Land buyer! protect thyself!!

Recently a well-heeled family met me with a request that I examine a piece of land in the eastern parts of Chennai they were about to buy. Its title had been confirmed by a good lawyer. The lawyer had referred the clients to me with a suggestion that I conduct a technical due-diligence of the property, before the deal is inked.

I sent my engineer, got it inspected, measured and photographed. The location was fine; its quoted price was reasonable; it is part of an approved layout; has good potential for appreciation. The property had everything going for it. Or so it seemed!

As part of the technical evaluation of the land, my engineers examined the Google satellite maps and zeroed in on its location. Even as I was appreciating how well located it was, close to a main commercial street which is quite a happening place in the city suburbs, it crossed my mind that it was quite close to a major canal which is winding its way to the sea nearby.

What’s the harm, you would ask? Does not the proximity of a good canal and sea make for a premium location?

Of course, it does-but subject to some riders!

It may not be common knowledge that there are restrictions to the development of land property close to sea coasts and major canals in their proximity. These are called ‘Coastal Regulation Zone’ norms (CRZ). Any piece of property coming within this zone is subject to serious restrictions in so far as the development potential is concerned. Rather I would say there is very limited approved development that is possible in these zones. Of course this is done with a scientific rationale.

For example,should there be a tsunami again in the eastern coast of India, such canals will channelize a substantial part of the wave energy along the canal course to a good distance upstream and help dissipate it! So unless the adjoining lands located on either side of the canal are also clear of developments, there will be serious loss of life and property. Similarly leaving a buffer land on either side of the canal as well as the shore side of the sea, will ensure there is no salinity intrusion into the ground water table.

So naturally there are restrictions on development of land located close to the major canal banks as well as sea shores.

Coming back to the story on hand, after we found the property is located close to the canal bank, we examined the relevant maps of the Chennai metropolitan area. Not surprisingly on either side of the canal we found the marking of a 100m wide strip of land which was designated as part of coastal regulation zone which cannot be developed and used.

When we scaled the map and related it to the Google map we realized that the land selected by the clients is lying well within the said coastal zone.

The case looked interesting. We examined how the layout got approved by the government with this limitation, a serious one at that. When we probed further, we found the so called ‘approved layout plan’ issued by the Government had so many factual errors and several pieces of misleading information. When we approached the government body which had supposedly developed the layout and asked for the official layout plan, they were least helpful.

Through some other checks we found the so called ‘layout plan’ is a bogus one! There was an original approval, but subsequently several additions have been made by unscrupulous operators who went on adding Government lands which were part of the reserved land that are part of CRZ to the original approved layout and literally ‘expanded’ it and ultimately touched the shores of the canal breaching the CRZ restrictions.

So they plotted the extra lands which were freely available and started ‘marketing’ them. The property which was sought to be sold to the clients was apparently one such.

A successful fraud is always a mixture of facts and fiction. In this particular case the facts and fiction are so well intertwined that we are still not able to trace the origin,scope and scale of the fraud. Absence of proper documents is a major impediment in this process. Had the concerned Government department uploaded the correct layout plan pertaining to this neighborhood, our task would have been easier.

After I explained to the clients about the intricacies of the case, they reluctantly dropped the proposal. It saved them Rs.100 lacs ($160,000/-), a sum which was fixed as the consideration!!

So, friends, please be careful about investments in real estate. It always helps to conduct a technical evaluation of the target property, before you venture!!

Do write to us in case you have some interesting information or feedback!

BVe Consulting Engineers

Engineering Project Consultancy & Property Advisory Services,

Residential-Commercial-Industrial-Infrastructure Designs

Due-diligence studies -Asset valuation services

Chennai -600 083

bv.consultingengrs@gmail.com

www.bveconsultingengineers.in

www.bveconsultingengineers.com

Some recent developments in the realty sector

 An online news-letter on property matters & development trends

It is stated by many ‘insightful’ reports there is a large unsold inventory of residential apartments across metro cities; for example in Mumbai it is about at 2,10,000 units. It is also estimated it would take 36 months to sell off this stock based on the sale velocity witnessed in the last two years. In Bangalore (do we say Bengaluru?) it is about 105000 units. NCR is grappling with 1,67,000 units. Chennai is said to have some 40000 of such unsold stock. The stock here refers to un-sold ready to occupy, un-sold under construction and un-sold units in projects launched two years back.

With so much of unsold stock we find some developers dropping prices of apartments in the case of small and medium apartments. Luxury apartments and top end villas have not had much of price correction.

