Many on this board including the so called Wise and also the Sethus to Jadhavs have a problem of my pricing on land. Just 2 minutes ago I called up a builder in Urapakkam. He is selling a flat. This is not on the better side of the Urapakkam and is quite some distance from the Railway station....1.5km. I know there are no shops on this side either and development is tardy. He was quoting a price of 2600psft on the advt posted in Oct 2008. On phone he quotes 2400psft. I said that was high. His logic...land price is 30L per ground! and it increases to 35L per ground if you are a bit closer. Then he says..."saar price of construction is also to be taken na... and he says 1K psft".
Let us come to the bare mathematics. Let us assume he wont build 2 times the land area even though that is possible in todays new Master plan but uses only 1.5 as FSI.
So it works out like this (all figures in rupees).
Cost of land = 30L/2400sft = 1250psft
Cost of land needed per sqft of building at 1.5 FSI = 1250/1.5= 833psft
Cost of construction = 1000 psft
So net cost incurred is 1000+833=1833psft.
Giving him a Fair margin of 200 rupees profit psft we can assume that 2033 is a fair price but in reality he charges 2400. So he yet has a Safety Bumper margin of 2400/2033= 18% over an above his fair profit margin. Now remember he would most likely have got a deal with the land owner where he will repay the landowner over period of time. So the builder's investment is zero on the land. Next he constructs using the buyer's money. Nowadays that is where he might be chewed a bit, since bookings are not fast enough. So he has to pay that interest portion for his construction activity.
Finally I assumed FSI=1.5. Most builders easily take this number to 1.8 and they also price car parking etc as separate. So if u use 1.8 in the argument and add 1.5L for car parking as this builder quotes it will mean his price is about 2600psft and his cost of land is 700psft. So his Safety Bumper margin is
2600-1000-700-200=700psft.
In other words he can yet reduce his price by 700psft and go home with a fair profit of 200psft.
Why am I saying this?
a. As many on this board with almost rudimentary Mathematics knowledge seem to say (rudimentary as in class 3 and no better even if one of those shit colleges gave them a B.E. degree sadly though!) if DLF reduces price by 400psft, it does not mean RE market is crashing. Just that it is stabilising at best and the pinch is felt for the EVER CONNING BUILDERS.
b. Let us assume that 2600psft is the end price and 1.8 FSI. Then if you back calculate (2600-1000(cost of construction)-200(fair profit))=1400 is the cost of land you are actually paying that too at 1.8FSI. So price of land is 1400*1.8=2520psft which translates to 60L per ground. So it is clear that if you have land (like I do) and I just become a builder I will gain 60L-30L=30L for my land. Being fair I try to ask for 45L for such a land and I know on the worst day the biggest Mathematical idiot on this board will buy it for 35L. So why should I sell land? Or why should anyone sell land...Unless he/she is hardup for money!!

In net, the builder in Chennai is minting money like mad, and in recent times his minting has come down. This will mean slightly cheaper flats. However in the process land price wont come down but with more of the buyers becoming SANER (move from Class 3 to Class 7 ... LOL ... Hopefully Wiseman reaches Class 7 soon!), they will prefer to buy land and build homes than flats.

Only when that class also disappears will there be a RE collapse. In Bangalore (I mean proper city...not Whitefield or Devanahalli which is almost same as Chengalpet or Tindivanam in development!), price of land to flat is extremely clean. Builders have clean profit margins and they are able to sell their property much more fairly than in Chennai. Ofcourse the Brigades who try to mint money have got chopped in the process. So Brigade which was quoting fancy prices in Rajaji Nagar has been forced to take a lot of shit, with FSI as high as 4-4.5 while the normal flat in that vicinity having hardly priced any bit lower.

