10 Commandments of Equity Investing

Markets respond to three factors
1. Liquidity
2. Sentiment
3. Value

Often the value-seeking investor becomes dejected with the grip of Liquidity & Sentiment over the markets. However, the play of these factors also present buying and selling opportunities to value investor.

Research proves that long term in investing is really a period of 12 years or more. Most investors may not have such patience. But at least 5-7 years investing period is necessary to ‘realize’ value inherent in stocks. I would classify anything less than 3 years as ‘short term’.

Some key things in analysing value is

1.Attractive PE Ratio

Peter Lynch postulated a thumb rule that PE = Expected Growth. However this principle has been misused during frenzied Bull Runs , with companies in certain hot sectors ( retail, real estate etc..) commanding PE of 100, 200 etc.

Frankly in the long term , can a company grow at 100-200% ? There was a time Infosys was quoting at 140 PE. Frankly if Infosys grew like that sustainably it could give India’s GDP a run for money in the long term.

My thumb rules are simple

A. Whatever be the investment argument, never BUY at a PE of above 30. And whatever be the temptation, always SELL when PE is above 80
B. For High Growth companies, I have a version of Peter Lynch called PE = 7 + 0.4 (Growth Rate). So if the growth is 30% , I would be comfortable with a PE of 19 or less

We get value if we get a company with a PE far less, than our calculation then clearly we see value.

2. Good EBDITA or PBDIT Margins & Good Margin Growth (vis-a-vis Sectors)

It is important that EBDITA margins are high. Now what is high depends on the sector , one is investing it. EBDITA margin is the true measure of business success/viability. However over a 5 year period it is important that EBDITA grows.

It is important to look at defining the competition with which to compare EBDITA with. One cannot for example look at Tata Steel & Welspun Gujarat and compare margins presuming both of them to be present in steel.

Frankly if a company’s growth is a lot higher than sector growth, the important thing to ask is whether this is real ?

3. Book Value & Absolute Sales in Relation to Market Cap

I also look at Price/Book & Price/Sales ratios. Although it is by no means sacrosanct, but if company is available at Price/Book of less than 1 & Price/Sales of Less than 1 , then I get a good sense of reassurance.

4. Solvency of the Company as measured by Interest Cover etc.

Frankly I think Interest Cover gives an indication of strength of earnings in relation to debt. Interest Cover is defined as Interest Cover= EBDITA/Interest.

Frankly this is a common sense indicator & a company must have an interest cover of 3 or more. This is important also for Banks & Credit Rating agencies. A good credit rating like AAA from Crisil implies an interest cover of 16.2 or more; Whereas a BBB is 2.3

The other important ratio to understand this is Debt Service Cover Ratio (DSCR)= (EBDITA- Tax)/(Interest + Annual Principal Repayment). Here one usually assumes the principal repayment over 5-8 years. A DSCR of 1.6-1.8 is acceptable, and below that is worrisome. Typically DSCR is good in the range of 1.6-2.1. Frankly if DSCR is more than 2.1 , the bankers would ask the company /business planner to retire the debts early

Frankly Debt/Equity (Net Worth) makes sense only from a sectoral perspective. Typically the comfortable ratios of Services should be less than 1, Steel around 2.5, Power around 4, Infrastructure around 5-10. Frankly which promoter will invest in a road project unless a 5:1 debt ratio is made available.

5. Sustainable Competitive Advantage or Moat

If you want to invest in the long term, you should be clear that the business has some differentiating advantages that are difficult to copy/beat.

These could be a product/technology related advantage, Brand/Image related advantage, Distribution/Retail network advantage or a Regulatory advantage.

Sustainability of profits need a Moat

6. Ability of Business & Category to Grow

The other critical things to understand are whether the business can be scalable. Also the growth rates of category need to be high.

An important factor again is to understand is how high is the operating leverage. Businesses with low operating leverage are preferred since they do not depend on whims/fancies of a few customers.

