Contents
List of Tables
List of Figures
List of Boxes
List of Images
List of Abbreviations
Foreword by Julian Diaz III
Preface
Acknowledgments
Introduction
1. Introduction to Real Estate Finance
Introduction
What Is Real Estate?
Land, Improvements, and Bundle of Rights
Translating Rights into Money
Real Estate Finance Careers in Real Estate
Ten Reasons for Real Estate Specialization in India Characteristics of Real Estate Markets The Real Estate Activities Model
Node 1: Entrepreneurial Activity
Development versus Building versus Construction
Node 2: Investing Activity
Node 3: Lending Activity
Node 4: Governing Activity
Node 5: Professional Activity
Node 6: Consuming Activity
Node 7: Successor Entrepreneur Activity
A Note on REAM
Some Misconceptions about Real Estate Glossary
Real Estate Activities Model End-of-Chapter Questions References and Suggested Readings
2. The Value of Time
Introduction
Scenario I: The Classical Valuation Fallacy The Two Rules of Money Tools for Financial Calculations
Getting Acquainted with the Financial Calculator
Scenario II: Rental Allowance Compounding
Scenario III: The Opportunity Cost Discounting
Scenario IV: Saving for the Future Rate of Return
Scenario V: Another Look at Saving for the Future Annuities
Scenario VI: Future Value of an Annuity
Scenario VII: Present Value of an Annuity
Scenario VIII: Analyzing Rental Cash Flow Uneven Cash Flows
Scenario IX: Deal or No Deal?
Net Present Value
Internal Rate of Return
How to Interpret NPV and IRR
Example 1
Example 2
Modified Internal Rate of Return (MIRR)
A Note on Uneven Cash Flow Analysis Measures Glossary
End-of-Chapter Questions End-of-Chapter Practice Problems
Compounding/Discounting
Contents ix
Annuities 66
Rental Cash Flows 67
Uneven Cash Flows 67
References and Suggested Readings 68
Mortgage Banking in India 69
Fundamentals of Debt Financing 69
Why Debt Financing? 70
Scenario I: Leverage 70
Secured and Unsecured Debt 72
Mortgage Basics 72
A Historical Review 72
Types of Mortgages in India 74
Simple Mortgage 74
Mortgage by Conditional Sale 75
Usufructuary Mortgage 75
Mortgage by Deposit of Title Deeds 75
Mortgage Financing in India 76
Why Is Mortgage Financing Less Popular in India? 76
Mortgage Deed 80
Salient Features of a Mortgage Deed 80
Legal Rights, Foreclosure, and Debt Recovery Tribunals 81
Some Clauses of the Mortgage Deed 82
Who Holds the Title? 85
Mortgage Rates 85
Underwriting Process 86
Evaluation of the Borrower 86
Scenario II: LTV 87
Demographics 88
Credit Appraisal 88
Evaluation of the Collateral 89
Glossary 90
End-of-Chapter Questions " 92
End-of-Chapter Practice Problems 93
References and Suggested Readings 94
Fixed Rate Mortgage 95
Introduction 95
Mapping TVM Concepts to Mortgage 96
Mortgage Principal Calculation 97 Scenario I: Mortgage Principal Calculation 98
X REAL ESTATE FINANCE IN INDIA
Scenario II: Mortgage Payment Calculation 98
Annual versus Monthly Reducing Balance 100
Amortization Concepts 102
Amortization Schedule 103
Scenario III: Mortgage Balance Calculation 103
Calculating Mortgage Rate Using Spreadsheet 106
Mortgage Scenarios and Financial Decisions 107
Administrative Fees and Other Charges 107
Effective Borrowing Cost 108
Scenario IV: EBC Calculation 108
Prepayment 109 Scenario V: EBC Calculation in the Case of Prepayment
without Penalty 109 Scenario VI: EBC Calculation in the Case of
Prepayment Penalty 110
What Is APR? Ill
Limitations of APR 112
What Are Your Takeaways from These Scenarios? 112
What Is a Percent Point? 112
Glossary 113
End-of-Chapter Questions 114
End-of-Chapter Practice Problems 114
References and Suggested Readings 118
5. Alternate Mortgage Types 119
Introduction 119
Scenario I: Loan against a Property 121
The Consumption Functions . 122
House-rich but Cash-poor 122
The Utility of Home Buying 124
Scenario II: Reverse Mortgage 125 The Popularity of Home Equity Loans and
Reverse Mortgages 126
Floating Rate Mortgage 127
The Tilt Effect 127
Fixed Rate Mortgage versus Constant Payment Mortgage 128
Teaser Rate 128
Caps and Floors 129
Scenario III: Floating Rate Mortgage I Variable Payment 129 Scenario IV: Floating Rate Mortgage I Constant Payment 132
Issues with Floating Rate Mortgage in India 133
EMI under Construction 134
Loan Schedule for EMI under Construction 136
Scenario V: EMI under Construction-I 136
Scenario VI: EMI under Construction-II 139
Comparing EMI under Construction with Lumpsum Mortgage 141
Glossary 141
End-of-Chapter Questions 142
End-of-Chapter Practice Problems 142
Compounding/Discounting 142
References and Suggested Readings 144
Managing Real Estate Companies 145
Introduction 145
Assets, Liabilities, and Equity 146
Property Owner's Perspective 146
Lender's Perspective 147
Developer/Builder's Perspective 147
The Need for Financial Statements 148
Financial Snapshots of Housing Finance Companies 148
Financial Snapshots of Real Estate Development Companies 148
Balance Sheet
Sources of Funds
Share Capital Book Value Depreciation Methods to Calculate Depreciation
Straight Line Method
Written-down Value Method
Does Land Depreciate? Amortization
Real Estate Brand License: A Case Study Price/Book Ratio Interpreting Price/Book Value Metric
Historical Prices
Firm's Age
Intangible Assets
Variations across Sectors
Return on Equity (RoE) Ratio
Shareholding Pattern
7.Profit and Loss Account
Incomes
Expenditures
Operating Expenses
Financing Expenses
Indirect Taxes
Excise Duty
Service Tax
Sales Tax
Property Tax
Profit
Why So Many Profit Measures?