In summary, if you want a flat to live tommorow (not after 2 years like India Bulls is selling in Medavakkam!) then buy it at that fancy price ... after all 2600psft and 2200 psft wont matter much in the long run as u might as well stay in your house today than pay rent. However if you are an INVESTOR and have cleared Class 7 mathematics (not by mugging but by understanding!) then you better buy Land for investment. If you book a flat with a long delivery time and then cry, especially if you are losing your job like that Fidelity guy, then u can use abuses like That HECK of a Fool or Like Jadhav the Bus driver, but in reality you need to improve your brain. So go to the nearest Mutton shop and try to fit that brain into yours! LOL!
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  • Nataraj 007 you must take it a bit easy.

    Chill out Nataraj - This much anger is not good for you.
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  • Dear Wiseman, Ragavan Ayangar and other blogers please do not stress over Nataraj.

    It is not his fault for being a Kenathu Thavali and uninformed.

    BTW on the long run Indian Real estate is a great Investment.
    The time in the market is more important than trying to time it.

    There will be up and downs and speculators will be burnt in the up and downs.

    I am very confident about Indian RE price growth.There will be two factors pushing it up (On the long term)

    1. The growth of Indian Economy.
    2. The long term Inflation rate of India.

    What we call real growth (Growth less Inflation) may be 8% - 10%p/a on the long term,But longterm Inflation of India will be well over 8% (Dont belive the Goverment CPI figures).


    The biggest losers will be the ones who are not invested in Indian RE Market for the long term (10 - 15 yrs).

    Inflation will eat cash value.
    long term Value of INR is another prime factor.
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  • Originally Posted by Economist
    Dear Wiseman, Ragavan Ayangar and other blogers please do not stress over Nataraj.

    It is not his fault for being a Kenathu Thavali and uninformed.
    .

    Do you understand what you write?
    "Stress over" - What does that mean in your English?
    "Kenathu Thavali"...I assume you meant Thavalai! - Who is uninformed? BTW, you are also talking about a positive outlook for India and how is it any different from your Kenathu Thavali?

    It looks like taking me on, is a way to gain popularity! BTW dont worry about some Ayangar, he is just a dup id. Very soon I will know about Economist's id!!
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  • History of 90s

    In the 1990s in India the interest rate kept going up to the point that in 1994-96 I could get 18% clean safe interest in Company FDs and not one of these deposits disappeared. I am not talking about RBC or another famous name that disappeared. Simple, interest is 15% and you get 3% upfront commission in decent finance companies.
    Now our friends argue that interest hardening will result in RE contraction. How foolish they are, only time will tell. Go back to the 90s. The interest rate raised and RE prices started soaring up. Atleast until late 96. Then they stabilised while interest rates reduced. Now using basic incomplete knowledge of Economics will not let these bears understand why. I will leave with what history has shown in the 90s. Anyone who bought in the 1992-94 went rich by 96 and never had to worry till today. We in 2009 are somewhere trudging towards 92 period. You know what a boom we are waiting for. Incidentally some of my investments were in 1988 and I know how much they have grown. So if you continue to believe the bear talkers who never give you one reason beyond talking about the greatest depression in the world and so on, then you are going to feel bad.
    One newspaper today is talking about Chinese aggression, good story! In the 90s people talked that the world will end in the late 90s. Did that happen? Same way all those talking that RE will fall in Chennai are going to just make you get nervous. On this board atleast one Natpudan came and mentioned the RE he bought and the price he bought it for. I am yet to see one seller talk here. In other words, there are almost no sellers! Those who want to miss the bus again as they did in 2004 can sell or miss buying. For the rest it is a one way ticket to the moon.
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  • Some more mathematics!

