Commercial real estate sector is in boom in India. In the last fifteen years, post liberalization of the economy, Indian real estate business has taken an upturn and is expected to grow from the current USD 14 billion to a USD 102 billion in the next 10 years. This growth can be attributed to favorable demographics, increasing purchasing power, existence of customer friendly banks & housing finance companies, professionalism in real estate and favorable reforms initiated by the government to attract global investors



• Growing Demand Market • •

Realization of large commercial projects IPOs by developers Gradual organization of the markets in the Tier I cities Emergence of transparency and liquidity Entry of international real estate consultancies Governing legal framework relaxed Competitive pricing

• Greater availability information of • • •


Cause-Effect scenario leading to emergence of organized real estate market in India The property market in India has traditionally been unorganized and fragmented. However, the recent past has seen a consolidation of positions in the market as developers are stretching their capacities to the maximum in order to meet the growing market demand, which in turn has encouraged large projects with sourced financing. The IPOs by large real estate developers like Sobha, Raheja and DLF have led to organization of the market in the Tier I cities, but the Tier II and Tier III cities still demonstrate the traits of an unorganized market. Whilst the Indian real estate market still lacks transparency and liquidity compared to more mature real estate markets, the increasing requirements of multinational occupiers, as well as the influx of international property consultancies has led to the introduction of greater availability of market information, both in published and private form pushing the sector to an organized market form. Categorization With reference to the availability of infrastructure facilities, following cities are currently attracting MNCs/corporate/real estate developers: Tier I cities, Mumbai (Commercial hub), Delhi (Political hub) and Bangalore (Technological hub): • Preferred option for many new market entrants • Command the highest international profiles and significant proportion of FDI • Offer qualified labor pool and the best infrastructure facilities • Exhibit development of sub-urban commercial real estate • Yield of 9.5 – 10% Tier II cities, notably Hyderabad, Chennai, Chandigarh, Kochi, Mangalore, Mys ore, Thiruvananthapuram, Goa, Bhubaneshwar, Ahmedabad and Pune • Yield of 10.5-11.5% • Offer competitive business environments, human resources availability, telecommunications connectivity, quality of urban infrastructure, • Attract high value IT, ITES and biotech corporate houses Tier III cities, like Cuttack and Jaipur • Low liquidity and still highly unorganized. Special Economic Zones: • 28 operational SEZs in the country, including those converted from Export Processing Zones (EPZ) to SEZ… • • Development of SEZs in various segments such as multi-product, Information Technology, Bio-technology, Gems and Jewellery, Textiles and technology intensive industries Attract both developers and corporate houses (refer table for a list of corporate that have shown interest in development of SEZs)

Corporate Reliance Industries Adani Group TCG Refineries Suzlon Hindalco

Location Gurgaon, Mumbai/Navi Mumbai Mundra Haldia Coimbatore, Udipi, Vadodara Sambalpur


Tier II and Tier III cities. Le Meridien etc are in expansion mode with many new players such as Accor Group. the real estate space can be classified as follows: Office Space • Backed by strong infrastructure • Promoted by increasing demand from IT industry • Shift of focus from the traditional CBDs towards secondary centers owing sharply higher land prices in the city centers. IHG Group 4 . Ansals.30% expected in the organized retail sector (malls and multiplexes) leading to an increased demand in real estate • Affected by government policies for foreign retailers • Pronounced in the Tier I. Parsvnath. Established brands in this sector include Asian Hotels. ITC. Shipra Estate to name a few. Retail Space • Growth of 25. Choice. from business travelers. Bhopal Vedanta Orissa Corporate interested in development of SEZs in India and the location of interest Apart for the corporate clientele. Mumbai. Delhi etc. As per utilization. Indian Hotels. Jaipur. Marriot. including DLF. the SEZs also attract a number of real estate developers. Hospitality Space Criteria Statistics Annual growth rate of the industry 8% Number of foreign tourists in 2012 6580000 Total number of five star rooms (2012) 150000 Total number of five star rooms needed by 180000 2015 Growing demand of real estate in the hospitality industry • • Increasing demand of lodging in commercial cities such as Bangalore.Genpact Bhubaneshwar. Omaxe.

thereby contributing immensely to economic development. Urban development. India's Construction industry has grown at a Compounded Annual Growth Rate (CAGR) of about 11. tiles. Utilities) 5 . Foreign Direct Investment (FDI) inflow into the sector during 2007-08 is estimated to be around Rs. steel. power plants and roads is projected at more than Rs. Construction investment accounts for around 52. Industrial and Special Economic Zones (SEZs)) 2) Infrastructure (Transportation. The Construction sector has strong linkages with various industries such as cement. Industry Segmentation Construction sector can be broadly classified into 2 sub-segments: 1) Real estate (Residential. 4 trillion in 2011. Spending on infrastructure sectors such as ports.5 trillion annually for the next six years. fixtures and fittings. and will require 92 million man years of labour. Investments in Construction have a positive domino effect on supplier industries. 1. chemicals. Industry size and Growth of Construction Industry The size of the Construction industry is around Rs. While in the short term it serves as a demand booster.4% of the Gross Fixed Capital Formation in India. Commercial/Corporate. The Construction sector in India is the second largest economic activity after agriculture and provides employment to about 54 million people.Environment Scanning and Competitiveness of Construction Industry 1. 240 billion.1% over the last eight years on the back of massive infrastructure investment and rapid rise in housing demand. in the long term it contributes towards boosting the infrastructure capacity. paints.1. 2.2.