7. Past Record of Growth

One would want a business with a high CAGR of at least 10-15% for the following indicators over last 5 years. This is critical to assess the capabilities of the companies.

One would want Sales, Equity, EPS, ROCE & EPS to grow more than 15% to be secure in the belief that the company has a good pedigree and aptitude for growth.

8. Soft Factors like Management Capability & One’s Interest/Understanding of Category/Business

This includes our own comfort with understanding the company and the business. It also includes our view of management , its capability, corporate governance etc.

Capability of management can be to an extent determined by efficiency ratios like Credit Days, Inventory Turnover, Cash Flow Efficiency ( Receivable/Sales)

9. Minimum Criteria for ROCE & ROE

Fundamentally a business must return a risk premium of 5-6% over Government bonds. In India, the average rate of bonds is 7%, so the ROCE must be at least 12%.

ROCE is EBIT/ Capital Employed( Shareholder’s Funds + Debt + Deferred Tax)

ROE is a good indicator of share price value ROE is PAT/Net Worth. Fundamentally the ROCE & ROE should be along similar lines.

For debt free companies ROCE does not make any sense. A brilliant ROE and a weak ROCE could be a sign of worry (Depreciation or Interest is not accounted properly, Other income too high)

10. Other Miscellaneous Indicators- Good to Have , not Necessary

If company is a good dividend paying company ( 2% yield or above), with a track record of consistent & increasing dividends then it can give high dividends over the long term on capital invested.

A low Beta of less than 1 , is also useful since it shows some degree of protection from market volatility.

Besides other indicators of value, things like embedded value i.e Comparison of Assets (Land Bank), Holdings/Investments in Other Companies or Cash may be significant when compared to market capitalization

Real Estate Funds – Top 5 Things to Know

These are HNI products best suited for investors wanting to diversify beyond traditional investment avenues.  Minimum ticket size is around 10 Lacs.

1. Provides the benefits of real estate with the ease of a financial product
2. Ideally restrict your investment to a maximum of 15% of over your all portfolio
3. Expected to provide returns of 15-22% post expenses and taxes.  Taxation could differ from fund to fund.
4. Fees structures can be higher than most retail products
5. Risks mainly relate to title of properties that the funds invest into

Super Luxury Residential Development in Mumbai – 2011 Update

Mumbai luxury real estate is one of the costliest in the world also one of the fastest in terms of price growth. While luxury real estate prices remained stagnant in the most parts of the world, in Mumbai prices increased by over 20% in 2010. According to Global Wealth Report by Knight Frank and Citi Bank, Asian cities such as Shanghai and Mumbai will start to close the gap in next 10 years with New York and London that are presently on top of the wealth report’s global cities index. Mumbai was also ranked the world’s 25th most expensive city in terms of property prices while Monaco remains the world’s costliest city followed by London.

And this trend is only bound to continue with aggressive real estate appetite demonstrated by Indian HNIs. According to the report Indian HNIs would like to invest at least 10% of their total portfolio in residential real estate. This was double than what financial advisers would have done. Real estate, as an asset class, however has rarely disappointed in a city like Mumbai where stories of five baggers in five years not very uncommon. The luxury apartment in a city like Mumbai may cost anywhere between USD 1 million to USD 12 million, and range from 5,000 square feet to 13,000 square feet in size. The luxury real estate euphoria is fuelled by bullishness in some real estate pockets in South Mumbai where luxury apartments in have become 25% to 30% costlier than they were a year ago.

However it has been a mixed bag in 2011, where the glut of apartments in Central Mumbai can play a spoil sport and one may see some correction in prices.  According to broker estimates around 40% of luxury apartments coming up in Mumbai are unsold. Buyers in markets like Central Mumbai are not buying into high rates of INR 25,000 per square feet. And as a result, pre-sales (wherein residential apartments are typically sold before fully constructed) have come down.  This has resulted in construction delays since Indian developers want to ensure that they don’t have a large number of unsold units in their ready buildings.

