Unnati_Infrastructure Construction & Real Estate_2014

UNNATI Sector Report 2014

Real Estate, Infrastructure & Construction

Mohit Maheshwari

Ankit Maheshwari

Real Estate, Infrastructure & Construction 2014

2 Unnati Investment Management and Research Group MDI Gurgaon

Table of Contents

1. CONSTRUCTION INDUSTRY ...................................................................................................................... 5

2. REAL ESTATE ............................................................................................................................................. 6

2.1. OVERVIEW OF REAL ESTATE SECTOR ............................................................................................... 6

2.2. VALUE CHAIN IN REAL ESTATE SECTOR............................................................................................ 8

2.3. PORTER 5 FORCES ANALYSIS OF REAL ESTATE SECTOR ................................................................... 9

2.4. MARKET SEGMENTATION .............................................................................................................. 12

2.4.1. RESIDENTIAL SEGMENT .......................................................................................................... 12

2.4.2. COMMERCIAL SEGMENT ........................................................................................................ 15

2.4.3. RETAIL SEGMENT ................................................................................................................... 17

2.4.4. HOSPITALITY SEGMENT .......................................................................................................... 17

2.4.5. SEZ SEGMENT ......................................................................................................................... 19

2.5. KEY GROWTH DRIVERS ................................................................................................................... 20

2.5.1. RESIDENTIAL SEGMENT .......................................................................................................... 20

2.5.2. COMMERCIAL SEGMENT ........................................................................................................ 22

2.5.3. RETAIL SEGMENT ................................................................................................................... 22

2.5.4. HOSPITALITY SEGMENT .......................................................................................................... 22

2.5.5. SEZ SEGMENT ......................................................................................................................... 23

2.6. KEY GROWTH DETERRENTS............................................................................................................ 24

2.7. KEY ANNOUNCEMENTS IN BUDGET 2014-15 ................................................................................ 26

2.8. REAL ESTATE CYCLE ........................................................................................................................ 28

2.8.1. SUB PRIME CRISIS: AN EXAMPLE OF REAL ESTATE BUBBLE BURST ....................................... 29

2.9. GOVERNMENT REGULATIONS AND FRAMEWORK/ EXPECTED POLICY CHANGES ........................ 31

2.9.1. REITs ....................................................................................................................................... 31

2.9.2. REAL ESTATE BILL, 2013 ......................................................................................................... 34

2.9.3. LAND ACQUISITION, REHABILITATION AND RESETTLEMENT ACT, 2012 ............................... 38

2.9.4. AMENDMENT IN SECTION 54 OF INCOME TAX ACT .............................................................. 39

2.10. FINANCIAL SUPPORT TO REAL ESTATE SECTOR ......................................................................... 41

2.11. KEY PLAYERS ............................................................................................................................... 44

2.11.1. DLF LIMITED ........................................................................................................................... 44



2.11.2. HDIL ........................................................................................................................................ 45

2.12. SECTOR OUTLOOK ...................................................................................................................... 46

3. INFRASTRUCTURE SECTOR ..................................................................................................................... 47

3.1. OVERVIEW OF INFRASTRUCTURE SECTOR ................................................................................. 47

3.2. VALUE CHAIN IN INFRASTRUCTURE ............................................................................................... 48

3.2.1 INCEPTION .............................................................................................................................. 48

3.2.2 LAND ACQUISITION ................................................................................................................ 49

3.2.3. TENDER PROCESS ................................................................................................................... 49

3.2.4. CONSTRUCTION ..................................................................................................................... 50

3.2.5. COST RECOVERY ..................................................................................................................... 50

3.2.6. MAINTENANCE ....................................................................................................................... 50

3.3. CONSTRUCTION CONTRACTS ......................................................................................................... 51

3.3.1. TYPES OF CONSTRUCTION CONTRACTS, BASED ON PRICE RISK ............................................ 51

3.3.2. TYPES OF CONTRACTS, BASED ON SCOPE OF EXECUTION ..................................................... 51

3.4. SEGMENTS OF INFRASTRUCTURE SECTOR..................................................................................... 55

3.4.1. ROADS & HIGHWAYS ............................................................................................................. 55

3.4.2. PORTS ..................................................................................................................................... 57

3.4.3. AIRPORTS ............................................................................................................................... 59

3.4.4. WATER SUPPLY AND IRRIGATION .......................................................................................... 60

3.4.5. URBAN TRANSPORT ............................................................................................................... 61

3.4.6. RAILWAYS ............................................................................................................................... 61

3.5 FINANCING AND MARKET STRUCTURE .......................................................................................... 63