Indian Construction Industry Landscape Construction Industry Real Estate Infrastructure Residentia l Commercia l Special Economi c Zones Utilities Power Urban Infrastructure Transportation Railways Irrigation Civil Aviation Roadway 6 .

have greatly reduced their exposure . though in Delhi they have stayed constant. as Raheja noted. home buyers had better take care. When survival is at stake. Housing prices too fell around 25 per cent in both cities in these two years. "They miscalculated and invested most of their money in land and non-core assets.and fast. has in recent years junked its carefully cultivated premium-projects-only image. After the downturn it dropped even further to Rs 160 in 2009." The outcome? Of the top ten listed developers by revenues. have started offering loans instead of acquiring equity charging interest of more than 20 per cent and seeking collateral often twice the size of the loan.. the industry has been forced to adjust . Half its residential properties are now in the Rs 30 lakh to Rs 80 lakh 'mid-tier' range……………………………………………………………………… There was a rush of foreign direct investment into Indian real estate when the sector was first opened. which came at steep rates 7 .The Real Estate segment contributes around 24% to the Construction GDP of India while Infrastructure segment contributes around 76%. DLF. was due to their frenetic land buying during the boom years." says Navin Raheja. to trim its debt………………………………………………………………………………………………………… ……………………………………….1. they found interest expenses had soared. keeping up appearances becomes secondary . Private equity (PE) players. even reputed developers are now foisting one-sided agreements on customers in which the developers hold all the cards.5 per cent in two years. Expect the unexpected from the realty sector. It was a time when every developer had started aspiring to be No. In Mumbai. as compared to a 19 per cent reduction in such funding in India as a whole. for example. even turning to non banking finance companies (NBFCs) for funds.the equally high profile Lodha Developers. thus declining 38. which incidentally bought the Mumbai land from DLF. Even the mightiest have faced up to reality: in August last year. Finally. the country's costliest real estate market. the average rent paid had already fallen from a high of around Rs 260 per sq. such as Motilal Oswal PE or IIFL Private Wealth. Though most of them somehow rallied and managed to improve cash flows by the following March. seven had negative cash flows from operating activities in March 2008. With both financiers and customers in short supply. foreign and domestic. In their bid to stay afloat.5 acres of prime land it owned in the heart of Mumbai. per month in 2007 to Rs 200 in 2008.their investments in real estate fell by 36 per cent in 2012 over 2011. the drop during the same period was 31. thanks to the two successive downturns of the last few years. In Delhi.4 per cent. The real estate boom had begun tapering off even before the first downturn struck in September 2008 with the collapse of global financial behemoth Lehman Brothers. top developers were very bullish. India's largest realtor. sold 17. for instance. Since then commercial rents in Mumbai have fallen by a further 20 per cent. "In 2006/07. Chairman and Managing Director of Raheja Developers. This. but that is now drying up. And those still backing realty projects. ft.

of interest. Some tried to line up equity issues. banks had grown even more wary of lending to this sector. they were in trouble. Some developers went in for qualified institutional placements to raise money. While the benchmark Sensex on the Bombay Stock Exchange (BSE) shed 60 per cent between January 2008 and March 2009. 8 . Interest cost as a percentage of total income for eight of the top 10 developers rose almost four times within a year to 16 per cent by March 2009. It was doom and gloom all around. when banks showed some reluctance to go along with them. Meanwhile. With few takers for properties post 2008. but very few of their initial public offerings (IPOs) went through. and customers preferred to wait and watch. the realty index tanked 90 per cent.

Around 82. according to a report released last December by Knight Frank India. Thus developers have been devising all kinds of schemes to woo them . which too Indiabulls arranges if needed from one of its group companies. Lodha Developers tried another tactic. "Most developers are now focusing on the broad segment of flats costing Rs 20 lakh to Rs 1 crore. Flat allotees too were later chosen through an automated software programme.000 housing units remained unsold in 2010. kicks of the most popular being the "20:80 payment model" in which buyers pay just 20 per cent of the value of an apartment as booking amount." says Pranab Datta. It offered them in a price band instead of at a fixed price." says Vakil of seeks a mere 15 per cent as advance while booking a flat and another five per cent while giving possession thereafter the housing loan." 9 . the way IPOs do.Yet all such funding falls flat if properties do not find customers. Knight Frank India. "It was a nice way of grabbing some of the demand. Much like a successful IPO. Again. developers have been focusing more on the relatively affordable homes of late . and nothing more until it is handed over to them to live in…………………………………………………………… Mumbai-based realtor Indiabulls Real Estate has developed the model further . and the buyer has only to pay equated monthly instalments (EMIs)……………………………………………………………… While selling some of its Mumbai flats. and decided the final price only after receiving buyer responses. rising by another 12. Chairman.000 in 2011. the trend best reflected by Lodha Developers' shift of emphasis. it drew twice as many applicants as the flats it had to sell.……………………………………………………………. in much the way an initial public offering (IPO) does.

