Crowd Funding – Advantages & Disadvantages

Crowd funding is a way to raise capital from accredited investors and venture capitalists without accumulating debt. Reward based crowd funding platforms provides tangible gifts to investors in return for the funds. Crowd funds helps cover the risks rising out of unexpected expenses and market validation for a new venture without giving up equity.

The reach of crowd funding is unimaginable, as this form of funding is most effective when social media and referral traffic accesses information through the website. Potential funders and investors and many a times viral marketing spread the word giving exposure to the venture. A venture that raised enough funds is proof enough for the successful concept and market credibility, bringing trust from public. The research done on various options, the opinion of experts in the field and from legal angles will definitely ensure a successful venture.

Crowd funding allows entrepreneurs to understand aspects of their business that they have not thought of. It could also potentially inspire others with great ideas! Messages over the Internet can be in the form of a video or a message and the campaign can provide unique exposure and momentum resulting in larger success and loyal investors.

There is no cost involved if the target fund is not raised and there is no penalty either! (There could be exceptions though!!!) If successful, the average returns for the platforms could be around 5% of the total funds raised.

The rule of the game is to keep crowd funding even after raising funds, updating and evolving and to keep investors updated.

In real estate, crowd funding enables capital growth opportunities and value-add opportunities in terms of strategic investments. For portfolio clients this may bring opportunities for diversification of their investments. 

Disadvantages

Launching a crowd funding campaign is an opportunity to gauge the market reaction. It may or may not work effectively and is not an easy process. One cannot forge a confidentiality agreement with the internet, and hence business ideas may be exposed to people who will replicate it faster and effectively causing a loss to the original ideator.

Investors who are not patient may bring in lawsuits claiming mismanagement and fraud. The amount of investment involved and time frame has to be clearly indicated to avoid distrust and miscommunication at a later stage.

Investors who have a good credit standing and professionals may not want to be part of the crowd-funding scheme, as this will expose their credit standing. Neither would they want to raise funds since clients may become a partial owner of their business as well.

Crowd funding may not work always and hence it is imperative to have a sound business plan. It is necessary to protect the business with a patent or copyright to avoid being copied/duplicated. The investors may be inexperienced and unsophisticated which may impact the goals of the business, and can keep away genuine angel investors. Lack of accountability and regulation may result in fraudulent transactions.

When the campaign is not successful the money raised is returned to the investors and the platform does not get any returns. Returns to investors need to be calculated properly in order to avoid giving away too much, in case of successful campaigns.

Specific to real estate, crowd financed funds cannot be spread over many entities. So it is a hit or miss in most case. Since funding is huge, only large investors can think of real estate funding and there is considerable friction amongst companies/individuals vying for lucrative options. P2P funding can be an effective model for the Real Estate Industry then crowd funding.

Few Suggestions

In the absence of an effective regulatory supervision for crowd funds, it is important that funds prepare project reports projecting the actual costs of the project, excluding overheads. This, combined with textual data can convince investors that funds are used for the right purposes, thus invoking trust. It is necessary to know each investor and the amount contributed to map the returns vs. investment graphs to project demonstrated profit earning by investors, fund and the project. Building a solid foundation of dependable clients will enable the foundation to improve market share and revenues. The goal here is to create credible projects for investment. In real estate, underwriting the loans can reduce risks. Similarly, graphs featuring returns can induce confidence in investors. A competent consultant or fund administrator should do all of the above to ensure that the funding momentum is ongoing. Many a times, a happy client may reinvest his profits back into the fund, creating an investment portfolio by itself.

Execution of a profit making deal in real estate can be done only by a responsible consultant. What plays decisive role is the investor communications, strategic introductions and frequent updates. A portfolio consultant can achieve all 3 ensuring greater shareholder support and access to capital.

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Builder offers apartments at Rs 7000 per sq.ft. in Guindy

City developer, VGN has come up with the right reasons to offer opportunities to Chennaiites, to own a house in the heart of the city at unbelievable prices. The developer is offering apartments at Rs 7000 per sq. ft. in an area close to the city’s landmarks that define the city lifestyle.

The project that is coming up on 10.46 acres of industrial land belonging to Hindustan Teleprinters Limited was purchased by VGN through an auction for Rs 290 crore in 2013. The clearance for use of the land for residential purpose was obtained by the earlier owner and Piramal funded the acquisition.

This may trigger a price war amongst developers, which will be a blessing to city dwellers who wish to own their own homes within the city. Ever since the realty boom started, they were forced to look for apartments far away from the city as the prices of apartments in the city were unaffordable.  The current development is a silver lining for apartment hunters in the city, and the city is looking forward to more good news in months to come!

