extent.
Project Operating Risk	People investing in the ongoing projects by builders face this risk. This risk may arise when a builder / contractor falls short on finance or other resources required for completing the project. This is also linked with the financial risk explained above.	Never pay complete or major part of payment in advance to the builder. This will finish his liability to complete the project in planned manner. Check the track record and credibility of the company before investing in their projects. Have proper legal agreements ready at each checkpoint of payment.
Construction Risk	Closely related to the above genre of risk, this arises when there are inefficiencies in the construction process. Refer to our previous post – Construction of a RealT project  [click here] for more detailed insights on this point.
Interest Rate Risk	Often due to the not-so-stable political and economic conditions in India, the RBI chooses to change the interest rates of the housing loans. This may cause additional pressure on the individual investor as his planned outlay can change drastically in terms of interest payment.		The individuals should thoroughly clear the conditions with the issuing bank about the interest rate fluctuation in case of changes by the RBI. Some banks allow fixed interest rates forever, but that are slightly more than the market rates; but definitely more secured.
Expropriation Risk	Expropriation risk basically refers to the risk of a private property having used for a public purpose. This risk mainly applies to age-old dormant properties. Mega profit-generating realty projects in very unstable economies like African Nations also face this risk.		This risk can be done away with by being a bit cautious and vigilant for your properties. On age-old ancestral properties, susceptible to this risk, you should do a bare minimum construction time to time. This way it won’t be dormant anymore. In unstable nations, the company carrying out the project should proactively partner with the government in profits or other ways so as to reduce the risk of expropriation drastically.
Financing Risk	Borrowers for real estate investments often face the risk of financing, especially after the sub-prime crisis of 2008. The above mentioned interest rate fluctuations are also included in the gamut of financial risks. More on financing can be read in our earlier posts, which also covers the various ways of financing a RealT project: Financing - Funding a RealT [click here] Financing the RealT by Equity [click here]

These risks are prevalent in almost each and every real estate investment. Of course, the extent of different risks will depend on the size and nature of the investment. But if handled with a little more care, these risks can be minimized to a large extent and then even the Real Estate Investments will find their lost glory again.

---- Thanks for reading RealT Horizon. Your comments will help us improve our analysis. J ----

Construction of a Real Estate Project

In this post, we will try to bring forth the details of next part of the Value Chain – Construction.

Once a person has cleared his ownership title & has arranged for his finance requirements, the next step is to actually start the construction of the anticipated property. Though it appears the most cliché and straightforward part of the value chain, but there are ‘n’ number of issues involved in this seemingly simple part too. Researches at many world-class respected Universities have revealed that this phase involves the maximum wastage – both in terms of time & money.

Figure 1: A breakup of the time involved in any real estate project over the construction period

Let’s start analyzing this phase with the help of a step-by-step flowchart of the activities involved in it: 

Figure 2: Construction flowchart

As is apparent from the above flowchart that construction phase is not that simple as it seems to be at the first sight. Due to multiple sub-phases, the amount of delays and wastes increases exponentially in this level.

The construction phase provides a lot of opportunity to improve the supply chain inefficiencies and reduce the project cost to a large extent. The multiple iterations incurred at the design phase can be reduced if there is a specialized agency to take care of it. Again, the raw-material supplies and labor requirements after the Design Phase, if handled appropriately can help the contractor finish off the work more efficiently at a lower cost and lower budget.

Solution

There are several real-estate moghuls in the market and they sure do implement several measures in order to keep a check on the issues that we discussed above. But there is definitely something missing in their efforts due to which this sector is still unable to be efficient. We suggest some of the following measures which may prove to be useful:

• The design phase should be outsourced instead of being in-house. This is because the expertise of the building contractor is to construct, not to design. Having a specialized design agency will remove the redundant steps in this phase and come up with better and more efficient designs. Although many of the construction works being carried out these days uses this approach only, but still major chunk doesn't. 

• Supply chain in the construction phase can be improved to a large extent if the procurement system can be tightened. The world is moving towards just-in-time (JIT) technique where only that much raw material is procured at a time as is required. But still this is absent in the real estate domain. Contractors still go for bulk purchases due to which a lot of wastage happens.

PS: There is lot to the above discussion which can be helpful for RealT apart from the above 2 points. In India, apart from the lack of ownership and proper financing, this phase requires maximum attention and through RealT Horizon, we will try to bring some of those aspects in the front.

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