) "We want to primarily do residential projects because it has instant cash flows. C. in any case." he says. says the Knight Frank India report. While growth in home loans fell from 13. the gap between new launches and sales dropped sharply to 32.5 per cent for the corresponding period in 2011/12. in 2012. Sharma.9 per cent for the corresponding period in 2010 /11. down from almost four per cent in March 2010 to less than three per cent in March 2012. Home loan defaults have also been declining since 2010. banks have become a little more accomodating towards home loan seekers. developers start getting cash flows from the day they are launched. However. How well are such efforts working? It is early days yet for a clear answer." The Lodha Group has even converted two of its projects in the Mumbai Metropolitan Region from commercial to residential." J.There is also a growing bias towards residential projects rather than commercial.2 per cent in the December 2009 to December 2010 period. "Commercial ones have a long gestation period and are cash intensive.…………………………. Vakil puts the residential demand at seven times the commercial. "With commercial properties returns come in only after completion. (Three quarters of the real estate market in India." says Vikas Oberoi. has always been residential. 10 . Simultaneously. Chairman and Managing Director of Oberoi Realty.000. Vice Chairman and Managing Director of Bangalore-based Sobha Developers echoes his view…………………………………………………………………………… "With residential projects. it recovered to 12. to 11.

Tata Realty and Infrastructure. a research service focused on PE and mergers and acquisitions. ASK Property Investment Advisors and Kotak Realty Fund are some of the funds through which you can invest in domestic and overseas properties……………………………………………. One key difference is that the rental-based funds do not take any development risk. We are a part of Kotak Mahindra Group. Rental-based funds buy a property with a committed tenant and earn the rent. We focus on investments in real estate and real estate intensive businesses. one of India's leading financial conglomerates. We currently provide investment management services to four funds that are domiciled in India and provide investment advisory services in relation to one Offshore Fund. ICICI Venture. Since our establishment in May 2005. 11 . Indiareit Fund Advisors. Our LPs comprise domestic Institutions." says Richa Karpe. we deploy capital judiciously to benefit from the USD 100 billion Indian Real Estate market which is virtually building every asset class ground up. WHAT IS REALTY PF FUND ? "Realty PE funds are typically development-based and buy stakes in projects. Altamont Capital Management.RESEARCH METHODOLOGY REAL ESTATE PRIVATE EQUITY FUNDS ABOUT KOTAK REALTY FUND Real estate private equity fund investments Kotak Realty Fund (KRF) is one of India's first private equity funds with USD 811 million in assets under management. according to Venture Intelligence. which helps many families manage their wealth.. The funds under management are opportunistic funds and have a flexible investment approach. With our extensive presence and deep understanding of the Indian market. we have invested in more than 32 projects / companies across different asset classes and geographies………………………………………………………………………. Global Institutions and private clients. HDFC Real Estate Fund.. director (investment). There were 89 active realty PE funds in India between 2008 and 2011.

Then you have to find a tenant if you want to earn a regular income. You then have to go through the paper work and get the property registered. you have to find a buyer once the price crosses your target. you just have to put in the money. Thereafter. an exit is possible. The tenure of such funds is shorter than that of the development-based funds. the minimum return 12 . usually 2% of the investment. PE funds do not take all your money at one go but ask you to release the amount in tranches as they find new investment opportunities. The funds charge a management fee." says V. "Realty PEs help investors benefit from the expertise of the fund manager. You have to first identify a location and a property with growth potential and do the due diligence. As an investment in a PE fund is a private contract between the fund and the investor. but it also requires more effort. the funds sell their investments in the secondary market and return the money to the investors. Hari Krishna. "The investment period is usually three years during which the investment commitment can't be changed. HAVE PATIENCE Unlike direct buying. Some PE players fund only last-stage liquidity gaps. If your goal is capital appreciation. "Given the relatively higher risk and lower liquidity." says Krishna. In a PE fund." says Karpe. Investors might also have to pay a one-time set-up fee. Realty PE funds typically have tenure of 5-8 years. Rental-based funds also have a shorter tenure.PE ADVANTAGE Investing directly allows you to own a property. The rest is taken care of by the fund. your realty PE portfolio will appreciate only after 2-3 years. investors are justified in expecting an annualised return of at least 20% over the life of the fund. It also allows you to participate in the realty market with an investment of as low as Rs 5 lakh. where an investment can appreciate significantly within a year. These funds have a hurdle rate. the funds do not disclose their valuations and returns generated by their investments. It spreads the risk by investing in projects across locations. director. Maintaining secrecy about investments is crucial because the funds will lose their edge if this critical information is known to the general public and their competitors … The returns from realty PE funds depend on the performance of the broader real estate market. At the end of the tenure. Kotak Realty Fund.