    I bought a CMDA (la MMDA approved) land in Thirunindravur on the Avadi-Tiruvallur section. Today there is a tar road in front of the property and a scenic lifestyle with independant houses. In 1988 I paid 27K per ground or Rs11.25psft. Today quite a bit beyond this area CMDA plots are being sold by some Aysha Real estate for Rs 625psft. I know my plot will get me close to 1K psft but let me take Aysha rate of 625. So in 21 years my plot has appreciated by 625/11.25=55.55 times.That means 21% return cumulative per annum or to use the Finance guys words a CAGR of 21%.
    I am curious why the price of this land will ever fall. Second why I wont continue to get this return in the next 10 years. That means price in 2019 will be 1.21^10x625=4200psft. Now today a Lovebird will state 4200psft is too big in Tirunindravur. He is right, but 10 years from now it will happen unless ofcourse our interest rates shrink to 2%like in US. With growing interest rates, it is likely that growth of this plot will shoot up more than 21%.
    In simple, invest in RE and I mean land, if documentation and approval are clean as it is the SAFEST and BEST returns provider.
    Goodnight!
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  • Originally Posted by Natarajg007
    I bought a CMDA (la MMDA approved) land in Thirunindravur on the Avadi-Tiruvallur section. Today there is a tar road in front of the property and a scenic lifestyle with independant houses. In 1988 I paid 27K per ground or Rs11.25psft. Today quite a bit beyond this area CMDA plots are being sold by some Aysha Real estate for Rs 625psft. I know my plot will get me close to 1K psft but let me take Aysha rate of 625. So in 21 years my plot has appreciated by 625/11.25=55.55 times.That means 21% return cumulative per annum or to use the Finance guys words a CAGR of 21%.
    I am curious why the price of this land will ever fall. Second why I wont continue to get this return in the next 10 years. That means price in 2019 will be 1.21^10x625=4200psft. Now today a Lovebird will state 4200psft is too big in Tirunindravur. He is right, but 10 years from now it will happen unless ofcourse our interest rates shrink to 2%like in US. With growing interest rates, it is likely that growth of this plot will shoot up more than 21%.
    In simple, invest in RE and I mean land, if documentation and approval are clean as it is the SAFEST and BEST returns provider.
    Goodnight!


    If past history was all there was to the game, the richest people would be librarians.
    The investor of today does not profit from yesterday's growth.
    - Warren Buffet
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  • Originally Posted by Natarajg007
    In the 1990s in India the interest rate kept going up to the point that in 1994-96 I could get 18% clean safe interest in Company FDs and not one of these deposits disappeared. I am not talking about RBC or another famous name that disappeared. Simple, interest is 15% and you get 3% upfront commission in decent finance companies.
    Now our friends argue that interest hardening will result in RE contraction. How foolish they are, only time will tell. Go back to the 90s. The interest rate raised and RE prices started soaring up. Atleast until late 96. Then they stabilised while interest rates reduced. Now using basic incomplete knowledge of Economics will not let these bears understand why. I will leave with what history has shown in the 90s. Anyone who bought in the 1992-94 went rich by 96 and never had to worry till today. We in 2009 are somewhere trudging towards 92 period. You know what a boom we are waiting for. Incidentally some of my investments were in 1988 and I know how much they have grown. So if you continue to believe the bear talkers who never give you one reason beyond talking about the greatest depression in the world and so on, then you are going to feel bad.
    One newspaper today is talking about Chinese aggression, good story! In the 90s people talked that the world will end in the late 90s. Did that happen? Same way all those talking that RE will fall in Chennai are going to just make you get nervous. On this board atleast one Natpudan came and mentioned the RE he bought and the price he bought it for. I am yet to see one seller talk here. In other words, there are almost no sellers! Those who want to miss the bus again as they did in 2004 can sell or miss buying. For the rest it is a one way ticket to the moon.

    In 1990's how many people overleveraged 4-5 times to buy RE.Average age of buyers were around 40 and most of them bought with their own money as banks were not giving loans like today.Lets assume that a buyer had bought property worth 10 lakhs in 1990's with help of bank loan like today.
    Since you are getting 18% interest in FD's, banks should be lending you at 22-25%.So whatever the CAGR of 25% you got from land as quoted in other post will have been neutralised by the interest paid to bank and your investment would have grown 2-4% after 10 years and if you add inflation you will be sitting on loss of 8-10% per annum.Thats why people in 1990's didnt overleverage to buy land.But today everyone knows how much leverage buyers in their early 30's have taken without taking all these factors in to consideration and how much they are suffering now.Why spent your life long earnings for a broker to become rich!!
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  • Originally Posted by BigBear
    If past history was all there was to the game, the richest people would be librarians.
    The investor of today does not profit from yesterday's growth.
    - Warren Buffet

