Property rates in Hyderabad are skyrocketing since last one year. Every day we see plenty of offers floated on newspapers. Both commercial and residential property builders are floating lucrative offers to attract customers.
I would like to give my thoughts on one of the Commerical property in Hyderabad which seems to be lucrative by the offers floated but when calculated the returns, it seems not so great.
What is the offer?
Hyderabad IT industry has really changed the picture of the city. With many IT and ITES companies opening their shops in Hyderabad, demand for commercial property has phenomenally increased over past few years.
Most builders are trying to grab this opportunity but constructing large scale commercial buildings. Hitech City, Financial District, and Kokapet are turning to be the hot spots for real estate investments in Hyderabad. Uppal is a new entrant in this race and could see some light soon.
Builders will need a lot of money to complete the projects. There are different source of how they acquire this money for construction
- Bank loans which are generally at 18% for commercial constructions with 80 to 100% collateral
- Private funds or Investors with various financial equations. One of the simple equations is to borrow money from 15 to 18%.
Both options seem to be costly and not viable in the long run. With these challenges, builders now are coming up with lucrative offers with Guaranteed rental schemes.
Here is how it works for one of the commercial projects I spoke to.
A customer will need to shell out INR 18 Lakhs for 121 ft commercial space with assured rent of INR 13500 per month for the next 10 years. There is a 5% increase every five years but that’s really low when compared with current market trends.
What happens after 10 years?
Sales guys are always smart. Any offer from a proper sales guy makes us feel that the offer is just made for us and needs to grab it ASAP.
When I asked this question of what happens after 10 years, he says they would renew at Market rates. Do you know whats the current rental market rates in the area they offered? Keep reading, you will know more.
Let’s do some math
I know most people say they hate Math. When it comes to money everyone turns to be an Economist, Financial Advisor and a great mathematician playing with numbers. Well, it’s not wrong to be so. We are all human and when we want to put our hard earn money to play, we take the extra measures.
Your initial investment is INR 18 Lakhs. This works out to be INR 14,900 per sft. Your assured Rental for 10 years @ INR 13500 per month would be around INR 16,20,000.
Let’s assume that you took a loan at 10.5% for the complete payment for 5 years tenure. By the end of 5 years you would land up paying INR 23,21,350.
Let’s assume you want to sell this after 10 years. With historical projected for 10 years, you may sell this at INR 18,15,000.
Your total Loss at the end of 10 years will be INR 7 Lakhs.
Why do I incur Loss?
Lets now look at the current Market rates. This will make you understand more about this deal.
The current Per SFT cost in Hyderabad is around 7K to 10K average. A year ago this was just 5K. If you look at the Per sft cost that you are shelling out on this property, this is double the market price. After 10 years you may still make the same price because you are already paying double the price now.
The current Per SFT rental value is INR 55 to 60. Guaranteed rental value assured by this builder works out to be around INR 110 per sft.
Now you may ask. When they charged you double they are also paying you to double the rental rates. Does this makes sense? Be careful the conditional apply and market adjustments will always apply at a later stage making this to half. Assuming there are no conditions and adjustments to the market for the next 10 years, you still can’t achieve these rates after 10 years.
We are ignoring many factors like Depreciation, Inflation, etc which will still show you more loss than the calculated figures.
Oops, I forgot the important catch..
All the property that’s offered is an undivided share. What does this mean? It means that on paper you are the landowner for 121 sft on a particular floor say 10th but you don’t know your property demarcations.
It’s like buying land on the moon but not sure where on the moon.
So what? You still make a guaranteed rental right? hahahaha…Just this one word of Guaranteed rental for life **** makes you feel comfortable.
Who would really buy this back from you after 10 years? Well, there could be another offer saying the builder will buy back but for sure you will land up getting way to less after 10 years.
Who is making money here?
I believe you must have figured out by now. Its the builder.
The equation is simple. Look at the top where I said they could raise funds at 18% with collateral either from a bank or private investors. In any given case they would have the collateral this current property or an existing one.
When you as a customer can offer them free cash with no liability in place and double the market rates, who can really ignore that pile of cash.
So the Equation is simple here. They would construct on your money and would inturn offer your own money with 0% interest. That’s how this works.
Whenever you get into such deals do your calculations.
Again my perception and calculations might be wrong but this what I thought when I first looked at this deal. Do you own diligence before investing.
Read more on different kinds of real estate investments here.