Obviously the potential buyers find the prices of mid-segment apartments quite unaffordable! Given that the land is the main cost component in the value matrix of most of the urban apartment projects, we need to take a hard look at it! In Chennai kind of markets, the value of land constitutes as much as 50-75% of the quoted rate of the apartment, especially the city properties.

Curiously despite the fall in demand for apartments, continuing slow-down in the economy and demand the land prices stubbornly continue to remain high! There are some strong reasons why this is so; it is

common knowledge that a substantial amount of money invested in major apartment projects is that of select politicians, their side kicks, extended families,crony capitalists, corrupt Govt. officials and others who had parked their ill-gotten wealth in real estate. In some cases the lands are acquired much below their market price using the political/muscle power or with advance insider information. Therefore this money by definition does not demand any immediate return. So the investors have staying power and hold on to their prices. Consequently prices of land/apartments continue to remain high!

But how is that the prices remain high even in the case of smaller properties in urban areas?; after all most of these are owned by honest and law-abiding citizens.

The reasons for this phenomenon in this case are different! We will examine this in the forthcoming issue!

Do write to us in case you have some interesting information or feedback!

BVe Consulting Engineers,

Engineering Project Consultancy & Property Advisory Services,

Residential-Commercial-Industrial-Infrastructure Designs

Due-diligence studies -Asset valuation services

Chennai -600 083

bv.consultingengrs@gmail.com

www.bveconsultingengineers.in

www.bveconsultingengineers.com

An interesting tidbit of info!

 An online news-letter on property matters & development trends

The price of gold had increased by about 2000% since the year 1981; during the same period, land properties in metro cities and suburbs had appreciated by 20000% to 40000% ; take for example the price of 10g standard gold; it was about INR 1670/-in 1981 ; it ruled at about INR 30000/- in the year 2013; this works out to CAGR* of about 9%;

*compounded annual growth rate

Bank fixed deposit certificates, during this period, gave a CAGR of about 9%;

During the same period the inflation grew up by a CAGR of about 7%;

During this period a plot of one Ground (2400 sq.ft.) in South Chennai went up from about INR 1 lac to INR 400-450 lacs; this gives a CAGR of about 20%;

The BSE sensex, during this period, grew from about 175 to 19000, giving a CAGR of 15%;

So if we take the real CAGR (nominal CAGR less the inflation), it works out as follows:

Gold – 2%

FD’s – 2%

Stocks – 8% (this will be higher if we consider the dividend payouts)

Land – 13%

Of-course all stocks don’t give this return nor would all properties! Only those who had selected their stock and land pickings carefully would have reaped a good return in the above lines!

But generally various comparative studies acknowledge the fact the stock market gives the best rate of return over long periods, among all asset classes. Obviously one needs good knowledge and perseverance to stay invested in stock market. It can cut both ways.

Same way beyond one’s dwelling, if one were to hold landed assets, that requires lot of ability to ensure quality tenants, ability to get the possession of the same as and when required and avoid encroachments.

So the higher returns from these classes of assets come with a ‘price’ and they demand ‘active efforts’ as noted above.

Ordinary mortals like the author are happy not investing in stocks or real estate assets and thus not having to worry on the returns and the issues that go with these!

Do write to us in case you have some interesting information or feedback!

BVe Consulting Engineers,

Engineering Project Consultancy & Property Advisory Services,

Residential-Commercial-Industrial-Infrastructure Designs

Due-diligence studies -Asset valuation services

Chennai -600 083

bv.consultingengrs@gmail.com

www.bveconsultingengineers.in

www.bveconsultingengineers.com

Curb the transaction costs! Kick-start the economy!!

Curb the transaction costs! Kick-start the economy!!

Everyone talks of investments not happening and demand not picking up in Indian economy. This is in the backdrop of heightened expectations of the new Union Government taking over the reins of power in May’14.

The construction sector is particularly badly hit. Shrinking pipe line of new orders for contractors; huge backlog of sale of new apartments; construction permits and clearances continuing to get delayed; red tapism ruling the roost in various sectors; shortage of skilled labour; high interest rates; poor credit facilities; problems related to environmental clearances ; no fresh investments; power shortage; the problems seem to continue as they were in the previous UPA regime.

I for one believe the transaction costs of doing a business is one area where there could be visible improvements with minimal changes and efforts. Take for example, the task of buying such varied goodies like pizzas to pancakes , mobile phones to movie tickets or computers to credit cards, from home. We all know it has become quite simple, hassle free and just a phone call away.

