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Property Price Trends in Chennai

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  • Re : Property Price Trends in Chennai

    Friends,

    I came across an interesting article on rediff which explains how to calculate the true value of a property from the rental income.

    True value test

    Most people end up buying a property at a price that is more than its value. As a result, they have to either wait unduly long to get a good return or sell at a loss.

    Follow these steps to correctly evaluate a rent-worthy property. Assume the asked price is Rs 35 lakh and the down payment is Rs 8.75 lakh (or 25 per cent of the property's value)

    Step 1: Expected net operating income (NOI)

    This is rental income minus operating expenses such as repairs. This cost excludes EMI

    Rental Income - Operating Expenses = NOI

    Rs 2.4 lakh-Rs 15,000= Rs 2.25 lakh

    Step 2: Annual debt service amount

    Lenders want the expected NOI to cover your annual debt obligation. So, they lend in a way that the repayment is covered by the NOI. If the bank wants a debt coverage ratio of 1.15 times, the annual debt service amount will be Rs 1,95,652.17

    NOI / Debt Coverage Ratio = Annual Debt Service

    Rs 2.25 lakh / 1.15 = Rs 1,95,652.17

    Step 3: Debt service ratio

    This is the annual debt obligation as a percentage of the total loan

    (Annual Debt Obligation / Home Loan Amt)* 100 = Debt Service Ratio

    (Rs 1,95,652.17 / Rs 26.25 lakh) * 100 = 7.45%

    Step 4: Rate of return on your down payment

    This depends on NOI yield and down payment portion

    NOI Yield * Down Payment Contribution = Return on Down Payment

    [(Rs 2.25 lakh / Rs 35 lakh) * 100 = 6.43%] *
    [(Rs 8.75 lakh / Rs 35 lakh) * 100 = 25%]

    6.43% * 25% = 1.61%

    Step 5: Market capitalisation rate

    This is the sum of the debt service ratio and the return on your down payment

    Debt Service Ratio + Return on Down Payment = Market Capitalisation Rate

    7.45% + 1.61% = 9.06%

    Step 6: Property's right value

    This is the true value of the property (V). This calculation shows the property is worth Rs 24.84 lakh, which is lower than the asked price of Rs 35 lakh.

    NOI / Market Capitalisation Rate = V

    Rs 2.25 lakh / 9.06% = Rs 24.83 lakh

    source :http://business.rediff.com/special/2...ng-a-house.htm
    Applying it to chennai real estate scenraio, We can see that the price being quoted today is super inflated.

    Lets take the example of a 1000sqft 2BHK house in Adyar.

    current rate = 8500/sqft = 85 Lakh for the flat.

    Assuming the person goes for a home loan.Today banks insist on 20-30% downpayment.

    So, the person can avail 60 Lakh loan with 25 lakh downpayment ie. 30% downpayment.

    Rental income from the house 12,000/month = 1,44,000 per annum.

    Calculating as explained in the article above.

    Net operating income = 1.44 Lakh - 14K = 1.3 Lakh

    Annual Debt Service = 1.3 Lakh/1.15 = 1.25 Lakh

    Debt Service Ratio = 1.25 Lakh/60 Lakh * 100 = 2%

    Return on downpayment = (1.3Lakh/85 * 100) * (25 Lakh/85 Lakh * 100)
    = 1.5% * 30%
    = 0.45 %

    Market Capitalisation Rate = 2 + 0.45 = 2.45%

    Property Right value = 1.3 Lakh/2.45% = 53 Lakh

    Property Right price = 5300/sqft as against the quoted 8500/sqft.

    i.e. current price is 30% more than the right price.

    Comment


    • Re : Property Price Trends in Chennai

      Originally posted by nabishek View Post
      Friends,

      I came across an interesting article on rediff which explains how to calculate the true value of a property from the rental income.



      Applying it to chennai real estate scenraio, We can see that the price being quoted today is super inflated.

      Lets take the example of a 1000sqft 2BHK house in Adyar.

      current rate = 8500/sqft = 85 Lakh for the flat.

      Assuming the person goes for a home loan.Today banks insist on 20-30% downpayment.

      So, the person can avail 60 Lakh loan with 25 lakh downpayment ie. 30% downpayment.

      Rental income from the house 12,000/month = 1,44,000 per annum.

      Calculating as explained in the article above.

      Net operating income = 1.44 Lakh - 14K = 1.3 Lakh

      Annual Debt Service = 1.3 Lakh/1.15 = 1.25 Lakh

      Debt Service Ratio = 1.25 Lakh/60 Lakh * 100 = 2%

      Return on downpayment = (1.3Lakh/85 * 100) * (25 Lakh/85 Lakh * 100)
      = 1.5% * 30%
      = 0.45 %

      Market Capitalisation Rate = 2 + 0.45 = 2.45%

      Property Right value = 1.3 Lakh/2.45% = 53 Lakh

      Property Right price = 5300/sqft as against the quoted 8500/sqft.

      i.e. current price is 30% more than the right price.
      Good calculation article.