Kotak Realty Fund. You can also look at the performance of the past funds." adds Krishna. Reits are stock exchange-listed investment vehicles. but an investor can sell his portfolio to another buyer. Before investing in a PE fund. though rental-based funds come fairly close to it. Realty PEs are not very liquid. says it has generated returns in excess of 30% on its exits so far. "India still does not approve the REIT structure. which invest in properties for rental income. Try to learn about the fund management team. 13 . MISSING LINK Real estate investment trusts (Reits) and real estate mutual funds are two other ways of investing in property. provide loans for properties or buy existing mortgages for interest income. which raised $550 million (around Rs 2. which started in May 2005. investors can expect an 11-15% return on an annualised basis. the offer can be at a huge discount to the market value. which demands that most of the appreciation be returned to the investors on a regular basis. You must check the fund's reputation along with its parentage.500 crore) in 2005-06." says Karpe. They usually take 20% of returns in excess of the 10% hurdle rate. ICICI Venture also has a realty PE fund. "After adjusting for fees and taxes. When investing. It refused to disclose its current valuation or returns." says Karpe. you should be fully aware of the fund mandate and objective. it is important to pick the right fund. Even if he does.beyond which they take a share of the profits. "An investor looking to sell may not always manage to find a buyer.

How does it impact NRIs? Very often we find non-resident Indians (NRIs) are approached when rupee depreciates to bring in foreign exchange and capitalize on the sliding rupee. Overall in the medium term. developers and host of financial institutions bring schemes that are made to look attractive for NRIs when the rupee is volatile. How much more will the rupee depreciate? Considering the current political scenario wherein the central government is looking forward to bring in legislation for the food security bill that further increases the subsidy bill for the nation and many more such populist measures that will be helpful for the political parties keeping in mind the Lok Sabha election in 2014. Current account deficit and foreign institutional investors selling heavily in the Indian bond market has been the key trigger for rupee depreciation. Interest rates on non-resident external account and foreign currency non-residential account deposits look very lucrative when NRIs take into account stand-alone rupee returns.VOLATILE RUPEE AND INVESTING IN THE INDIAN REAL ESTATE SECTOR Both capital and currency markets globally have been volatile for the last few weeks triggering serious turbulence in the Indian currency. In the last two decades. bringing in foreign currency to capitalize the high interest rate scenario has not helped NRIs as they have lost out on the overall capital return basis. When we look back. data show that NRIs have only lost out whenever they bought foreign exchange into India in such volatile times thinking they are capitalizing the volatility in currency and locking into high-yielding deposits. we cannot afford to see rupee sliding further as many other critical parameters such as fuel import will start hurting the economy. It is a wrong perception that NRIs make good returns by locking in high-yielding deposit. the overall medium-term financials of the country are not looking exciting. All bankers. High interest rates get compensated by depreciating rupee. The Reserve Bank of India is still not looking to intervene to control the sliding rupee but may soon come into action to bring interim stability. 14 . Data points such as negative export and industrial growth has further triggered the uncertainty. The banking regulator and the finance ministry have not come out aggressively to support the falling rupee and have continued their bond sale programmed further affecting the sentiment. we may continue to see volatility but over the long term.

What options are available? NRIs have always been the soft targets when it comes to tricky situations. non-resident Indian (NRIs) investors have been presented with an attractive opportunity. While 60 was considered to be the last frontier for the Reserve Bank of India to defend. Falling rupee should not always be seen as an opportunity but certainly can be seen an option to explore good investment options with 8-10 years investment horizon. equity market valuation and triggers have suddenly receded in the background to make space for discussions on the Indian currency. They can directly invest in India in their local currency by buying equity shares on their own account 15 . Bangalore and Pune currently offer decent opportunities in terms of value. Those who have already invested have had to face a double whammy of falling markets as well as currency depreciation. The tide of rupee depreciation battered everything in sight from bonds to equities. Markets such as Hyderabad. Chennai also offers good opportunities. Unfortunately not all such options are in the best interest of someone who is not physically in India and lacks active management and nimble-footed action given the dynamic economic scenario. NRIs investing in India should be ready to face volatility Rupee is the new star on the horizon. While domestic investors have bled due to the sharp depreciation that led to the bloodbath in the equity and debt markets. It is strongly recommended that NRIs should never take decisions based on emotional aspects such as buying real estate in hometowns with expectation of high returns. Real estate decisions ought to be based on sound and judgemental advise from a professional with pure investment objectives and with no emotional aspect attached to it. the dollar breached the level nevertheless. rupee direction is now determining debt and equity flows. There are various investment options available for NRIs today who are looking to invest in India. Very often they start believing that they are being pitched the best options that money can buy in India. All debates on bond yields. The rupee depreciation has made all Indian investments cheaper in dollar terms for NRIs looking at making fresh allocations in India. NRIs have rarely made money when they have got sold to ideas that are very special or not standard offerings in the market. From being subservient to debt and equity flows.