 

Mumbai’s Luxury Residential Micro Market- South Mumbai

Mumbai has basically two luxury micro markets- South Mumbai & Central Mumbai.  The South Mumbai market consisting of areas like Malabar Hill, Cumbala Hill, Napean Sea Road etc. is an evergreen market with severe paucity of land and an insatiable appetite for luxury development. Price points of INR 50,000 per sqft are fairly common in this market. Buyers usually are Indian HNI businessmen (upgrading from old constructions to new fully loaded, feature rich towers), NRIs and well-heeled professionals.  They usually take very small bank loans (often for tax efficiency) and are not affected by interest rates firming up etc.

Trump Tower, Hughes Road: Donald Trump plans to bring his signature of luxury homes to Mumbai on Hughes Road in south Mumbai. The Trump Towers are being developed along with Mumbai-based developer Rohan Lifescapes.  The 60 storey Tower will have 5,000 square feet apartments overlooking the Arabian Sea. The tower will have around 45 apartments and the lifestyle amenities will include a luxury spa, gymnasium and a mini-theatre. It will be interesting to see whether the design or the development will have anything unique or whether it will be a just a case of Mr. Trump charging a hefty royalty fee for his brand.  According to market sources given the small amount of flats and the novelty associated with the Trump brand name, the development may fetch a 20-25% premium vis-a-vis neighbourhood developments in South Mumbai.

 

Mukesh Ambani’s Billion Dollar Home: South Mumbai also has the privilege of housing India’s richest man, Mr. Mukesh Ambani, tipped to be the world’s richest man in a few years. Mr. Ambani has built the world’s most expensive house in Mumbai estimated to be above a billion dollars. The house named Antilia, after a mythical island, resembles a condo tower or a set of Lego building blocks from the outside. But from the inside it is grand consisting of around 37,000 sq metres of space, more than the Palace of Versailles.  The billion dollar tower soaring over 550 feet has three helipads, a health club, dance studio, fifty seat movie theatre and underground parking for over hundred and fifty cars. The home is rumoured to have a wait staff of 600.

 

Mumbai’s Luxury Residential Micro Market: Central Mumbai

The Central Mumbai luxury market consisting of Lower Parel, Mahalaxmi, Worli and Elphinstone is facing a glut of luxury development with a supply of 10 million square feet of high-end residential spaces coming in 2-3 years.  It is difficult to go a kilometre around this area and not see a new construction coming in. This belt is set to see 7-8,000 houses in 2-3 years. With the projects quoting anywhere between Rs 18,000 and Rs 26,000 per square feet it is difficult to see how this supply will be absorbed at these rates.

There are two segments of developers here. One set of developers, say Class A, have low inventory and/or are in a JV with the land owner (who acquired land at a nominal rate years ago) willing to hold on till the market recovers. The other set of developers, say Class B, are willing to negotiate since they have a large inventory coming in and have brought land at reasonably higher rates. As a consequence the price quoted by two neighbouring projects could have a noticeable variation.

The Class A developer prefer slowing down the project instead of reducing prices. The cost of land for these developers is low and the selling price for the apartment may be 5-10 times the cost of land. These developers bought land in cotton and textile mills at INR 3,000-5,000 per square foot around a decade back.  They recover their land cost selling a small percentage of the apartments. They can thereafter afford to wait to sell most of the inventory at high prices. This will obviously cause a lot of delay in construction of these projects.

The Class B developers who has a large inventory of properties is feeling the crunch due to high interest rates (affecting buyers as well) and cautious financing by banks. These developers will be the first one to cut prices and price cut of 10% to 15% may be in order. The price correction may also be disguised by offering freebies like free parking and a waiver of stamp duty.

Central Mumbai is however also witnessing some exciting super luxury developments some of which are Lodha’s World One & Indiabull’s Sky developments.