3.5.1. CURRENT FUNDING SOURCES AND MARKET STRUCTURE..................................................... 63

3.6. PAST TRENDS SEEN IN PROJECT EXECUTION ................................................................................. 69

3.6.1. STALLED OR DELAYED PROJECTS IN THE PAST ....................................................................... 69

3.6.2. CHALLENGES AND RISKS IN PROJECT EXECUTION ................................................................. 72

3.6.3. GROWTH IN INFRASTRUCTURE SECTOR ................................................................................ 74

3.7. KEY GROWTH DRIVERS ................................................................................................................... 79

3.7.1. POLICY ACTION ....................................................................................................................... 79

3.7.2. FOREIGN DIRECT INVESTMENT .............................................................................................. 79

3.7.3. INVITS ..................................................................................................................................... 79



3.8. KEY GROWTH DETERRENTS............................................................................................................ 80

3.8.1. LAND ACQUISITION BILL......................................................................................................... 80

3.8.2. POOR MARKET RESPONSE ..................................................................................................... 80

3.8.3. TECHNOLOGY AND HUMAN RESOURCE ................................................................................ 80

3.8.4. INTERNAL SECURITY ............................................................................................................... 80

3.9. INITIATIVES BY THE NEW GOVERNMENT ....................................................................................... 81

3.9.1. STEPS TAKEN TO SPEED UP THE PROCESS ............................................................................. 81

3.9.2. KEY ANNOUNCEMENTS OF THE NEW GOVERNMENT: BUDGET 2014-15 ............................. 82

3.9.3. IMPACT OF GOVERNMENT POLICIES AND ANNOUNCEMENTS ............................................. 85

3.10. KEY PLAYERS ............................................................................................................................... 86

3.10.1. HINDUSTAN CONSTRUCTION COMPANY LTD (HCC) .............................................................. 86

3.10.2. IVRCL LTD ............................................................................................................................... 87

3.10.3. NAGARJUNA CONSTRUCTION COMPANY LTD (NCC) ............................................................. 89

3.10.4. GROWTH OF KEY PLAYERS ..................................................................................................... 90

3.11. SECTOR OUTLOOK ...................................................................................................................... 91

4. REFERENCES ........................................................................................................................................... 93



1. CONSTRUCTION INDUSTRY

Construction industry makes a vital contribution to the competitiveness and prosperity of the economy. A

modern, efficient infrastructure is a key driver of productivity, and the construction industry has a major

role in delivering the built infrastructure in an innovative and cost effective way.

While the level of development of any economy can be judged by its infrastructure, the level of investor

enthusiasm can be gauged by its construction industry. Construction activities contribute more than 10%

to Indias annual GDP and is one of the largest employers.

Construction sector can be broadly classified into two sub-segments:

Real Estate Infrastructure

The chart below illustrates further sub-division of real Estate and infrastructure sectors.



2. REAL ESTATE

2.1. OVERVIEW OF REAL ESTATE SECTOR

The term real estate is defined as land, including the air above it, the ground below it, and any buildings

or structures on it. It is also referred to as realty. Real estate covers residential housing, commercial

offices, trading spaces such as theatres, hotels and restaurants, retail outlets, industrial buildings such as

factories and government buildings. Real estate business involves transactions, such as purchase, sale, and

development of land, residential and non-residential buildings. Major players in the real estate market are

the land owners, developers, builders, real estate agents, tenants, buyers etc.

In the past real estate was unorganized, fragmented and was dominated by high net worth regional

players. Thus the sector missed out on institutional capital, foreign investment and there was no

transparency. This scenario underwent a change in line with the sectors growth, and as of today, the real

estate industrys dynamics reflect consumers expectations of higher quality with Indias increasing

integration with the global economy. Consequent to the governments policy to allow Foreign Direct

Investment (FDI) in this sector, there was a boom in investment and developmental activities. The sector

not only witnessed the entry of many new domestic realty players but also the arrival of many foreign real

estate investment companies including private equity funds, pension funds and development companies

entered the sector lured by the high returns on investments.

The real estate sector happens to be one of the very important sectors for the overall growth of the

economy. It has demonstrated substantial growth in the last few years and it is projected to grow at the

rate of 25% in the coming years. The progress of the housing sector does not only have direct, but indirect

as well as induced effects on the country's economic growth as various global studies have shown that a

well developed housing sector has a high and positive correlation to a country's economic growth. Real

estate sector is a major employment driver, being the second largest employer next only to agriculture.

About 250 ancillary industries such as cement, steel, brick indirectly depend on real estate which amplifies

the importance of this sector.