      Comment


      • Re : Property Price Trends in Chennai

        Originally posted by nabishek View Post
        Friends,

        I came across an interesting article on rediff which explains how to calculate the true value of a property from the rental income.



        Applying it to chennai real estate scenraio, We can see that the price being quoted today is super inflated.

        Lets take the example of a 1000sqft 2BHK house in Adyar.

        current rate = 8500/sqft = 85 Lakh for the flat.

        Assuming the person goes for a home loan.Today banks insist on 20-30% downpayment.

        So, the person can avail 60 Lakh loan with 25 lakh downpayment ie. 30% downpayment.

        Rental income from the house 12,000/month = 1,44,000 per annum.

        Calculating as explained in the article above.

        Net operating income = 1.44 Lakh - 14K = 1.3 Lakh

        Annual Debt Service = 1.3 Lakh/1.15 = 1.25 Lakh

        Debt Service Ratio = 1.25 Lakh/60 Lakh * 100 = 2%

        Return on downpayment = (1.3Lakh/85 * 100) * (25 Lakh/85 Lakh * 100)
        = 1.5% * 30%
        = 0.45 %

        Market Capitalisation Rate = 2 + 0.45 = 2.45%

        Property Right value = 1.3 Lakh/2.45% = 53 Lakh

        Property Right price = 5300/sqft as against the quoted 8500/sqft.

        i.e. current price is 30% more than the right price.
        The article calculation is correct, but never in free market this works. The prices never reset to fundamental prices. It always carries a premium on top of fundamental price or the correct price. This applies to both stock and real estate market.
        It is the premium price one has to consider why making a buy decision.

        Comment


        • Re : Property Price Trends in Chennai

          Originally posted by lovebird View Post
          Good calculation article.
          The calculation is correct, but it never works in real markets. In free markets, the prices never reset to fundamental prices(correct price), always there is a premium attached to the correct price. This applies both to stock and real estate markets.

          So instead of evaluating the correct price, it is better to consider the premium to justify the price.

          Comment


          • Re : Property Price Trends in Chennai

            LogiCalculation ?

            Nabishek, The calculation looks entensive but I am not able to understand a simple logic.

            When a house yielding 2.4 Lacs annually is worth of 24.83 lakhs, howcome a house with annual return of just 1.44 Lacs can cost more than twice...ie 53 Lakhs ? Something we are missing here in the calculation ?

            In other words ,When a house/apartment yielding 2.4 Lacs annually is priced 35 lakhs, howcome a house with annual return of just 1.44 Lacs can cost more than twice...ie 85 Lakhs ?

            Any gyan on this ?
            Last edited July 9 2009, 01:25 PM.

            Comment


            • Re : Property Price Trends in Chennai

              Originally posted by nabishek View Post
              Friends,

              I came across an interesting article on rediff which explains how to calculate the true value of a property from the rental income.



              Applying it to chennai real estate scenraio, We can see that the price being quoted today is super inflated.

              Lets take the example of a 1000sqft 2BHK house in Adyar.

              current rate = 8500/sqft = 85 Lakh for the flat.

              Assuming the person goes for a home loan.Today banks insist on 20-30% downpayment.

              So, the person can avail 60 Lakh loan with 25 lakh downpayment ie. 30% downpayment.

              Rental income from the house 12,000/month = 1,44,000 per annum.

              Calculating as explained in the article above.

              Net operating income = 1.44 Lakh - 14K = 1.3 Lakh

              Annual Debt Service = 1.3 Lakh/1.15 = 1.25 Lakh

              Debt Service Ratio = 1.25 Lakh/60 Lakh * 100 = 2%

              Return on downpayment = (1.3Lakh/85 * 100) * (25 Lakh/85 Lakh * 100)
              = 1.5% * 30%
              = 0.45 %

              Market Capitalisation Rate = 2 + 0.45 = 2.45%

              Property Right value = 1.3 Lakh/2.45% = 53 Lakh

              Property Right price = 5300/sqft as against the quoted 8500/sqft.

              i.e. current price is 30% more than the right price.

              Can you provide the same calculation for 2 different time periods

              1. Adyar in 2003, considering property price and rentals at 2003 levels.
              2. Adyar in 2009, considering property price and rentals at 2009 levels.

              may be this would through more light into why you are right.

              Comment


              • Re : Property Price Trends in Chennai

                Originally posted by sethugm View Post
                Nabishek, The calculation looks entensive but I am not able to understand a simple logic.

                When a house yielding 2.4 Lacs annually is worth of 24.83 lakhs, howcome a house with annual return of just 1.44 Lacs can cost more than twice...ie 53 Lakhs ? Something we are missing here in the calculation ?

                In other words ,When a house/apartment yielding 2.4 Lacs annually is priced 35 lakhs, howcome a house with annual return of just 1.44 Lacs can cost more than twice...ie 85 Lakhs ?

                Any gyan on this ?
                The calculation takes into account the yield that the bank is hoping to generate by lending to the borrower and also the yield the buyer is hoping to generate on the downpayment made using only the rental income of the house.