    Buffet says many things, 50% are right like for most!
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  • Originally Posted by BigBear
    In 1990's how many people overleveraged 4-5 times to buy RE.Average age of buyers were around 40 and most of them bought with their own money as banks were not giving loans like today.Lets assume that a buyer had bought property worth 10 lakhs in 1990's with help of bank loan like today.
    Since you are getting 18% interest in FD's, banks should be lending you at 22-25%.So whatever the CAGR of 25% you got from land as quoted in other post will have been neutralised by the interest paid to bank and your investment would have grown 2-4% after 10 years and if you add inflation you will be sitting on loss of 8-10% per annum.Thats why people in 1990's didnt overleverage to buy land.But today everyone knows how much leverage buyers in their early 30's have taken without taking all these factors in to consideration and how much they are suffering now.Why spent your life long earnings for a broker to become rich!!

    Incidentally banks were lending at 15 to 18% in the 1990s. Yet the RE gave a return more than bank deposits! Now let me argue a bit differently. Between 1988 and 1996 I could have got using the safest of Company FDs with all careful analysis about 17% returns on the average. From 96 to 2002 the return was about 12%. From 2002 till now it will be about 8%.
    1.17^8x1.12^6x1.08^7=11.8 times
    That fades in comparison to 55.55 times. Incidentally the example I gave was not the best of 1988 investments of mine. Another gives me close to 120 times conservatively!
    Now take into account the tax you will pay throughout the period. So if you got 17% you might actually take only 70% in hand. So it will be .17*70=11.9%
    Using that it will be
    (1+.17*.7)^8x(1+.12*.7)^6x(1+.08*.7)^7= 5.84times
    Now if I sold my land and got 55.55 times and paid 30% tax I will yet get 38.85 times. That is 6.6times.
    Infact the reason the rich and mighty sink their money into real estate is to avoid tax as RE investment is non taxable for IT and Capital gains is only at time of sale.
    Big Bear you need to understand the above mathematics and then comment. Ur views are appreciated!
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  • Recalculate

    Hi Nats

    Can u give a proper perspective upto a time line say 2003-4, when the boom started, using prices quoted at those levels.

    I suspect that, u will get much lesser return, since u got a booster dose of liquidity which everything else has got, after Govt policies.

    The next sector for this dose will also show this trend.
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  • Originally Posted by Natarajg007
    Incidentally banks were lending at 15 to 18% in the 1990s. Yet the RE gave a return more than bank deposits! Now let me argue a bit differently. Between 1988 and 1996 I could have got using the safest of Company FDs with all careful analysis about 17% returns on the average. From 96 to 2002 the return was about 12%. From 2002 till now it will be about 8%.
    1.17^8x1.12^6x1.08^7=11.8 times
    That fades in comparison to 55.55 times. Incidentally the example I gave was not the best of 1988 investments of mine. Another gives me close to 120 times conservatively!
    Now take into account the tax you will pay throughout the period. So if you got 17% you might actually take only 70% in hand. So it will be .17*70=11.9%
    Using that it will be
    (1+.17*.7)^8x(1+.12*.7)^6x(1+.08*.7)^7= 5.84times
    Now if I sold my land and got 55.55 times and paid 30% tax I will yet get 38.85 times. That is 6.6times.
    Infact the reason the rich and mighty sink their money into real estate is to avoid tax as RE investment is non taxable for IT and Capital gains is only at time of sale.
    Big Bear you need to understand the above mathematics and then comment. Ur views are appreciated!