 

Lodha’s World One: Lodha’s 450 metres, 117-storey World One tower is scheduled to come up by 2014 on the erstwhile Srinivas Mills in Lower Parel. World One is tipped to be taller than the Empire State Building in New York and scheduled to beat the record for tallest residential tower which is currently held by the 323-meter residential complex in Australia called “Q1.

World One will be a super luxury development consisting of about 300 units incorporating principles of sustainable and green living by recycling its water, harvesting rain water and using solar power. The building is targeting an Indian HNI who prefers a lot of outdoor space in apartments unlike insides of the apartments in New York, Hong Kong or London. Indian families don’t want to be shut in and need an access to outside air so each apartment has a balcony. The foreigner or an expat in India will detest that on account of pollution & dust.

The height and the unique curved form of the building will allow a 360 degree panoramic view of the city including the Bandra Worli Sea Link, the Race Course and the Arabian Sea. The height will also cut down noise, pollution and heat. The flats on the higher floors will have 4.5 centigrade degrees lower temperatures than the ground floor. Lodha has already pre-sold some of these flats to its old customers at a 30% premium to neighbourhood development at INR 25,000 per square feet.

 

Indiabulls Sky Project: Indiabulls Sky project, a high-end offering from Indiabulls Real Estate will be hopefully delivered by 2013. The Sky project is made up of three towers – Sky, Sky Suite and Sky Forest. The project has choice of villa-like presidential apartments, duplexes and penthouses. The living spaces target the rich to the super rich with spaces from 2,600 square feet to 13,500 square feet.

Apart from the lavish spa and the massage parlour, the building comes with its own housekeepers and personal butlers.   It boasts of spacious reading rooms, a home theatre, a cigar room, a wine cellar and an American deli. To meet the needs of a global jet setting Indian, the development has an ultra modern business centre and services like concierge service for travel bookings, limousine hires, or currency exchange airport.

Add to all the above, an in-house convenience store with a pharmacy and a 24-hour coffee bar, the project promises to provide a scintillating lifestyle.

 

Mumbai’s Luxury Residential Emerging Micro-Market: Western Suburbs

It is estimated that by 2020, people earning above Rs. 20 lakh will increase from 4 percent to 10 percent of Mumbai’s population which translates to roughly six hundred thousand families. There will be a need for luxury housing for these families in Western Suburbs.

The Western Suburbs are a hub of commercial activity with Bandra-Kurla complex & Andheri Kurla Road emerging as thriving commercial centres. This is fuelling a great demand for luxury housing in the vicinity of these centres. The emergence of luxury housing in suburbs is supported by higher land availability and a high FSI (twice as much as in South Mumbai).

The luxury residential in Western Suburbs is being led two developers :   the Lodha group and the Oberoi group . These developers have developed differentiated projects in suburbs backed by good sales & marketing programmes.

These developers burst into the scene when they picked up real estate that is not easy to come by in Mumbai. Oberoi got 80 acres of land that had been pharmaceutical company Hindustan Ciba Geigy’s research centre in Goregaon (a suburb near Andheri). Oberoi has developed this area into an island of luxury development and commands a 25-30% premium for its residential & commercial luxury development.

The Lodhas have launched a project called Lodha Fiorenza in Goregaon as well. This project has been launched with Jade Jagger, the daughter of Rolling Stones rocker Mick Jagger. Jagger has partnered with London-based design firm Yoo Design Studio and is set to design 400 homes priced between Rs 3 crore and Rs 12 crore. The project has received a good initial response with close to 100 units sold since the launch.

Backlog of 22 months

The residential real estate supply side is beginning to come under pressure, as there is inventory build-up in central Mumbai, north Mumbai, Gurgaon and Pune. There is a backlog of about 22 months, which is dangerous by any standards. The desirable backlog should at best be around nine months.

Tata’s Affordable Township Development at Boisar, Thane, India: An Unqualified Success

Located in Boisar East, around 1.5 km from the railway station is Tata’s integrated green township. The townshipis spread over 63.5 acres and houses two kinds of projects.