                Also, The earning and EMI repayment capacity of the person availing loan and appreciation in property price/rental is not taken into account in the calculation, which should explain the discrepancy.

                Please note, the 35 lakhs property in the article fetches 20k rent whereas 85 lakhs worth property in adyar fetches only 12K.

                The numbers looks silly, because of the assumption that the bank is willing to loan 60 lakhs at 25 lakhs downpayment.None of the banks readily sanction such a huge loan for chennai RE today, however much the person may earn.

                The logic mismatch which you are pointing out is what the calculation is questioning to arrive at the true value.

                If one gets to buy the house at the above calculated price, the person can leverage to the maximum on the borrowed money and make good profits based on future price appreciation of the property.They would get better returns on the downpayment in terms of rental yield.

                Originally posted by contra View Post
                Can you provide the same calculation for 2 different time periods

                1. Adyar in 2003, considering property price and rentals at 2003 levels.
                2. Adyar in 2009, considering property price and rentals at 2009 levels.

                may be this would through more light into why you are right.
                I have merely substituted the numbers to get an idea of present Chennai RE scenario and dont claim it to be right or wrong.Its Just another instrument that could help to get the right price feel.

                The price/sqft in adyar in 2003 was around 2000-2500/sqft and rental for 2bhk arnd 5k-6k/month.

                In those days, banks were financing upto 80-90% of the property value.

                I think it should be simple to do the math using these numbers.
                Last edited July 9 2009, 04:20 PM.

                Comment


                • Re : Property Price Trends in Chennai

                  rental value in adyar

                  Hi friends,

                  The rental value of RS 12,000 in Adyar seems to be less.
                  As far as i know ,one cannot find a two-bedroom apartment in
                  adyar for less than Rs 18,000 rental.Please correct me if iam wrong friends.

                  regards
                  unlikely

                  Comment


                  • Re : Property Price Trends in Chennai

                    Originally posted by nabishek View Post
                    Friends,

                    I came across an interesting article on rediff which explains how to calculate the true value of a property from the rental income.



                    Applying it to chennai real estate scenraio, We can see that the price being quoted today is super inflated.

                    Lets take the example of a 1000sqft 2BHK house in Adyar.

                    current rate = 8500/sqft = 85 Lakh for the flat.

                    Assuming the person goes for a home loan.Today banks insist on 20-30% downpayment.

                    So, the person can avail 60 Lakh loan with 25 lakh downpayment ie. 30% downpayment.

                    Rental income from the house 12,000/month = 1,44,000 per annum.

                    Calculating as explained in the article above.

                    Net operating income = 1.44 Lakh - 14K = 1.3 Lakh

                    Annual Debt Service = 1.3 Lakh/1.15 = 1.25 Lakh

                    Debt Service Ratio = 1.25 Lakh/60 Lakh * 100 = 2%

                    Return on downpayment = (1.3Lakh/85 * 100) * (25 Lakh/85 Lakh * 100)
                    = 1.5% * 30%
                    = 0.45 %

                    Market Capitalisation Rate = 2 + 0.45 = 2.45%

                    Property Right value = 1.3 Lakh/2.45% = 53 Lakh

                    Property Right price = 5300/sqft as against the quoted 8500/sqft.

                    i.e. current price is 30% more than the right price.
                    the value of a 'object' is what someone is ready to pay and RE has so many abstracts involved value like status,passion,megalomania etc involved as somebody said the Udayam theatre was purchased bcoz of 'PRESTIGE"
                    exactly there are so many abstracts involved that you cannot put a value
                    on a place for the rent it fetches.
                    give me reason for the price of art by famous artists,
                    the reason for christies auctioning 'useless' artefacts for millions.can you justify the price.

                    let me compare the owning of a car
                    if you calculate the cost of renting a car versus
                    buying a car
                    the interest
                    the depreciation
                    the driver salary
                    the garage rent
                    the maintenance

                    then none should buy a car
                    but the pride,status and satisfaction of your 'own' beats all these calculations. our lives are driven by many compulsions arising out of many factors be passion,peer pressure,status,idiosyncracies etc.

                    the article shows the value based on rent but it discounts the joy of owning a house the sense of accomplishment, the sense of pride which comes with it.

                    it is like you know the treatment you get when you alight from a merc versus alighting from a maruti 800

                    Comment


                    • Re : Property Price Trends in Chennai

                      Originally posted by abk View Post
                      the value of a 'object' is what someone is ready to pay and RE has so many abstracts involved value like status,passion,megalomania etc involved as somebody said the Udayam theatre was purchased bcoz of 'PRESTIGE"

                      the article shows the value based on rent but it discounts the joy of owning a house the sense of accomplishment, the sense of pride which comes with it.

                      it is like you know the treatment you get when you alight from a merc versus alighting from a maruti 800
                      Yes there are lot factors which determine the price.

                      One should also know the treatment when he alights from a Maruti-800 but to have paid Merced price.

                      Comment

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