Why can’t we have the equivalent of it in getting a construction permits; or obtaining completion certificates for occupation ? Why should it be so onerous that a developer shudders to think of investing money in a new green field project?; the task of getting various clearances and approvals is so riddled with procedural bottlenecks and regulatory minefields, that a developer’s productive energies are mostly consumed in dealing with this rot in the system. He is left with that much lesser time to think of technological improvements, quality, better customer service, cost reduction, innovation and the like.

In my own case I have found it takes anywhere between 3-5 months to get through this process of getting water, sewer and power connections in Chennai, even if your building is perfectly complying with all norms. This is after relentless follow up and countless no. of visits to various offices of Metro water HQ, Area office, Unit office, Corporation’s zonal office, unit office and division office, EE office dealing with road cut permits, TANGEDCO’s AE’s office, AEE’s office and EE’s office. One just can’t estimate the transaction costs of dealing with such levels of stupid bureaucracy and wanton dealys. It is as if these officials are doing a big favour to the citizens by agreeing to provide these utility connections, which should actually be given as a matter of right!

Look at this! About 200 completed apartment projects in Chennai are not in a position to be commissioned due to the huge backlog of issuance of ‘completion certificates’ by Chennai Metropolitan Development Authority (CMDA). It is quite likely the average delay due to the pile up of such a certificate is about 75-100 days. During this period the apartment owners are not able to occupy the flats and are forced to live in rented houses. The builder is not able to apply for power, water and sewer connections. He continues to use DG power which is about three times costlier as compared to grid power, not to speak of loss of foreign exchange in buying fuel. He spends unnecessary overheads and administrative time on maintaining the flats till the time of handing over. Sometimes he is forced to compensate the buyers of apartments for the delay.

All these will wipe off about 10% of his legitimate profits which are very limited in any case. So this leaves him with that much lesser capital for the next investment. We are not talking of the other aspects of Government created delays in plan approvals, property registration, delay in power, water & sewer connections and the ubiquitous costs of corruption involved in every stage. If we take all these together the cost imposed on the developer (which is either passed on to the buyer or borne by the developer as reduction in profits) will be about 25% of the fair profit estimated by the developer.

Let us say in a 100 apartment project with one lac sq.ft. developed space, the developer estimates a profit at Rs.300/- per sq.ft.; if 25% of it is knocked off as the increased transaction costs as explained above, the additional cost paid by the flat buyers is Rs.75/- per sq.ft.; in other words, Rs.75,000/- for a 1000 sq.ft. unit. This is a huge amount for a home buyer. If the developer does not pass on this cost to the buyer he is poorer by Rs.75 lacs which will have to be funded by bank credit or additional equity. Had this money been deployed in some other project, it would have created corresponding economic activity and incremental addition to GDP.

We can thus see the increase in transaction cost for both the buyers as well as the developers on account of the mindless delay, blighted procedures and slothfulness on the part of the Government agencies in a small area of one particular economic activity. Multiply it by million times you can see the crippling effect of unnecessary transaction costs on the economy overall.

Is it not time to think of cutting down the transaction time and costs so as to make our national economy more robust?

The accent should be on providing service to the customer; if a power connection is given on time, the department earns revenue from it and the inflows add to the government’s kitty. So is the case with water and drainage. Why this delay which hurts the customer as well as the service provider?

What we need are,

a) clarity of rules and procedures, which should be simple enough

b) minimal documentation and avoidance of duplication

c) online processes for each application

d) time limits for each approvals and service connection and

e) self-certification for most of the approvals

Imagine how much time and energy will be saved if the above were to be truly implemented. It is entirely doable and will divert substantial resources from useless tasks like follow up, chasing government officials and filing endless types of forms to productive usages which will add significantly to the nation’s wealth creation!

Do write to us in case you have some interesting information or feedback!

BVe Consulting Engineers

Engineering Project Consultancy & Property Advisory Services,

Residential-Commercial-Industrial-Infrastructure Designs

Due-diligence studies -Asset valuation services

Chennai -600 083

Telefax: 044-24743400

Mobile: 09340072281

bv.consultingengrs@gmail.com

www.bveconsultingengineers.in

www.bveconsultingengineers.com

Leasing office space is no joke!

Aruna, a twenty something, petite and gregarious girl reaches her office every day by 9am sharp. A systems analyst working in a newly minted, glittering office tower that rises 15 stories up in a busy stretch dotted with IT buildings-symbolic of the new urban India growth story-she gets picked up from Chennai’s western suburbs and reaches the premises in air-conditioned cushioned comfort that the employer run Volvo multi-axle city coach provides mercifully.

