Notes For

GLOBAL REAL ESTATE MANAGEMENT

Unit-4

Prepared by
Ms.Jayanthi Satish., B.Sc, MMM, HDSE, CDIM, LL.B
(20 Years of Exp. In REAL ESTATE INDUSTRY –
Sales/Marketing/Operations/Legal)
MEASI Academy of Architecture

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 UNIT - 4

BALANCING RISKS AND REWARDS

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DOMESTIC REAL ESTATE RETURNS

Real estate is one of the largest sector in India. It is also a globally recognized
sector which is witnessing a high growth in recent times because of increasing
demands of offices and residential places.

RETURNS DOMESTIC VS INTERNATIONAL

Annual returns on the project (Based on Last 5 year (2012-2017))

There are perhaps five sources of gains in the price of a given property, and the
final profit is a product of these.

 First, the original change in usage of a piece of land from agricultural or

barren to residential or commercial.
 Second, the development of physical infrastructure which makes this land
usable for the new purpose.
 Third, the improvement in livability or commercial viability as the area
becomes more and more populated.
 Fourth, the periodic booms and busts that afflict real estate, and
 fifth, the general inflation of the economy that becomes part of the visible
change in the property's price.

The intense marketing hype around real estate developments is intended to

convince you that one day in the imminent future, the property you are buying
will be among the most desirable in your part of country. Therefore, you must
pay up now.

To put things in investment terms, your acquisition price is at a high multiple of

a value that will supposedly be attained in the far future.

The real estate investment model has changed, and as far as the individual
buyer is concerned, it has changed for the worse.

Comparing Returns by means of Leverage

A situation of sitting on huge profits by just investing a small amount as down-

payment and rest with home loan is pure example of leverage and very common
in India.

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Comparing Leverage India has the highest possibility of investors comparing to
the foreign countries.

Comparing Returns by means of RESIDEX (Housing Index)

NHB Residex is the first housing price index in India. It has been launched in
order to fill price information gap and to streamline the process of development
of property in various cities across the country.

Each and every country has housing index values, on comparing of the different
cities, investing in the domestic always gives a good return.

Real Estate Has Higher Transaction Costs

When purchasing shares of a stock, the transaction cost for the trade is very
low, But when purchasing real estate, the transaction costs are considerably
higher.

Unlike other types of investments, real estate transaction costs can significantly
affect the value of the investment and make it more difficult to turn a profit.

More than one-third of companies underestimate the costs of investing in rapid-

growth markets.

Companies should not simply assume that rapid-growth markets are also low-
cost ones.

Time overruns are an even bigger problem, with 43% saying that the investment
took longer than they had anticipated.

Unexpected costs in rapid-growth markets can be a serious issue. With low per
capita incomes requiring transaction to adopt a high-volume but low-margin
business model, even small increases in costs can erode profitability.

These are the costs which affects the transaction cost in cross border
investments

1. Financing costs – rising inflation and currency fluctuations

2. Mode of entry costs – choosing the right partner and accuracy of

valuations

3. Operational costs – R&D costs and finance function integration

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4. Regulatory costs – evolving regulatory systems and high levels of
bureaucracy

5. Human capital costs – shortage of the right talent and high levels of
attrition

6. Political costs – Government instability and dealing with bribery and

corruption

TAX LIABLITIES FOR CROSS BORDER INVESTMENTS

 As per the Indian tax laws, if an NRI holds a property in India, he or she is
not liable to pay tax unless there is a rental income accruing from it.
However, if the property is sold, then capital gains tax – short term or
long term, as the case may be, is applicable.
 Short Term Capital Gain (STCG) is applicable when the property is
disposed of for a profit within a period of 3 years from date of purchase.
Profit thus accruing is taxable as per the applicable income tax slab for the
seller.
 Long Term Capital Gain (LTCG) occurs when the property is sold after 3
years. Indexation benefit is available in such cases and the profit after
applying such indexation benefit is taxable at 20.6 %.

Taxability of rental Income for NRIs

 If the property held by the NRI is let out on rent then such rental income
is taxable. Due taxes have to be paid on such income and proper income
tax returns need to be filed under relevant PAN.
 If the NRI has two or more properties in India then only one can be
treated as self occupied and ‗deemed rent‘ has to be declared for the
other properties and tax has to be paid on them. However, as per the
rules applicable to resident Indians, NRIs‘ too have the choice of showing
30% of such deemed rental income as maintenance cost and get tax
benefit against the same.
 No tax is payable on deemed income in the country of the NRI‘s
residence, however it is advisable to declare the same there as it could
otherwise cause problems during repatriation of funds from India.

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Currency risk

 Another big disadvantage of investing in international real estate is the

currency exchange risk.
 Changes in the exchange rate between the US dollar and another foreign
currency are inevitable and usually unpredictable.
 It goes without saying this risk is hard to mitigate and for investors it
poses a huge threat to their potential earnings.
 So, if the dollar is weak, your gains will increase (get more dollars when
you exchange currencies). If the dollar is strong, your gains will be
smaller when you convert your earnings into dollars.

TRANSPERENCY

 Regulatory reforms brought through the Real Estate Regulatory Act

(RERA) and transparency brought about by Goods and Services Tax (GST)
will effect consolidation in the real estate sector.
 The consolidation will see larger players peak in strength, and smaller
ones getting eroded or aligned with the established ones. markets
 The transparency in the real estate can be achieved only through the
digitalization.
 The transaction should be made online, the property can be purchased
and sold through online itself.

Joint Venture costs

 A Real Estate Joint Venture (JV) plays a crucial role in the development
and financing of most large real estate projects. A joint venture is a
business arrangement in which two or more parties agree to combine
their resources in order to accomplish a specific task.
 In a Real Estate Joint Venture, this specific task is the development of a
real estate project.
 The joint venture allows real estate operators (professionals who are
experts in managing and developing real estate projects) to partner with
real estate capital providers (individuals or organizations that can provide
the capital needed for a real estate project)
 Real estate joint ventures consist of two separate entities:
o the operating member

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 o the capital member.
 The operating member is usually an expert on real estate projects and is
responsible for the daily operations and management of the real estate
project.
 A typical operating member is usually a highly experienced professional
from the real estate industry with the ability to source, acquire, manage,
and develop a real estate project.
 The capital member usually finances a large part of the project or even
the entire project.
 In a Real Estate Joint Venture, each of the participants is responsible for
profits, losses, and costs associated with the joint venture. However, the
joint venture is its own entity, separate and apart from the participants‘
other business interests.

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