The Indian real estate industry has been on a roller coaster ride since 2005. It has been riding through

many highs and lows since then. The industry achieved new heights during 2007 and early 2008,

characterized by a growth in demand, substantial development and increased foreign investments. In

200708, the global conditions impacted the Indian economy at large and the real estate sector in

particular. The industry in India faced the heat of the global crisis in terms of a demand slowdown and a

severe liquidity crunch. Despite the consequential impact of the global slowdown, the Indian real estate

sector managed to emerge without too much distress due to the sound fundamentals of the economy,

some regulatory intervention and an overall better-protected financial regime. The challenge for the

sector today is to meet the rising demand for world class infrastructure in cities, housing across different

income levels and create sustainable cities for future generation.



National Housing Bank completely owned by Reserve Bank of India computes an index termed NHB

RESIDEX reflecting the real estate market trend. NHB RESIDEX was launched in July 2007 and it tracks the

movement in prices of residential properties on a quarterly basis covering 26 major cities. The movement

in prices of residential properties for the quarter January-March, 2014 has shown increasing trend in

twelve (12) cities ranging from 1.3% in Bhopal to 7.1% in Surat, and fall in twelve (12) cities ranging from -

0.6% in Vijayawada to -5.7% in Patna in comparison to the previous quarter October-December, 2013.

Indices for 2 cities namely Faridabad and Kochi have remained stagnant.

Source: National Housing Bank (NHB)

There are various reasons for this slowdown in the sale of homes in India. One of them is that prices have

kept rising in the bigger cities, despite actual sales decreasing. It is pretty clear by now that most people in

cities such as Mumbai and Delhi are unwilling to buy homes in highly priced projects. The time has

definitely come for developers to lower their profit expectations and prices.



2.2. VALUE CHAIN IN REAL ESTATE SECTOR

Land Acquisition: This is the first step in value chain of any real estate or infrastructure project. Indian

cabinet passed a new land acquisition bill, which was tabled in the Parliament during the Monsoon Session

2011. The bill was passed on 29 August 2013 in the Lok Sabha and on 4 September 2013 in Rajya Sabha.

The bill received the assent of the President of India, Pranab Mukherjee on 26 September 2013. The Act

came into force from 1 January 2014 and is called as Right to Fair Compensation and Transparency in Land

Acquisition, Rehabilitation and Resettlement Act, 2013.

The new law is beneficial to land owners and considered to be anti industry. For developers, the cost of

land is going to increase significantly, impacting their project costs and therefore margins. Land valuations

are already high and by further increasing them, land acquisition becomes even more difficult.

Land Bank Creation: It refers to buying and holding land for future project development. Firms with vast

land bank are at major advantage as anyone without an existing land bank will now be looking at vastly

increased entry cost because of new land acquisition law. Land bank is considered as last resort by

company to trim down the debt. Recently Infosys bought 5-acre land from HP in IT hub of Bangalore for Rs

65 crore.



Project Conceptualization: Project conceptualization phase of real estate project deals with scope of

project and a list of desired design features and requirements is created. This phase also describe the

basic processes that must be performed to get a project started and also helps a firm to draft a reliable

budget estimate

Seeking Approvals: In India, a lot of approvals are required to be obtained before construction at any site

could start, for example it takes 57 different approvals from the state and central government and visits to

as many numbers of windows of different departments for a real estate project to shape up in Delhi-NCR.

"The approval process that includes the No Objection Certificates (NoC) and licenses, takes about two to

three years to complete.

Project Execution and Construction: Excavation, working on structural framework and finishing are three

activities in this stage.

Marketing: Real estate in India has low barrier to entry, threat from new entrants and competition from

existing players is high. Hence marketing plays an important role in success of project.

Facility Management: Real-estate developers are involved nowadays in facility management services,

providing more value-added services with the application of high-level technology and cost-saving

measures. Facility management is an important, methodical business discipline, which helps in the perfect

regulation of space, infrastructure, people and the organization.

It includes:

Maintenance of building

Construction and remodel

Repairs to problems and mall functions

Security

Fire safety

Cleaning

Day-to-day operational management of the building etc.

2.3. PORTER 5 FORCES ANALYSIS OF REAL ESTATE SECTOR



Porter five forces analysis is a framework to analyze level of competition within an industry. Named after

Michael E. Porter, this model identifies and analyzes 5 competitive forces that shape every industry, and

helps determine an industry's weaknesses and strengths.

Threat of New Entrants: The easier it is for new companies to enter the industry, the more cutthroat

competition there will be. Factors that can limit the threat of new entrants are known as barriers to entry.

