Channel Partners: An Emerging Trend in Real Estate

In our first post “Understandingthe Reality in RealT”, we mentioned Transaction as an essential part of the 5 step value chain. We further elaborated its details in our following post – “Transacting & Using your RealT”. Today we bring to you a fast emerging trend in the Transaction phase of real estate projects – the introduction of Channel Partners.

The figure below shows exactly where Channel Partners have made their place in the value chain:

   

What are Channel Partners?

Essentially CPs are the agencies that take the responsibility to sell-off whole or part of the realty projects in a pre-agreed upon duration & take their commission/fees in doing so. In this process, they underwrite the properties which are to be sold by them. More on this will get clear in the following discussions.

How are Channel Partners different from Brokers?

Although doing the same work, there is a huge difference between Brokers and Channel Partners.

A Broker acts as a liaison between the Seller & Buyer and in this process he takes his commission from both the parties.

A Channel Partner on the other end underwrites the property to be sold for a particular duration by paying the owner some percentage of its cost (refundable). The CP is then free to use any means of promotion & sale including sub-broking, conducting events, etc. to sell the property. Once the property is sold in the pre-decided duration, the CP gets a handsome cut from its sale, much larger than a broker’s, and gets his underwriting amount back from the builder.

If in case a CP fails to sell the underwritten properties in the specified time duration, he is liable to pay to the builder, an amount that is pre-specified in the agreement between him and Builder.

Why do Builders prefer Channel Partners?

With the evolution of new ways & processes in Real Estate, Builders have quickly adopted the concept of Channel Partners. We were perplexed at first about the acceptance of Channel Partners in this sector but when we looked at its profitability by putting ourselves in the shoes of a Builder, we got all our answers.

Following are some of the benefits that a builder enjoys in partnering with a Channel Partner:

• Immediate funding of Operational Costs: The builder uses the underwriting amount to fund his immediate cash requirements. This is similar to funding by booking amount, the difference being that the percentage of cash is relatively small.
• Guaranteed sell of the property: By partnering with the CPs, the Builder ensures that his property will be sold. He no longer has to worry about the marketing and promotional activities. Even if the CP is unable to sell the property in the specified time, the Builder easily gets the interest amount by penalizing the CP.
• Better than Broking: Using CPs is better than relying on the brokers. This is because of the fact that brokers have no liability to sell the property, whereas CPs have!
• Free Promotion: Suppose that a CP has underwritten 50 units out of total 100 units constructed by the Builder. Now, to sell those 50 units, the CP will carry on promotional activities by conducting events, advertising etc. But in this whole process, the Builder is getting benefit of free publicity of remaining 50 units as they fall under the name of same project.

These and several other benefits have made Channel Partners a hot topic in emerging markets. Also, it is noteworthy that this trend is picking up pace quickly in Tier 2 cities. RealT Horizon is glad that our vision of development in the Tier 2/3 cities is getting much air!

---------- Thanks for reading RealT Horizon J ----------

Real Estate for Small Investors, is it?

First of all, apologies for a delayed post this time. We were hooked up with some Real Big issues!

So tell us, where do you think is money in RealT Sector? Or is it just a fad & small investors can never make out anything from this sector?

As far as what we have concluded from our secondary research data, it seems that more than 65% of people are not interested in investing in real estate primarily because they think – “we require huge investments to buy a property!”

We would not completely deny this fact but at the same time, it doesn't entirely hold too. Before we go any further and clarify this ‘myth’, let us first give you a glimpse of where money lies in RealT Sector:

So as apparent from the above categorization (we are assuming that you are a normal investor with not much knowledge of other fields of real estate), there are several fields apart from transactions and development from which you can make money in this sector. Take for example Relocation Services. By relocation services, we mean that you can provide services to relocate people or businesses & arrange for accommodation and other services in case required by them. This will provide you with an opportunity to make some handsome amounts with fewer efforts.

Services like ‘Appraisal’ require technical know-how of how to value a given property. If you have the proficiency to do this, you can make this as your career and trust us, you won’t require anything else to pursue as your profession.

On the similar lines is another vertical – ‘Property Management’. As Portfolio Manager is to Stock Market, Property Manager is to Real Estate. And we think that we need not to reiterate how much fortune a Portfolio Manager makes! If you have some expertise and experience in the field of real estate, this is your place to be.

How can Small Investors invest in Real Estate?

This is probably the most important question that haunts every middle-class individual when he/she starts earning. With the rise of middle class population in India in recent years, people who just graduate from the universities look forward to invest in some vehicle. But due to unavailability of any structured or convenient vehicle for investment in Real Estate, the obvious choice that they are left with is – Stock Market or Fixed Deposits.

We would like to throw some light on how a mid-income group person or a small investor can invest & make money in this market. There are several measures available for this purpose, few of which include:

• Affordable Housing
• Attractive EMI schemes
• Joint Investments
• Private Lenders
• REITs

Within the scope of this post, we will just try to explain Affordable Housing & later we will take on other measures.

