Transacting & Using your Real Estate Asset

After a project is constructed, it is time for actual transactions and possessions to happen. There are various intricacies involved in these seemingly simple stages. Let's see how.

Transactions

The sell and purchase transactions in the real estate sector follow several innovative methods. More often than not, builders initiates the transaction process much before the actual project is constructed - as soon as from the concept stage. Just to have a better picture of this look at the following chart:

The above chart is a snapshot of one of the prevalent schemes that builders follow for selling off the constructed property. This process of interval payments ensures that ready supply of funds is available with the builder which can be used to service the operational costs of the project.

Usually the process of transactions is carried out by:

1. Brokers
2. In-house marketing
3. Word of mouth publicity

Out of the above 3 channels, brokers are the most prevalent and considered-effective means of carrying out transactions. In Indian scenario, especially, brokers form an integral part of the real estate value chain. Although they are the most convenient means of sell/purchase of properties but having brokers in the transaction process gives rise to a plethora of additional costs for both the parties - buyers and the sellers.

Of course having brokers for this process reduces the time-to-possession and do not divert builder's attention from his main job, but if some other effective channel can be devised for this process, we are sure that a lot of costs can be saved in every project - nearly to the tune of approximately 5-10%!

Usage

As already discussed by us in our first post - Understanding the reality in RealT – Generic Real Estate Value Chain, usage can be divided into following 3 categories, depending on the nature of use.

There are different norms and procedures for acquiring the possession of all the above mentioned categories, but more or less the underlying process is the same.

Ending Notes: With this post, we have completed an eagle-eye view of all the phases of value chain which are involved in any, literally ANY, real estate project. We will now cover various topics which we think will be benefitial for a first-time investor in understanding how one can make money here ;-)

----- Till then, Keep reading RealT Horizon :-) -----

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.

---- Thanks for reading RealT Horizon :) ----

Financing the Real Estate by Equity

In our previous post Financing - Funding a RealT, we showed how debt can be used as a vehicle to fund your RealT project. In this post, we will try and elucidate how one can finance projects using equity.

Out of the above 3 ways, top 2 are self-explanatory. But let’s just look at the Real Estate Investors part and REIT in detail.

As can be seen from the above classification that in real estate, there are various investment fund options. Let us summarize each of these with one line explanations: 

Type of Investor
Venture Capital	They invest very cautiously in realty projects by valuing its worth using their models of valuation.
FDIs	Real Estate sector has attracted a lot of FDI in India, but recently the trend has been falling. See figure 1.
Hedge Fund	Though not very popular, but Hedge Funds are increasingly moving into funding the real estate projects.
Insurance Companies	They invest in large projects having high returns for longer horizons which commercial banks generally don’t take up.
Pension Fund	Another new source of financing in real estate. They generally fund through mortgage bankers & brokers.

An analysis of Real Estate FDIs in India

Figure 1: Rising FDI share towards the end

REIT (Real Estate Investment Trusts)

This is an extremely important instrument in the Real Estate Financing as it pools in the investments from various investors and then use this fund to finance the realty projects. REITs is a vast topic in itself and we will share our views on them in our later posts. But just to explain the basic phenomenon of REIT, refer figure 2.

Figure 2: Basic mechanism of REIT formation

Note: We have just touched upon the aspects of Equity financing in real estate, however the details of many of these instruments will be covered in our subsequent posts.

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