 

• Low Cost Housing named Shubha Griha
• Affordable Housing named New Haven

 

The township is complete in all aspects – community centres, recreation facilities, schools, hospitals, etc. The green design incorporates features such as maximum natural ventilation, glazed windows, energy-saving compact fluorescent lights, solar public lighting, open and green landscapes, rain water harvesting, etc.

 

Shubh Griha – Low Cost Housing (Sold Out)

Tata Housing’s Nano flats were sold at a starting price of around Rs3.9 lakh. Consisting of 1RK (360/283 sqf ) & 1 BHK (465 sqf) apartments the complex was sold out at approximately Rs1,400 per sq ft. Subha Griha is an integrated township with school, playground and hospital facilities. The complex consists of Ground +2 buildings with a large community centre, gardens, special retail and hawking zones.

Developing land on a joint ownership basis with land owners, Subha Griha ensured that capital was not blocked and costs remained low. It incorporated new low-cost construction technologies, such as prefabrication. Steel and cement vendors and suppliers were locked on long-term contracts. Marketing and distribution costs were drastically reduced. While normal costs hover at 5 per cent of project costs, in the case of the Shubha Griha scheme, the marketing costs were capped at less than 2 per cent.

Most of the advertising was through press reports and advertisements at railway stations and bus depots. It relied heavily on word of mouth. Distribution of application forms (for low cost housing) was outsourced to other partners, including State Bank of India. For a scheme of 1,000 flats more than 7,000 customers queued up to pay the booking amount for the flats. In the midst of the frenzy, Tata Housing managed to get the number of flats increased from 1,000 to 1,300 and allotted the flats by lottery.

Shubh Griha scheme unique is that as much as 35-40 per cent of the buyers are in the unorganised sector, people who hitherto had no access to formal housing funds. Another unusual aspect of the scheme is its customer-friendly design. The flats have been designed specifically to suit the lifestyles of the target audience. For instance, the flats come with ready lofts for storage, large living rooms that can be converted into extra sleeping areas at night, toilets that are distanced from the kitchen etc. The residents of Shubh Griha also serve as domestic help (maids, servants, drivers, peons etc.) for residents of New Haven.

 

Affordable New Haven

The New Haven was affordable housing targeting primarily middle/senior managers and executives of SMEs of Boisar/Tarapur. Majority of the flats of New Haven are booked by JSW and TATA Steel to accommodate its work force. Tata New Haven has its own educational facility, club house, health care, shopping centre, swimming pool, gymnasium, gardens etc.

The two-BHK (690/820/930 sqf) and three-BHK (1200/1380 sqf) flats in New Haven, with areas ranging from 690 sq ft to 1,380 sq ft, were sold at Rs 1,900 per sq ft initially. With both phases I and II sold out, Tata Housing has recently fully sold out phase III at an average price of around Rs 2,200 per sq ft. The response to New Haven has been phenomenal.

 

Gold is a compelling story in India- Few Facts

• India’s 2010 gold demand rose 66% and hit 963 tonnes in volume terms and US$38bn (+106%) in value terms. Even as demand from Western markets shrunk, India and China raised their gold consumption in 2010 accounting for almost all the growth in global demand. Demand from rural India surprised positively, driven by the healthy monsoons and higher minimum support prices (MSPs) from the Government.

• Estimated that gold accounted for a high 9% of household savings in FY11.

• At US$29bn, India’s jewelry demand alone was almost at par with FII net inflows into the Indian equity markets in 2010.

• India’s  gold investment demand (10% Cagr in the past five years) continues to out pace jewelry demand (5% Cagr). WGC notes that over 2000-2009, “the value of gold demand in India has increased at an average rate of 13% per year, outpacing the country’s real GDP growth by almost 6%.”