While the threat of new entrants is currently relatively weak in real estate sector, an economic upturn will

inevitably change this position. The primary cause of this low entry threat is due to the current economy;

difficulty in obtaining capital combined with slow sales, little to no commercial construction, and strong

rivalry among existing industry competitors. However, there are minimal barriers to entry (excluding

required capital) and virtually no economies of scale or brand loyalty issues to contend with.

Bargaining Power of Buyers: This is how much pressure customers can place on a business. If one

customer has a large enough impact to affect a company's margins and volumes, then the customer hold

substantial power.

Recent slowdown in sales and increased gap between demand and supply has resulted in large inventory

with builders. This increased inventory and high accumulated debt has led to strong bargaining power of

buyers in real estate sector.

Bargaining Power of Suppliers: This is how much pressure suppliers can place on a business. If one

supplier has a large enough impact to affect a company's margins and volumes, then it holds substantial

power.



While there are numerous suppliers to choose from, reducing their effective threat to the industry, there

are also numerous inputs required in order for this industry to operate. Each input is vital for establishing

and maintaining profitability within this industry. Banks and other private capital firms have an effect on

this industry; in respect to whether or not it will finance the venture and at what cost they will lend the

money. Banks have become highly conservative after economic downturn. Additionally, property owners

have the power to control the cost of the real estate. Hence the bargaining power of suppliers is strong in

real estate sector

Threat of Substitutes: It occurs when companies within one industry are forced to compete with

industries producing substitute products or services.

Existing housing is the main substitute for buyers of new homes. Newly built housing accounts for a

relatively small proportion of most countries' housing markets, compared to the sale of existing homes.

Buyers may choose newly built housing for specific reasons such as modern construction standards,

location, price or the existence of government support schemes directed specifically at newly completed

housing.

The residential rental market can be seen as a threat as it is often a more affordable option than buying a

new home. This is particularly the case when the availability of mortgage finance from financial

institutions is restricted, meaning buyers are unable to obtain a loan. Similarly, rising prices may prevent

buyers from purchasing a new home. However, owning a home remains of considerable importance to

many buyers, as a method of investing in the future and ensuring security of housing provision for them.

This somewhat mitigates the threat of substitution as buyers may consider purchasing a new home to be a

superior choice to rental. Overall, the threat of substitutes in this industry is moderate.

Industry Rivalry: The intensity of rivalry among competitors in an industry refers to the extent to which

firms within an industry put pressure on one another and limit each others profit potential. If rivalry is

fierce, competitors are trying to steal profit and market share from one another. This reduces profit

potential for all firms within the industry. According to Porters 5 forces framework, the intensity of rivalry

among firms is one of the main forces that shape the competitive structure of an industry.

The threat of rivalry is strong. This industry is divided into three segments; large-cap, medium-cap, and

small-cap; determined by quantity of capital. At any moment a merger or acquisition could occur and in

the current economic downturn, the corporations that are healthy and well-capitalized will not only

persevere, but they are in position to acquire the weaker firms. Additionally, rivalry is strong due to the

large number of firms and the difficulty to differentiate. Because real estate operations firms dont offer a

product, other than the facilities they lease, they rely on service; this can be difficult to quantify or

differentiate. It should be noted that under normal economic conditions this industry is highly

profitable. However, in the current economic conditions, there is minimal profitability and only

companies with large cash reserves are likely to survive.



2.4. MARKET SEGMENTATION

2.4.1. RESIDENTIAL SEGMENT

Residential demand is the mainstay of the Indian real estate sector. The major demand drivers for the

residential market include increasing disposable income levels, increase in the number of nuclear families/

households, tax savings on home mortgage products as well as real estate being considered a necessary

investment.

Real estate witnessed its peak during the first three quarters of 2008, with residential prices reaching an

all time high, largely led by investor driven market speculation. Majority of the developers maintained

focus on the premium segment as it offered better returns. As the downturn unfolded in the second half

of 2008, rising economic uncertainty, job cuts and employee layoffs made a huge dent in consumer

confidence and spending. This sparked a slowdown in demand for premium residential projects across the

country and emphasis shifted to affordable housing.

Till early 2009, residential projects across leading markets offered large unit sizes, high-end facilities, and

premium specifications, amongst others. The basic price came at a premium to the market average, and

the ticket size was out of reach for a large segment of aspirant buyers. However, the demand dip led to

concerns regarding salability and returns regarding the premium product amongst investors. This led to

many developers re-orienting their development focus to meet the requirements of the masses. This

meant reduced unit sizes, bare minimum amenities and basic specifications. This reduced pricing attracted



large scale end user interest, from mid income buyers waiting to own a house. As a result, the second half

of 2009 saw increased sales momentum, voluminous absorption and huge take offs across all micro-

markets. As a fast selling realty product, sale of affordable projects has helped developers to pay off bad

loans and cushioned them from the pain in the premium residential and commercial sectors.