P2P lending gains momentum in India

“Peer to Peer Lending” is a debt financing option enabling individuals to borrow and lend money without the presence of any regulated financial institution as an intermediary. P2P platforms are gaining more acceptance due to less volatility and higher yields compared to other investment options.

P2P platforms disburse loans quickly; post credit profiling that is in sync with real risks. P2P can form an essential part of investment portfolio for investors due to the minimal risks involved and the assured returns.

Borrowers look for small and short term financial help to expand their business, or for events like weddings and rituals. Financial resources are also required for term investments in real estate development and businesses. Banks seldom provide loans to the real estate sector bringing opportunity for P2P fund raising for the sector.

P2P platforms in real estate empower both the lender and the borrowers. In real estate, P2P lending enables developers to raise funds at the right time. And in turn gives the investor returns that can outweigh other growth assets in the same asset class.

So how does P2P benefit the lenders?

Peer-to-peer lending platforms allow the investor to diversify his investment. The yields are higher and the average returns on the platform ranges from 18-30 percent depending on the deal. .

In terms of liquidity, P2P comes with neither short term nor long term capital lock-in. The deal can be structured or customized as per individual requirements of the investor. EMIs can be further re-invested into traditional asset classes or revolved within the peer-to-peer loan market. The money compounds over a reasonable period.

The yield rates on the P2P platform respond to changes in the base rate. It does take inflationary impact into account to ensure that the real returns to the investor can be positive.

P2P platforms give autonomy to the investor while making decision. The reverse auction model helps in fair price discovery of the loan. The lender decides the rate of return he is aiming for and then takes lending decisions which is highly data driven.

Even on the risk-return pay off matrix, peer-to-peer funding is well balanced in comparison to other options the same category. In a developing economy fixed deposit options or other standard debt options can never overcome the impact of inflation. The returns and flexibiltiy options peer to peer lending platforms provide, far outshines the benefits of these investment categories.

Banks and private financial institutions make their profits on interest arbitrage. They raise loans on lower interest and lending at much higher rates.

Since banks refuse loans to real estate sector, another option open to the real estate sector is Crowd funding and REITs. Crowd funding enables raising money through an internet platform enabling deep discounted purchases in projects, both commercial and residential, at an early stage and then making an exit after 1-3 years. REITs are investment vehicles that allow both small and large investors to participate and acquire real estate properties. Lower entry barriers in both REITs and Crowd funding, help investors to participate in larger commercial and residential projects., mostly decided by the fund managers and enjoy the returns.

In the case of P2P funding, managed by a competent fund administrator or manager , the investors clearly know where their investment are done and can watch these investments grow. The administrator will ensure that your P2P investment will work for you while you sleep. Hence, it is important to identify a competent portfolio manager or administrator for your P2P investments.

There are advantages that come with being part of various P2P investment platforms managed by competent administrators. Reputed project management advisors/administrators have the advantage of strong relationships with local market to identify profitable deals for the investor. Under their guidance the investors quickly associate with brands that bring them the gratification of having control and transparency about the deal that they are part of.

P2P investments are not part of publicly traded investments and hence are not subject to fluctuations. Investors work with credible borrowers and choose investments that are just right for them.

India has been witnessing an unprecedented surge in P2P investing options over the past one year and for the kind of flexibility and innovative structures these platforms offer investors, one can be rest assured that these options will grow manifold in the years to come.

Promote steel consumption while building infrastructure

The growth in steel consumption indicates a growth in construction sector, and demand for steel critically hinges on development and expansion of the sector. The need for steel in construction industry is 7 times higher than in other sectors like machinery, automobile and packaging.

Advanced countries look at investment in infrastructure building and up gradation of existing facilities in urban infrastructure and building residential complexes to enhance steel consumption and to push economic growth. Apart from an increased consumption, it results in higher utilization in indigenous capacity.

Steel cement ratio in project construction is higher, since steel enables faster construction and allows extra floor space availability. Light gauge high-performance steel, castellated beams are used in these constructions.

In the Smart city concept, the emphasis is more on digital advancement, improvement in public services, eco-friendly environment, safety and security for the citizens, good roads, adequate electricity and water supply. Each smart city can be planned with an elegant looking entry gate made out of high grade pre-painted steel or stainless steel to project a shining image. At busy road connections the small span steel-concrete composite Road over Bridges (ROB) may be planned for safe movement of the senior citizens, women and children.

As steel structures are of permanent nature and require little maintenance and the consideration of Life Cycle Cost advantages of steel-based construction must be inculcated at the planning stage itself for the smart cities. Steel will play a stellar role in the housing and city planning activities of the Government, going forward.