• India’s traditional demand for  gold during festive occasions (Diwali, Akshay Trithiya) and marriage seasons remains deeply embedded as part of culture. Rising incomes will drive aspiration values and maintain gold as a ‘status symbol’

 

Read more at HDFC Securities report .http://www.hdfcsec.com/Research/ResearchDetails.aspx?report_id=2975425

Chandrakant Sampat School of Investing- Top Three

 

1. Criteria to Select a Company

a. Least capital expenditures.

b. Little or  no borrowings. This means all future costs are provided for

c. ROCE not less than 25%

d. Big chunk of their earnings as a dividend.

 

2. No more than ten companies in your investment portfolio. ” If you spread it out, so many of them will go wrong and very few will come right. So, it will be squared out. But if you are in eight-ten companies, even one giving you everything, will cover your wealth”.

 

3.  Soft Indicators for Company Selection : Vision, High integrity,Value Creation &  frugality.

 

Read his interview http://www.moneycontrol.com/news/features/chandrakant-sampat-the-magiciand-street_529121.html

The Price School of Investing – Seeking Fertile Fields of Growth

I write this more to remind myself , than in these exciting times of our investing lives (where India is in a long term secular bull run), that I should pay heed to Price School of Investing and not follow a uni-dimensional approach of ‘Value’ of ‘Ben Graham School’.

A`lot is changing around the world, and a lot is changing within India. It is difficult to relinquish the approach that I cannot invest in anything that I do not fully understand. It is easy for me to understand how a sugar  substitute would do well in  a nation with great incidence of diabetes, but I often find it difficult to comprehend how solar technology will evolve and become a viable alternative.  I vaguely understand that the next growth cycle for telecom will be ushered in by 3 G and Mobile Banking but I fail to exactly understand the ramifications.

I am bewildered, amazed & curious. And it is in this frame of mind that I have to turn to Mr. Price.  Price talks about seeking “fertile fields of growth” and sticking to them for a long time. The latter part of sticking to something for a long period of time is something that I find easy to follow.

I have no notions of being a prodigy/genius or an exceptional man of any sort. I am no financial wizard and find it very difficult to sell at highs and buy again when the stock corrects. Timing has never been my forte.  I think a vast majority of average investors like me would do well to realize that our only hope in the world is holding something of value for a long, long time. However we need to understand that whatever school of investing we follow, we need to know when the time is up. When for example, a value stock is no longer a bargain or a growth stock is showing signs of fatigue or maturity.

Coming back to Price and his ‘fertile fields’. Price stressed, as all nomadic farmers know, that fields are the most fertile towards the beginning and the most profitable and the least risky time to own a share is the early stage of growth. In India, a lot of stocks would fall in this category and a lot of businesses are children of post-liberalization era.

Some of Price’s requirements for a growth company were

1. Superior research to develop products & markets
2. Lack of cut-throat competition
3. Comparative immunity from government regulation
4. Low labour costs but well –paid employees
5. At least 10% ROCE, sustained high profit margins and superior growth of earnings per share

Price maintained that there are two aspects to capitalizing on fertile fields

1. Identify a high growth industry
2. Identify the most promising company within the Industry

I would also reckon that we add the other soft indicator of the Price equation, to make it more challenging and satisfying

3.An industry we cannot fully comprehend

I think an important thing that Price underlines is the emphasis on profit margins & earnings. This is an important requirement . It is important not to touch with a barge pole stocks that show a lot of promise, but only promise earnings.

 

Value +Growth +High Dividend Yield- 3 Stocks

The market meltdown has presented good options to buy into stock that have a good growth story, are relatively cheap  and are projected to have strong dividend yields  for Fy10-11

1. Indiabulls Finance (CMP 143, PE of 8.4) compares very favourably with peers and has reoreinted its business model to focus on housing finance , a key growth area. Indiabulls Finance has a price/book of 1.1, growth of 20-25% and dividend yield of 3.4%.  LIC Housing has price/book of 2.75 and a yield of 1.5%. HDFC has a growth projection of 20-25% ,a price/book of 6.5 & and  yield of 1.1%.