Affordable Housing

As per JLL’s report on ‘Affordable Housing in India – 2012’, there is no clear-cut definition of the term ‘affordable’. This is because it has different meanings in different scenarios as it is a relative concept. Just going by KPMG’s definition of affordable housing, it can be seen as:

	Income Level	Size of Dwelling Unit	Affordability
Economically Weaker Sections	<INR 1.5 lakhs pa	Upto 300 sq. ft.	EMI to Monthly Income: 30% to 40% House price to annual income ratio: Less than 5:1
Lower Income Groups	INR 1.5-3 lakhs pa	300-600 sq. ft.
Middle Income Groups	INR 3.0-10 lakhs pa	600-1200 sq. ft.

 
  Source:  KPMG

Affordable housing is a new concept which emphasizes on catering the needs of the above 3 mentioned income group individuals. The differentiation is based mainly on the size of dwelling unit and the location of the unit.

Small investors, typically falls under the umbrella of Middle Income Group. There are a number of trusted and reputed players in the business of affordable housing all over India, mainly in the metropolitan cities where the concentration of LIG’s and MIG’s is maximum:

Source: JLL Research, 1Q12

Closing Remarks: It is said “where there is will, there is way..” This falls apt in case of real estate investing. Though seemingly very tough, it becomes simple if you want to devise ways in this sector. And believe us, the pace and size of returns which you can expect from real estate is far more than any other investment.

---- Thanks for reading J ----

Financing - Funding a Real Estate Project

We got a feedback from some of our readers that our last post Ownership - Holding a RealT was a bit too much complicated to understand for a beginner. Totally respecting their valuable comments, we have tried to mellow down this post on RealT Financing (although the topic is way more complicated than the last one :-/).

What is Financing?

So coming back to the main business, the second level of Value Chain in Real Estate circumference – Financing. Just as you require money to pay for your household items, you need money to pay for your house (realty property) too. But financing a RealT deal is not as simple as buying vegetables down the street! More often than not, realty buyers need a proper plan, strategy and an agency to finance their dream projects. This is where this post originates J

How is Financing classified?

There are several ways in which a RealT deal can be financed. Typically all the ways can be classified under 2 heads – Equity & Debt.

To start with, we will cover the Debt portion in this post and try to explain the various options to raise finance through debt.

Debt

Debt, in literal sense means – “raising money from the market for a particular time horizon, at some interest rate”. Due to the advancement in the financial markets, many instruments have been developed to carry out this function. These instruments, if used rationally can benefit both lenders & borrowers, but improper use of such instruments can even lead to catastrophes like ‘Sub-prime crisis of 2008’.

Bank Loans

Raising money from a commercial bank is the easiest way for an individual investor. Banks offer attractive interest rates to the borrowers and are easily accessible. But this may not be the most effective way to finance a real estate deal due to the following reasons:

• Banks disburse loans for short-term
• The amount of disbursement depends on various factors like – individual’s net worth,  MPBF (maximum permissible bank fund), income statements, securitization etc.
• Indian Banks generally do not grant loans to a new real estate developer
• Banks generally do not grant loans on ‘land’ alone

Mortgages

Mortgage typically means taking loan from a party by pledging your property as a collateral against the loan. The mortgagee reserves full right to take a control over the pledged property in case of foreclosure (default, in simple terms).

Whatever you will read after this point is a bit complicated, but we have tried to simplify the concept as much as possible. Let’s see how much sense it makes. So, mortgages can be carried out in 2 ways:

Mortgage Broker:

The whole idea of Mortgage Broking is depicted in the above figure. Few points about this process:

• Brokers are independent agencies, having tie-ups with fund providers
• Fund providers generally prefer these brokers so that the borrower is already researched for credit worthiness
• Mortgage brokers are generally not involved in ‘loan servicing’
• They don’t use their own capital to fund the borrowers

Mortgage Banker:

These are specialized agencies which provides mortgages directly to the borrowers, using their own capital. These agencies do not accept deposits from the public, rather makes money from the loan origination fees & servicing fees.

They typically packages the loans & sell them to the institutional buyers or government sponsored enterprises in secondary markets. In US, there are Freddie Mac & Fannie Mae to carry out these functions while in India there is no such institution yet for this function. The nearest equivalent that can be thought of is Mortgage Risk Guarantee Fund.

We know that this has become a bit too much complicated to understand, but the following diagram may relieve our brain nerves a bit ;-)

So the whole process of Secondary Markets is depicted in the above figure. It shows step by step process followed by the loans to finally reach the borrower.

Note: We understand that this post has been a bit too much complicated. Please feel free to write to us in case you need any explanations on any of the above topics. The remaining portion of financing by equity will be covered in our next post. Stay tuned!!

----- Keep Reading RealT Horizon J -----