However in most of these options also. Hence the bias of currency depreciation is here to stay. These funds collect money in dollars and then remit and invest in rupee. this is good for the Indian economy especially since it will make India’s exports more competitive and lower the demand for imports thus eventually balancing the current account. this is a double sale offer since the Indian rupee has depreciated by at least 50% over the last five years and more than 10% in the last one year. They also have fixed-income deposit options both in local currency through non-resident external (NRE) fixed deposits as well as foreign currency non-resident (FCNR) deposits. This made the valuation of the Indian markets extremely attractive. For NRI investors. The Indian equity market has stayed range-bound over the last five years despite the earnings of the underlying companies growing by more than 50% during the last five years. in our view. however he will also lose out in case the rupee appreciates. the sharp depreciation of the Indian rupee has made Indian real estate cheaper in dollar terms which again gives an entry opportunity for NRI investors. A portfolio of leased commercial real estate can be created for the conservative investor. In the short term. The current volatility in the global markets has created attractive entry points for NRIs across a range of investment options in India. While in the medium to long term. the currency remains unhedged and the currency risks lie with the investor. We believe that the best way for NRIs to invest is to create a tailored portfolio which is based on risk appetite and ability to withstand volatility. it increases the complexity of investing in India for NRIs. There are also a lot of Indian and foreign asset managers who offer dollar-denominated funds in the Indian equity. A blended portfolio of Indian equity and residential real estate can be created for investors who have a higher risk appetite. In addition they can also directly participate in real estate by buying property which can be either commercial or residential. private equity. investments which are done with a medium. debt and real estate funds. While prices have remained stagnant over the last one year. we believe the imminent tapering of the quantitative easing from the US coupled with the strengthening of the US economy will lead to the strengthening of the dollar against the rupee. and those who can stomach the roller-coaster ride will. They can also participate in the Indian local currency debt market through debt mutual funds. have an exciting finish. 16 . the NRI investor does not face rupee depreciation risk. In case of FCNR deposits . long-term horizon such as equity and real estate have become attractive for NRIs. the assets will no longer be available at these valuations as the price of stability is very high.or go through managed solutions such as equity mutual funds and portfolio management services. Indian real estate also offers a similar dynamic. A lot of commercial real estate in India is currently available at attractive rental yields which offer both income as well as potential price appreciation. though to a lesser extent. Going ahead. Once the volatility subsides. The short-term depreciation bias is going to largely eat away bulk of the returns from the debt segment.

which is controlled by a few major players in each city. the Indian real estate market. Karnataka. Uttar Pradesh and West Bengal spread over across 18 States of India are members of CREDAI with over 3.GOVERNING BODY REGULATING INDIAN RETAIL SECTOR REAL ESTATE Real estate sector covers residential housing. Andhra Pradesh. Kolkata. trading spaces such as theatres. hotels and restaurants. This is because of the chain of backward and forward linkages that the sector has with the other sectors of the economy. Goa. commercial offices. Madhya Pradesh. 20 State/city level associations. Mumbai. Himachal Pradesh. Odessa. Tamil nadu. CREDAI (Confederation of Real Estate Developer's Associations of India) is the apex body of the organized real estate developers/builders across India. as compared to the other more developed Asian and Western markets is characterized by smaller size. industrial buildings such as factories and government buildings. and development of land as well as residential and non-residential buildings. namely. It involves the purchase. Kerala. The Central Government Estates in the remaining cities and towns are managed by the Central Public Works Department (CPWD). Directorate of Estates is an attached office of the Ministry of Urban Development. But. Supply of urban land is largely controlled by State-owned development bodies like the Delhi Development Authority (DDA) and Housing Boards leaving very limited developed space free. retail outlets. Chennai and five other cities namely Shimla. the real estate and construction is a $16 billion (2006) (by revenue) industry. being the second largest employer next only to agriculture. Jharkhand. Chandigarh.500 individual members developers encompassing over 60% of the organized 17 . The activities of the real estate sector encompass the housing and construction sectors also. Rajasthan. lower availability of good quality space and higher prices. Faridabad and Nagpur. Ghaziabad. Chhattisgarh. sale. Delhi-NCR. It is responsible for the administration and management of the office buildings for the various organizations of the Government of India as well as residential accommodation for the Government employees in the metropolitan cities of Delhi. Gujarat. In India. Government of India. Maharashtra. Punjab. It is a major employment driver.

only NRIs and PIOs were allowed to invest in the housing and the real estate sectors. At present. entertainment industries. the two laws that exist in every State are the stamp duty and rent laws.. Foreign Direct Investment (FDI) in real estate is being permitted since January 2002. 1894 The Indian Evidence Act. Foreign investors other than NRIs were allowed to invest only in development of integrated townships and settlements either through a wholly-owned subsidiary or through a joint venture company along with a local partner. Developments in the sector are being influenced by the developments in the retail. and vice versa. Previously. which govern planned development. India's real estate sector is witnessing an unfrequented high. India fully opened up the sector to FDI in 2005. Enabling regulatory changes. However. 1872 Transfer of Property Act. 1882 Registration Act. easier financing options and steady growth in equity markets have resulted in an upturn in the real estate investment activity. Besides. 1908 Special Relief Act. minimum area requirement were also imposed by the Government. 1872 While each State has its own set of laws. 1976 Land Acquisition Act. coupled with the Government’s relaxation of FDI policies has made the real estate an attractive investment option.private state/cities in the country. high industrial growth. 1963 Urban Land (Ceiling And Regulation) Act (ULCRA). 18 . foreign institutional investment (FII) is not permitted in the real estate sector…………………………………………………………………………………………. The Central laws governing real estate include:       Indian Contract Act. norms issued later made a minimum capitalization of $10 million for wholly-owned subsidiaries and $5 million for joint ventures mandatory. This. The sector has assumed growing importance with liberalization of the Indian economy. hospitality. etc. economic services and information technology (IT)-enabled services.