    Comparing FD's and RE is like comparing app le and orange.In FD's you get 100% safety whereas in RE you dont know what happens tommorow either someone will occupy your land or sell with forged documents or government might takeover or seller could cheat you with forged documents.Thats why there is a risk premium for RE as compared to FD's.
    I was talking about people in their 20's who borrow huge amount of money to buy RE thinking it as wise decision.Anyway who has full money to buy RE in city at this hyped price.Investing in RE is good if you buy low and sell high and not buy high and sell low.
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  • BigB,
    The data I gave is based on FDs in Companies which are not as safe as you might imagine. If I used Bank FDs that too of SBI then the value I gave will dip to pittance and that is where you can talk of safety. So by continously arguing you can wear me out but not be correct!
    As for Sansei, I will give a quick answer. Price in 1966 was 5K and in 2003 was 35L. So the growth rate will be 19.36%. Almost the same. Remember RE peaks up in bursts and not in a straight line. So average return over 10 year periods or more will make sense.
    Finally if the argument is dont borrow and invest, I am not going to argue much. The argument that because of borrowings prices went up is what I think is an extrapolation and not fact. The reason RE prices went up is higher salaries, infact a quantum jump in salaries. So if the salaries correct to Pre2004 levels then you can argue something. Also I dont want to bother about job losses. They make individuals sick but not society. The rich will continue to grow richer and the poor poorer and bubble paradox will continue irrespective of whether you like it or not.
    God save those who dont learn from history. And forget Warren Buffett. He has no reason to tell what you like, he can tell whatever he wants but does not mean he learnt anything about markets other than from the past, which means from history!
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  • I was tempted to take up this line, but no use!

    Originally Posted by Sansei
    Hi Nats

    Can u give a proper perspective upto a time line say 2003-4, when the boom started, using prices quoted at those levels.

    I suspect that, u will get much lesser return, since u got a booster dose of liquidity which everything else has got, after Govt policies.

    The next sector for this dose will also show this trend.



    Sansei, you are correct. I would like to know from Nats the price in 2004. In my opinion it should have been around Rs.105 or lower, assuming the average of 6-8 times rise in prices in the intervening period that Nats himself has mentioned in the other post to BigBear so conveniently for us.

    I have highlighted the numbers to indicate that they are exactly the figures given by Nats.

    Here are the figures if the jump from 2004 to 2009 was 6 or 8 times:

    6 times jump. Price in 2004 Rs.104, CAGR from 1988 = 14.75%

    7 times jump. Price in 2004 Rs.89, CAGR from 1988 = 13.65%

    8 times jump. Price in 2004 Rs.78, CAGR from 1988 = 12.7%

    As you can see the long term return on RE prices (even land) over 16 years, is in the range of 12% - 15% (even in the best of cases when you were lucky enough to buy just before the start of the greatest boom your generation has seen and sold just after the boom ended in one of the prime cities of the country).

    And if you go back to ALL the posts on this topic from me, this is exactly the range I have always maintained!!!

    Here is the proof. And it can be finalised if only Nats could provide us the price of his land in 2004!!! :D Others can also chip in so that everyone can see the truth about long term ROI on Land in the best of places in the best of times in India.

    And we are now entering the worst of times. So where do you think ROI and consequently, prices will head?

    Let us use the tried and tested Reversion to the mean!!!

    If you follow this argument, to get back to the mean price growth, let is see how far away will be the time when prices go down and them recover ...

    Assuming the Long Term growth rate are as given below, here is when the prices will reach up back again by ...

    At 12.70% the 1988 price will reach Rs.595 in the year 2021!

    At 13.65% the 1988 price will reach Rs.605 in the year 2019!

    At 14.75% the 1988 price will reach Rs.605 in the year 2017!

    So the prices should correct and recover to these prices given, so as to fit the model of reversion to the mean!

    Get the picture?:D

    cheers
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  • I have to appreciate about ur knowledge on real estate

    That is well said Nataraj...those guys who are talking about RE fall and writing some non sense just cannot understand what U are talking about...how it will benefit them
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  • Originally Posted by damoo_a
    That is well said Nataraj...those guys who are talking about RE fall and writing some non sense just cannot understand what U are talking about...how it will benefit them

    Damoo,
    Thanks for the appreciation. However unless there are folks like them, I wont have the topic to discuss! Their mistakes provide a forum for education to others.
    Cheers.
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