For high-rise buildings, the requirement of steel is more to construct additional roofing space in each floor, the basement, the covered parking and multi-level parking and other subsidiary constructions in the additional spaces. In India, the mass housing projects and affordable housing projects funded primarily from the government sources may not provide much space for higher steel application except for reinforcement steel used for concrete.

It is, therefore, necessary to distinguish between investment earmarked for residential construction and investment made in infrastructure building and make suitable changes in the methodology of demand estimation while correlating construction sector growth with growth in steel demand.

It is reiterated that steel use for construction sector as a whole in the country has gone up appreciably in the past one-and-half decade thanks to wider awareness about steel, acceptability and spread of steel- based designs, new user-friendly Codes and Standards (IS 1786, IS 15962, IS 11384), development of light-weight, high-performance steel. Despite all these developments, a good deal of challenges needs to be addressed for higher use of steel in construction sector in India.

Source: Financial Express

SBI gets RBI’s nod for starting real estate subsidiary

State Bank of India (SBI) has received in-principle approval from the Reserve Bank of India (RBI) to form a subsidiary to manage the real estate assets of the country’s largest lender. In the long run, banks may monetise these assets. The bank has 44 million square feet of owned assets and 50 million square feet of rented properties, the value of which is over Rs 23,000 crore.

Some of the employees engaged in managing SBI’s real estate and engineering activity would move to the subsidiary, which is slated to become functional next year. KPMG would help set up the new company.

The aim is make the subsidiary work on a standalone basis and use professional expertise to manage properties for the benefit of the parent , while there were no immediate plans to monetise these properties.

Source: Business Standard

Demand rises for small offices, with start-ups & investors fuelling demand

The rise in startups in cities like Bengaluru, Pune and Mumbai is fuelling demand for smaller office spaces which is less than 10,000 sq. ft. in area, in these cities. This is the new arena in which investors are investing in.

June September quarter saw the highest transactions in this area, which was 41 per cent, while 10000 to 30000 sq. ft. accounted for 33 per cent.

Startups go for larger spaces when they get funding from investors. Cities like Bengaluru, Pune and Mumbai are seeing this phenomenon. Small and medium enterprises that fare well in their businesses are unable to find Grade A spaces, for which there is a shortage.

Investors realize that yields in office properties are better than yields from house properties. Yields in the former are 9-9.5 per cent a year, compared to two to three per cent in residential property.

Source : Business Standard

Real Estate or Sensex? What will u bet on?

Real estate and Sensex are asset classes that rise and fall with economic cycles. Both attract liquidity and have the potential to increase or decrease the wealth of a person. Some of the perceptions are addressed here.

There’s no data to prove that real estate investments are safe because real estate prices do not fall. India’s real estate industry has no benchmark, just like the Sensex for equity. There are no real-time prices in real estate; there are no derivatives to trade real estate. Residential and commercial real estate prices do not go up or down on a daily basis. You cannot place an order to sell a house and expect it to be sold in the matter of minutes.

In the absence of any long-term real estate data, you’re left with anecdotal evidence about how real estate prices have risen in the past decade. But recent data shows otherwise. The RBI’s own Residential Property Price Index shows a slowdown since Q3FY13. If this slowdown persists or gets worse, real estate prices might actually fall. But again there is no data to substantiate this.

The Sensex has never fallen on a 10yr, 15year and 20 year basis. The question is about the risk involved in investing in an asset that gives 17% compounded annual growth rate (CAGR) over 35 years? Or how ‘risky’ is an asset that has delivered a huge 9-12% return over and above India’s average 5-8% inflation rate?

In a stock market, prices go up and down on a daily basis and you don’t have to buy the underlying asset – simply trade in derivatives. Equity markets are more liquid than real estate and the high rate of CAGR masks prolonged period of dismal returns.

For an Investor, it is important to  

1. Define your risk and return:
   Both asset classes – real estate and equity – will provide returns over the long term. One has to have a risk appetite and should be clear about the expectations, which needs to be realistic.
2. Identify opportunities:
   There are mid-caps and small-cap stocks just like there are micro-markets in real estate. Downturns provide opportunities in almost any asset class. Do your homework well in identifying these opportunities.

Interestingly enough, the real estate market and the equity markets (Sensex) rose in tandem – from 2003 to 2008. The conditions today are similar to those back in 2003: interest rates are bottoming out, inflation is low and economic growth is slowly picking up. Unfortunately though, for real estate, supply is far higher than in 2003. No wonder then that net domestic inflows into equity mutual funds have picked up, while real estate is in doldrums.

Source : Business Standard

RBI Rate cuts – Are Small savings affected?