Direct Taxes
Income Tax
Wealth Tax
Capital Gains Tax
Statement of Cash Flow
Glossary
End-of-Chapter Questions
References and Suggested Readings
Interest Rates
Introduction
Why Study Macroeconomics to Understand Real Estate
Finance?
Macro versus Microeconomics
Debt Markets
Who Governs the Interest Rate?
Demand for Loanable Funds
Case Study: Ahmedabad Municipal Corporation
Issues Bonds
Supply of Loanable Funds
Monetary and Fiscal Policies
Fiscal Borrowings
Treasury Bills
Scenario I
Treasury Bonds
Reining the Monetary Policy
Bank Rate, Repo Rate, and Reverse Repo Rate
Cash Reserve Ratio
Open Market Operations
The Relationship between Interest Rate and Bond Price
How the Supply of Loanable Funds Affects the
Interest Rate
The Cycle of Capitalism
The Fisher Equation
Setting the Context for Real Estate
Benchmark Prime Lending Rate
Base Rate
Loan Hazards
Mortgage Modification/Balance Transfer
Scenario II: Loan Modification Analysis
Synposis
The Breakeven Rate
Scenario III: A Balance Transfer Analysis
Glossary
End-of-Chapter Questions
End-of-Chapter Practice Problems
References and Suggested Readings
'!
8. Property Markets
Introduction
What Is a Market?
Real Estate Markets
Quadrant I (Space Markets)
Quadrant II (Asset Markets) ;
Quadrant III (Development Markets)
Quadrant IV (Supply Adjustment)
Space versus Property Markets in India
Market Efficiency
Product Strata
Market Localization
Product Heterogeneity
Proprietary Transactions
Black Money and Untrue Transactions
Central Registry of Securitization Assets Reconstruction and
Security Interest of India
The Pricing Function in Property Markets
Residex
Other Property Types and Space Markets
Some Application of Indices Glossary
End-of-Chapter Questions References and Suggested Readings
9. Capital Markets for Indian Real Estate
Introduction Capital Markets Debt Markets
Rating of Debt Instruments
Case Study: Real Estate Ratings
Spread Banking Primary Mortgage Markets
Securitization
Risk Pooling
Liquidity
Monitoring
Conduit Banking Secondary Mortgage Markets
Originators and Servicers
Issuers
The Mortgage-backed Securities
Arrangers and Credit Enhancers
The Trade-offs of Securitization Equity Markets
Private Equity Markets
Private Equity Funds
Portfolio Management Services
Foreign Direct Investment
Real Estate Stock Markets
The Initial Public Offerings
Stock Markets
Real Estate Mutual Funds
Real Estate Investment Trusts
Ownership
Assets
Income
Distribution
REITs in India Reform the Primary Markets First
Originators Should Have More Skin in the Game Rethink the Organization of the GSEs Glossary
End-of-Chapter Questions References and Suggested Readings
10. Perspectives on Real Estate Sector in India
Introduction
List of Topics
Tracing Land Titles
Tracing Litigations
Bar on Financing Land
Rephasement
Collaterals and Third Party Guarantees
Stamp Duty on Registration of Mortgage Deeds
Hesitancy to Lend by Bank Executives
Primitive Sanction Procedures
Maturity Mismatch
Suggestions
The Evolutionary Process
The Challenges
The Future
Real Estate Research and the Role of the Industry
Opportunities for Research
Need for Education
The Future
The Scale
Benefits of Infrastructure Spending
Conclusion
Background
Involving the Public and Private Sectors
Conventional Mortgages versus Innovative Financing
Support the Suitable Lenders
Shelter for the Urban Poor
Home Finance for Informal Settlements
Self-construction
Finance for Self-construction
Lessons for Financial Inclusion
Green versus Sustainable Real Estate
Limitations of Green Rating Systems
Originators Should Have More Skin in the Game Rethink the Organization of the GSEs Glossary
End-of-Chapter Questions References and Suggested Readings
10. Perspectives on Real Estate Sector in India
Introduction
List of Topics
Tracing Land Titles
Tracing Litigations
Bar on Financing Land
Rephasement
Collaterals and Third Party Guarantees
Stamp Duty on Registration of Mortgage Deeds
Hesitancy to Lend by Bank Executives
Primitive Sanction Procedures
Maturity Mismatch
Suggestions
The Evolutionary Process
The Challenges
The Future
Real Estate Research and the Role of the Industry
Opportunities for Research
Need for Education
The Future
The Scale
Benefits of Infrastructure Spending
Conclusion
Background
Involving the Public and Private Sectors
Conventional Mortgages versus Innovative Financing
Support the Suitable Lenders
Shelter for the Urban Poor
Home Finance for Informal Settlements
Self-construction
Finance for Self-construction
Lessons for Financial Inclusion
Green versus Sustainable Real Estate
Limitations of Green Rating Systems
Challenges to Green Real Estate How to Overcome the Challenges Green Real Estate Trends in India Conclusion References
Answers to End-of-Chapter Problems
Index
List of Contributors
About the Authors