The projected yield of  Indiabulls at CMP will be 6%

2. In infrastructure finance  SREI is a good bet , not keeping in mind Jhunjhunwala’s fancy to the stock. The budget has also increased focus on infrastructure. SREI Infra (CMP 43.5, PE 6) has price/book of 1.1 , Yield of 2.75% .  IDFC has a PE of 17, Yield of 1%, Price/Book of 2.2 .

The projected yield of SREI is likely to be 4%

3. Satluj Jal Vidyut Nigam a relatively secure hydropower play, likely to see good growth  action from 2013 onwards, is also available at a yield of around 4%, projected to be 4.5%.

Note : Projected yield is based on the following methodology.  Companies have been filtered based on achievement of at least 75% of FY10 profits in the nine months ended December 2010 and assumed that the companies would maintain their FY10 dividend payout ratio. We have forecasted the FY11E PAT by taking the actual PAT of nine months ended December 2010 and assumed Q4FY11 as an average of last three quarters net profit.

Condo Hotels in India – An Idea Worth Exploring

In India the second home/vacation home market is in early stages of development. Most second home owners are a dissatisfied lot, being sold properties which they find difficult to maintain and with very little opportunities for appreciation.

Thus for most second home locations , a condo hotel is an ideal WIN-WIN for the second home buyer , the developer and the hotel buyer.

Taking account of the increase in luxury second home residential development, seasonal nature of hospitality revenues and also with a view to develop a fairly differentiated product it is imperative  to introduce the concept of a condo-hotel to the Indian market. This option entails development of a condo-hotel, wherein the hotel rooms are owned by individual owners/investors and are leased to the developer for the purpose of running a hotel in lieu of agreed fees/profit share.

 

The Value Proposition for Condo Unit Owner/Buyer

The primary purpose the Condo is brought by the owner is real estate ownership of luxury second homes. There is also a bait of possible real estate appreciation. Condo hotels  are an attractive option since maintaining & ensuring luxury amenities in usual second homes is a big hassle.

The unit holder has the option of participating in the rental programme or not. This defrays the cost of ownership.

• Apart from capital appreciation, the owners (depending on lease terms and conditions) also tend to make a reasonable rental yield (say 2-3%) from their properties.
• Unlike most villas & gated development, which resemble a ghost-house for most of the year, this development provides the owners a buzzing & cheerful destination.
• Most second home owners realize that they end up going to their second homes far less frequently then they had envisioned. They also find maintenance and house-keeping of their second homes to be quite problematic. With first class house-keeping services and flexible lease arrangements, this development provides the owners the best of both worlds.

 

The Business  Proposition for the Developer

A condo hotel developer can realize a substantial return on investment much earlier, because the sales of the units usually close around the time the hotel opens for business. Additionally, the condo hotel developer has access to an additional source of secured financing: the pool of lenders that provide financing for traditional condominium development. This added source of capital can reduce lending costs. Condo hotels also provide the developer the opportunity to obtain a return of equity earlier than would be available in a traditional hotel development.

 

For the developer this considerably reduces the risk of high fixed cost that a plain vanilla hotel project entails. By selling off ownerships in the hotel in a preconstruction phase, developers are also able to more easily acquire favourable construction financing from bank. The developer typically retains control of common areas, restaurant etc.

 

The condo units  world-wide sell for a premium over “regular” condos ranging from 15% -40% per square foot due to the services provided to the condo hotel owner that are inherent in being part of a hotel operation such as housekeeping, maintenance, and room service—as well as the uniqueness in design, sophistication, and overall product offering.

 

The developer should focus on the real estate, the luxury lifestyle, the hassle-free living and real estate appreciation possibilities. Marketing should be entirely real estate oriented with focus on the prestige/ego asset.The developer should downplay the subsequent rental programme and not raise high expectations of rental yield.