Even as she enters the office she jostles for space to walk across the main entry door which surprisingly looks dwarf against the mammoth reception foyer beneath. As hundreds of employees emptied by the countless buses and cars, rush past the door to reach the lift lobby within a window of 20-25 minutes, there is a near stampede. It is an everyday spectacle! Aruna squeezes past,not failing to smile at acquaintances that look equally harried!

As she approaches the lift bank,the usual exasperation returns to her face seeing the huge crowd that is already waiting to hurry into any of the half a dozen20-passenger capacity elevators that seem to be in eternal motion. For a moment she thinks about taking the stairs but drops the idea as the stairs are too steep and narrow for comfort. Try as she might, it takes a good ten minutes before she manages to squeeze herself into one of the noiseless&sleek machines. As she enters her office in the sixth floor, it is invariably 9.25! Late!! The swipe card attendance system never lies!!

She soon squeezes herself into her 4’ x 4’ workstation and throws herself into the daily chores that await her. As more and more youngsters troop in, the office brims with people even as the glazed cabins abutting the walls get occupied by the senior executives. Meeting rooms get engaged as the morning grind of project discussions start. Even as the daily rhythm of the office gets fully set, she starts feeling choked and soon enough it is followed by mild sweating. Aruna cranes her neck and looks around, as she does every day, and exchanges troubled glances with the neighboring staff, who too start feeling the lack of ventilation!At around half past 11, when the office activity peaks all over the building,the air-conditioning system seemingly starts sputtering &gasping, a routine they have come to experience.

Soon it becomes too hot what with so many computers and assorted machines throwing out streams of heat adding to the body heat from the 340 odd staff who have checked in for work today. Someone switches on the pedestal fans bought for this purpose hoping some circulation will help. It does help, but in a limited way. The disturbance created by the lack of adequate ventilation soon tells on the work as batches of staffwalk towards the coffee vending machine, collect their brew and disperse into the adjoining passage hoping to get some fresh air. Someone looks for some window type openings in the glazed façade on south side to let in some fresh air but without success as no operable windows within reach have been provided. It’s all steel, aluminum panels and glass fixed and pasted, all the way!

Aruna decidesto freshen up! As she reachesthe rest room, she realizes it is crowded as always. With only six restrooms for about two hundred women in the floor, the situation is almost chaotic there. All of a sudden the power fails and the whole place is engulfed in semi darkness as the scope for natural lighting is very limited.It seems an eternity before the roar of the generating sets could be heard signaling the standby power mode ‘coming on’.

If you are an employee in a large and modern office complex, it is quite possible some of you would have experienced a few, if not most, of the problems listed above.

Why at all do they happen in the first place?

To put matters in simpler perspective, all these stem from the fact that the space leased by the employer is not engineered to handle the population it would ultimately hold nor have the relevant standards been followed in the development and choice of critical equipment.

Right from the regular stampede at the main entry, the long wait for the elevator, steep and narrow stairs, absence of operable windows at lower heights, sub-optimal air-conditioning, power generators not kicking in quickly, poor natural lighting to the inadequacy of rest rooms, all these are attributable to the failure in following modern standards and poor engineering in office design and construction.

Apart from these known weaknesses, there could be many more unseen and non-apparent defects waiting to create havoc!

No doubt all these result in loss of productivity; issues like poor ventilation will be a health hazard too; there could be life threatening issues if windows cannot be opened in case of a major fire which will result in smoke accumulation and people choking to death. Similarly steep & narrow staircases result in people not being encouraged to use them, even if willing; this may even be a death trap in case of an emergency evacuation.

Could the above weaknesses in the office space have been foreseen and avoided?

YES-if the management had carried out a proper& systematic technical due-diligence study of the premises through a competent engineering firm before they signed off the lease deal. It could have cost some money and taken about couple of weeks but would have saved the company the serious blushes apart from the everyday invisible productivity losses, not to speak of the looming safety hazards. 

Such a due-diligence covering all aspects of the construction would have brought out these serious handicaps and the company could have chosen a better premises, had they been meticulous enough!

Do write to us in case you have some interesting information or feedback!

BVe Consulting Engineers

Engineering Project Consultancy & Property Advisory Services,

Residential-Commercial-Industrial-Infrastructure Designs

Due-diligence studies -Asset valuation services

Chennai -600 083

bv.consultingengrs@gmail.com

www.bveconsultingengineers.in

www.bveconsultingengineers.com