(HUDCO) Confederation of Real Estate Developer's Associations of India (CREDAI) Haryana Urban Development Authority (HUDA) Punjab Urban Planning and Development Authority Visakhapatnam Urban Development Authority Hyderabad Urban Development Authority Mysore Urban Development Authority 19 .OTHER GOVERNING BODIES FOR REAL ESTATE IN INDIA Ministry of Urban Development Housing and Urban Development Corporation Ltd.

Also with the inclusion of GAAR in the ITA (the applicability of which is deferred by one year). which would have eased the borrowing cost and avenues for raising funds for the developers. General Anti-Avoidance Rule (GAAR) Mounting levels of fiscal deficit in the Indian economy has put tremendous pressure on the Finance Ministry. it has affected demand for real estate. 1961 (ITA) to tax the indirect transfer of an asset in India. At the same time. 1. what was arguably the most eagerly tracked tax litigation in recent times. an upward revision of the present limit of Rs. the transactions are structured in a manner that involve several steps and/or entities. One only hopes that there would be some free play in the joints and the unassailable evidence of commercial prudence for each transaction is not required to be maintained. the case of Vodafone International Holdings BV vs. Union of India wherein the SC held that an indirect transfer would not be taxable in India. In order to control it the income tax authorities have adopted a prorevenue attitude like never before. Hardening of interest rates has a major impact on the borrowing costs of the developers. the FM has assured that the onus would be on the department. The success of an anti-abuse measure lies in astute selection and vigilantly supervised employment. The real estate sector was looking forward at the Budget 2012 to come with some major policy decisions. such as the long standing demand of granting realty sector an industry status. The real estate sector will have to bear the brunt of GAAR as due to business and regulatory (such as land ceiling) needs. The introduction of GAAR by the Budget 2012 was widely criticized internationally. The Supreme Court (SC) settled. re-introduction of profit based deduction for affordable housing and to exclude real estate development from the purview of service tax. 20 . the tax authorities have been granted the wide ranging powers with respect to certain kinds of transactions if the main purpose or one of the main purpose of a transaction of a part of the transaction is to avail tax benefit. There would be more clarity as events unfolds from now till the next fiscal when GAAR becomes applicable and the guidelines are framed for its application. which is largely driven by bank finance. One of the biggest concerns was that onus of proving lack of tax avoidance was on the assesse. However.TRENDS IN REAL ESTATE SECTOR Finance has unequivocally been the biggest challenge for the real estate sector of India. However the Finance Act 2012 with retrospective effect from 01 April 1962 amended section 9 of the Income-tax Act.5 lakh on interest cost deductibility on self-occupied houses.

2011. which can be utilized only for the purposes of the project •No advance can be received without entering into an agreement with the customer. The objective of the Authority shall be to take all possible measures for the growth and promotion of a healthy. The genesis behind such proposed amendment seems to be to reduce the flow of black money in the market and ensure reliable data collection. The bill seeks to establish the Real Estate Regulatory Authority for regulation and planned development in the real estate sector. The Bill also provides for establishment of an Appellate Tribunal to adjudicate disputes and hear appeals from the decisions or orders of the Authority. 50 lakh in urban areas and Rs.000 square meters •The real estate developer shall be required to deposit at least 70% of the funds received from end customers into a dedicated project account. apart from collection of tax at the earliest point on transactions of immovable properties. commercial and retail real estate. the Government reintroduced the Real Estate (Regulations & Development) Bill. Some of the key provisions of the Bill are: •Mandatory registration with the Real Estate Regulatory Authority for any project to be spread over 4. Taking into consideration the rising demand for residential. in case of lapse/cancellation of the registration. 21 . 2011 Of late. efficient and competitive real estate sector. transparent.The recent growth in the Indian economy has stimulated demand for land and developed real estate across the country. Sales opportunity through pre-sales/soft launch may be curtailed •Registration can be extended only up to two years beyond the original period for development granted by the local licensing authority •Mandatory web-presence of the developer on the authority’s website •The Authority has the power to take over development work etc. Real Estate (Regulations & Development) Bill. 20 lakh if the property is situated in any other areas. the Finance Bill 2012 had proposed insertion of section 194LAA in the ITA to deduct tax by way of TDS @ 1% on consideration for transfer of immovable property (other than agricultural land) if the value of the property exceeds Rs. However the proposal was dropped deferring to the plea that it will put extra compliance burden on the consumer. the exposure draft of which was available for comments.