Small savings schemes may now get lower interest rate as banks prune interest rates in the wake of RBI repo rate cut.  Experts feel that interest rates on these needs to be rationalized. Banks also feel that high rates of interest on small savings run by the Government make fixed deposits uncompetitive. Small savings command rate ranging between 8.4-9.3 per cent, causing difficulty in reducing deposit and borrowing rates.

Small savings compete with banks, for household savings. Inflation has remained high most of the year affecting the real rate of return. With inflation under control, banks will be better placed to lower deposit rates and increase borrowing.

The small savings schemes include  National Small Savings Fund (NSSF), which includes Post Office savings account, Post Office time deposits ( 1,2,3 and 5 years), Post Office recurring deposits, Post Office monthly account, senior citizens savings scheme, National Savings Certificate ( VIII-Issue and IX-Issue), Public Provident Fund, Kisan Vikas Patra and Sukanya Samriddhi Account.

Review of the parameters for the small saving schemes in operation to make them more flexible and market linked and revising the interest rates annually will help.

According to the government data, while the outstanding balance under all National Savings Schemes and Saving Certificates in Post Office stood at over Rs 6,15,021.56 crore as on March 31, 2014, aggregate bank deposits were Rs 77,05,560 crore in the same period. The aggregate bank deposits stood at Rs 85,33,290 crore in 2014-15.

Lowering interest rates may impact small savings, and small savings is purely a rural phenomenon. Banks feel disadvantaged because of the high rates offered by the small savings scheme but I don’t think that is happening. Rationalisation is needed as there are schemes with no limits and the government is paying higher cost .If the rates are revised downwards, people investing in such schemes may get lured by dubious or ponzi schemes that promise to offer astronomical returns. However, financial inclusion is unlikely to be adversely impacted as it is behaviour driven and not rate driven.

This indicates that the government does not want people to save rather they want them to spend. The government wants the country to move towards consumer economy.  However, the working population does not want finance minister to intervene in interest rates at the level of employees’ provident fund.

The government has budgeted Rs 22,408 crore from small savings to meet its budget deficit. Also, reducing the rates significantly will not be easy as it may channelise the money into gold and real estate, leading to generation of black money. While the small savings schemes may give lower returns going forward, people would still have options to invest in tax-free bonds and corporate deposits which offer stable and higher rates

He added that those investing in these schemes need stability and predictability and corporate deposits fit into their needs.

IKIA Research

$15-20 billion of commercial space eligible for REIT 2-3 yrs

According to a survey conducted by KPMG about 100 million sq. ft. of commercial space are eligible for REITs in the next 2-3 years. India has 375 million Grade A office space, in total, available for REITs.

The commercial space is expected to add about 50 million sq. ft. of space each year and is a large opportunity for investment, especially in the major cities. Commercial spaces can also be shopping centers, warehouses, and hospitality spaces.

REITs would not address the liquidity challenges faced by developers but are expected to help streamline the sector by creating a transparent mechanism for raising finance in the market as it would be governed by SEBI guidelines which would help in maintaining transparency and their accountability. Amendments in taxation and regulatory aspects of REITs are required to enhance the effectiveness.

The Indian office space market has witnessed completion of 10 million square feet of office space during July-September 2015. While Bangalore offered the highest supply, developers are faced with challenges of liquidity to undertake commercial real estate, and most of the supply was pre-commitments of the earlier years.

Unlike residential spaces, , in case of commercial or office space the developer starts earning lease rents only after the building is complete, which makes the business of commercial realty highly leveraged even as demand for quality office space is outstripping supply.

This rise in absorption activity, primarily driven by corporate occupiers from sectors such as IT/ITES, banking / financial services, and e-commerce companies, reflected a sustained improvement in office space leasing sentiments across most cities

Source: IKIA Research

Housing Loans – New Updates

Banks can now provide loans up to 90 per cent of the property value, for properties valued up to 30 lakh, and this is an outcome of reduced interest rates on loans. The Loan to Value ratio is now up to 90 per cent. For properties above Rs 30 lakh and up to Rs 75 lakh, the LTV is up to 80 per cent and those above Rs 75 lakh, the ratio comes in at 75 per cent.

Risk-weights norms for home loans have changed as well.

The change will affect under-process loans as well. The loan disbursement will happen at the new rates. The only rate that matters is the rate at the time of first disbursement as the loan gets linked to the base rate and spread at the time of disbursement.

Subsequent disbursements will be linked to the base rate at the time of initial disbursement, even if there is a change in the repo rates and base rates. The changes which get passed on to new customers, does not get passed on to existing customers as it is also linked to the term of loan.

Anyone who wants to switch over to the new rates will pay a switch over charge to avail the new benefits. Any notable difference in the interest rate can be the reason why a customer can think of such a switch over.

Source: IKIA Research