before the draft LARR was introduced. railways. This draft Bill shall be in addition to and not in derogation of the existing safeguards currently provided for in these laws. Till date. however additional land shall still be required as many cities have reached the threshold of their carrying capacities. Although there are 18 other such laws of the central government for land acquisition (like for SEZ‟s. 1894. defence. land acquisition is a concurrent subject. efforts have been to try other initiatives like increasing the FSI or increasing the density in the given areas to cater to growing population. LARR. which ensures that there is no loss of livelihood of the affected people. in this scenario. the draft LARR shall enjoy the primacy over such specialised legislations that are currently in force.). Under our Constitution. There has been no national/ central law to provide for resettlement. This has given rise to agitation and in worst situations. 2011 was introduced by the Government. attempts to address the concerns of farmers and those who are dependent on land being acquired and facilitate land acquisition to cater to need of urbanisation. In order to facilitate land acquisition along with proper compensation mechanism Draft Land Acquisition and Rehabilitation and Resettlement Bill (LARR). To cater to such needs either private parties buy land themselves or government helps in land acquisition particularly for public purposes. 2011 Development along with urbanisation demands for land acquisition at one point or the other. the principal law continues to be the same which is outdated and requires more focus on the need of the country. land acquisition has to be a fair mechanism. With regards to public welfare and development needs.Land Acquisition and Rehabilitation and Resettlement Bill (LARR). it results in stalled projects. etc. 22 . NEED FOR A NEW LAW Though there have been amendments in the original Land Acquisition Act. however it has never been a smooth process and project affected people have more or less been neglected or under compensated. rehabilitation and compensation due to land acquisition. the basic law governing land acquisition has been Land Acquisition Act. industrialisation and growing demand for infrastructure development. land has been recognised as a State subject however. highways. Considering the scarcity of land and growing pressure on the existing infrastructure.

affected people. The Bill has 115 clauses. 1894. The bill will be central legislation in India for the rehabilitation and resettlement of families affected by land acquisitions. infrastructural projects and assures rehabilitation of those affected. 2013 is a Bill that was passed on 29 August 2013 in the Lok Sabha (lower house of the Indian parliament) and on 4 September 2013 in Rajya Sabha (upper house of the Indian parliament). This legislation has been eagerly sought by both industry and those whose livelihood is dependent on land. The bill establishes regulations for land acquisition as a part of India's massive industrialisation drive driven by public-private partnership. 2011 Land Acquisition and R& R provisions shall apply under the conditions as below: •land acquisition by the government for its own use. a nearly 120-year-old law enacted during British rule.Scope of LARR. The Bill will replace the Land Acquisition Act. Suggestions for Land Acquisition Bill. hold and control •land acquisition by the government to be transferred to private companies for stated public purpose (including PPP projects but other than national highway projects) •land acquisition by the government for immediate and declared use by private companies for public purpose b) Only R & R provisions shall be applicable under the conditions as below: •partial land acquisition by government for private companies for public purposes •buying of land by private companies on their own for equal to or more than 100 acres Though there have been many checks and balances imbibed in the new Bill to resolve the concerns pertaining to project. The Bill has provisions to provide fair compensation to those whose land is taken away. The bill was introduced in Lok Sabha in India on 7 September 2011. 23 . Rehabilitation and Resettlement Bill. there may be a threat towards notional increase in the land prices as according to the bill it implies “in case of urban areas the compensation amount would be not less than twice that of the market value so determined and in rural areas it would not be less than six times the original market value”. brings transparency to the process of acquisition of land to set up factories or buildings. 2013 Right to Fair Compensation and Transparency in Land Acquisition. 216 backed it while 19 voted against it. Out of the 235 members who voted on the bill.

absence of business infrastructure to market projects at new locations. steel. sand. • Demand dependent on many factors A challenge that the real estate developers face is generating the requisite demand for the properties constructed. In other words. difficulties in mass land acquisition on unfamiliar terrain. water supply which are often beyond the developer’s sphere of reach. 24 .CHALLENGES FACING THE INDIAN REAL ESTATE SECTOR • Highly regional reach of existing players Considering the peculiar features of the real estate sector such as the differing tastes of population across various geographies. • Majority of market belonging to unorganized segment The Indian Real Estate Sector is highly fragmented with the disorganized segment comprising of the small builders and contractors accounting for a majority of the housing units constructed. Also. but is dependent on a number of other external factors including proximity to urban areas. adverse price changes in any of the raw materials directly affect the bottom lines of the developers. most real estate developers in India tend to hover in tried and tested areas where the conditions are most familiarto them. who can claim to have pannational area of operations. currently there are very few players in the country. there is a lesser degree of transparency in dealings or sharing of data across players. bricks. The factors that influence a customer’s choice in property is not restricted to quality alone. amenities such as schools. demand for housing units is also influenced by policy decisions relating to housing incentives. As a result. A big challenge that real estate developers face is dealing with adverse movements in costs. wide number of approvals to be obtained from different authorities at various stages of construction under the local laws. As the revenues from sale of units are predecided. the final amount of revenue from a project is predetermined and the realization of this revenue is scattered across the period of construction. As a result. and the long gestation period of projects. • Increasing Raw Material Prices Construction activities are often funded by the client who makes cash advances at different stages of construction. gravel and paints. The real estate sector is dependent on a number of components such as cement. roads.wood.

Rising interest rates may dampen the growth rate of demand for housing units. • Tax incentives Interest payment on housing loans are tax deductible and it is one of the major factors influencing demand. The phasing out available tax incentives could affect the existent demand for housing units.• Interest Rates One of the main drivers of the growth in demand for housing units is the availability of finance at cheap rates. 25 .

This has created a huge demand and supply gap in housing in India.It helps to boost the national economy. most foreign investors have aimed India in a big way. it provides the participating companies an exit route. The booming IT industry has also resulted in a large section of young investors. The Government of India's liberalization and economic reforms programme encourages industrial policy reforms that have reduced the industrial licensing requirements. Prior to 2005. More investments mean more job opportunities and more jobs means more workforces. popularly known as Foreign Direct Investment is encouraged in the country. 26 . and facilitated easy access to foreign technology and FDI. largely through joint ventures. removed restrictions on investment and expansion. Foreign investors other than NRIs were allowed to invest only in development of integrated townships and settlements either through a wholly-owned subsidiary or through a joint venture (JV) company along with a local partner. Increased inflow of investments arising out of flexible FDI policies is sure to have a direct and positive impact on the real restate scenario of India.FDI-Inviting Real Estate Investments: FDI. FDI is encouraged in the following sectors in India:• Development of Hotels • Travel and Tourism Industry • Hospitality • Development of Township • Development of Commercial Real Estate • Infrastructure development • Construction of Resorts • Constructing Educational institutions and recreational sites • SEZ (or Special Economic Zones) Not surprisingly. Along with curtailing the risk factor. India fully opened doors for FDI in real estate in 2005. only NRI’s and PIO's were allowed to invest in the housing and the real estate sectors.

Hospitals etc FDI Current Scenario • Foreign direct investment (FDI) in India's real estate and housing market jumped 80 times between 2005 and 2010 from Rs Rs 171 crore to Rs 13. Hotels. built-up area of 50. resorts.US$ 5 million (to be brought in within 6 months of commencement of business) • Original Investment cannot be repatriated before a period of three years from completion of capitalization. 422 were cleared by the Reserve Bank of India's Mumbai office. • The investor may exit earlier with prior approval from Foreign Investment 27 . • Minimum capitalization for wholly owned subsidiaries . 10 hectares (25 acres) • In case of construction-development projects. FDI Projects Allowed • Townships • Housing • Built-up Infrastructure • Construction Development which would include but not limited to housing.US$ 10 million for JV with Indian partners . followed closely by 316 in Delhi Guidelines for FDI Application in Indian Real Estate Minimum Area • In case of development of serviced housing plots.586 crore of the total 1.614 projects in which foreign investors have put in money since 2005. Commercial Premises.000 sqm.FDI permitted 100% under Automatic Route.

Hospitals & SEZ Projects • The Hotels & Tourism. Time frame & rules • At least 50 per cent of the project to be developed within five years from the date of obtaining all statutory clearances. street lighting.Promotion Board (FIPB).where roads. sewerage and other conveniences are not available. the FII route was used to overcome the rules and bring in foreign investment. FII Vs FDI • Real Estate projects can attract FDI up to 100 percent. water supply. • Project to conform to the norms and standards of Local Body concerned • All necessary approvals including layout plans. Previously company not willing to meet the stringent project conditions. Hospitals and SEZ Projects have benefits not attracting conditions as to Minimum Area of Development. FDI in SEZ will be subject to SEZ Act and Policy of the Department of the Commerce in this regard. All the company needs to do was get FIIs that are registered with SEBI to invest in the IPO • Though RBI has objected towards the IPO investment through FII where the conditions are not fulfilled however still FII are been done through the secondary market 28 . infrastructure facilities as per the prevailing laws needs to be procured • The Local Body concerned which approves the layouts etc. Capitalization and Time frame • However. would monitor compliance by the Developer Hotels & Tourism. subject to certain conditions. • Investor cannot sell undeveloped plots . drainage.

will see significant reforms in the real estate sector in India. will improve the investment climate for this sector. From INR 52 for each US dollar about a year ago. which has resulted in space constraints. Hence. This bill. it has depreciated to around INR 59. which. it has not yet happened. in turn.  Real Estate prices have been steadily increasing in India. you need that much less dollars to make your investment. India faces the issue of a large population. However. even as the price graph moves upwards. there is plenty of room to earn a neat return on your investment. the important reasons for buying a property NOW are given below:  The Indian Rupee has continued to slide against the US dollar. lots of projects have got stuck in a logjam due to delay in getting approvals and clearances. we are nowhere close to the sky high prices seen in the year 2008 before the Lehman debacle. Although everyone has been waiting for that imminent correction to take place. when you convert your dollars to Indian Rupees to buy a property. Nevertheless. this indicates that your 1 US dollar is equivalent to almost INR 60 in India. once enacted. Thus.  29 . The government is in the process of passing the Real Estate bill. Further.SUGESSIONS TO INVEST IN REAL ESTATE OR NOT Apart from the emotional factor of investing in India.


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