Indian cities are normally categorized into three tiers for analysis purpose:

Tier I comprises of Delhi, Mumbai and Bangalore.

Tier II consists of Hyderabad, Pune and Chennai, the cities targeted by companies as alternative off

shoring destinations and which now possess a well-trained pool of skilled labour.

Tier III cities: These are cities with populations of more than a million (10 lakhs) are not yet completely

established as outsourcing and off shoring destinations. Their absolute cost advantage over Tier I cities is

estimated at between 15% and 30%.

The residential market of the tier I and II cities in India have been witnessing extreme volatility in terms of

demand and supply over the last two years. While the residential market showed signs of recovery in 2012

and, there was a sudden drop in new launches and absorption from 2nd quarter of 2013 onwards.

The steep fall continued in 2014 as well. All cities witnessed a steep fall in absorption in the range of 14-

37% during 1st quarter of 2014, with the Bangalore and NCR markets falling by the lowest and highest

rates, respectively. The election results, various declarations for the housing sector in the Union Budget

and all the subsequent decisions taken by the central government in order to revive the economic growth

of the country seem to have changed the home buyers sentiment from negative to positive in the last

three months. Phenomenal growth in sales is expected in subsequent quarters of 2014.



The Residential segment can be further divided into three sub divisions:

Affordable Housing

Middle income Housing

Luxury Segment Housing

Affordable Housing: There is no clear-cut definition of the term affordable, as it is a relative concept and

could have several implied meanings in different contexts. JLL report on affordable housing in India

defined affordable housing on the basis of four criteria.

Minimum volume of habitation: As pressure on urban land increases, architecture of all forms, be

it commercial or residential, are going vertical. Whilst most definitions adopt an area standard, JLL

mentioned an additional volume standard. This provides flexibility to architects to work on vertical

planning of a dwelling unit as well.

Provision of basic amenities: Whilst most definitions dwell on minimum area and cost

considerations, provision of basic amenities such as sanitation, adequate water supply and power

to the dwelling unit is crucial. Also, provision of community spaces and amenities such as parks,

schools and healthcare facilities, either within the project or in the neighborhood, are desirable

depending upon the size and location of the housing project.

Cost of the house: Whilst assessing affordability of the buyer, the cost of the house should

consider not only the purchase costs but also the maintenance costs of the dwelling unit. Lower

operational and maintenance costs using sustainable features is key to any affordable housing

project. While LIG and EWS are likely to get public and private subsidies at the time of buying a

house, high operational costs might lead them again to squatter settlements and slums.

Location of the House: An affordable housing project should be located within reasonable

distances from workplaces and should be connected adequately through public transport. If

housing is developed very far away from major workplace hubs in a city or entails expensive

transport costs to the city, whilst price of the residential units might be low due to lower land

costs, the Housing + Transportation (H+T) Affordability is greatly affected. In the case of affordable

housing, key industrial nodes can also serve as workplace hubs.

Recently RBI has tweaked the definition of affordable houses and has said home loans up to Rs 50 lakh in

metros and Rs 40 lakh in non-metros given by banks from the proceeds of long-term bonds will qualify as

affordable housing loans. Earlier, housing loans up to Rs 25 lakh in metros and Rs 15 lakh in non-metros

were considered as affordable housing loans. This means interest rates could come down on affordable

housing loans given out of proceeds of long term bonds which is a huge encouragement for housing

sector.

Despite having an extensive network of financial institutions, banks and apex housing cooperative

societies, low-income groups lack access to home finance. National Housing Bank, a fully owned subsidiary



of the Reserve Bank of India, was set up primarily to accelerate housing finance activity in India and

promote the Housing Finance Companies (HFCs) by providing them with financial support. It acts as the

apex institution and regulator of the housing finance industry.

New governments commitment of housing for everyone by 2020 has again brought affordable housing

in focus and is a big boast to this segment.

Middle income Housing: Middle class is a broad term; in many countries it is loaded with political, social

and historical implications. For both economists and business executives, who need accurate and

quantifiable information, its not really an issue of class at all, but rather income and spending power.

But even when reduced to pure economics, quantifying the middle class is still a remarkably contentious

issue; for instance, depending on the standards used, estimates of the size of Indias current middle class

range from 30 million to 300 million.

Rise in disposable income of Indian middle class have a dramatic effect on demand of middle income

housing across the country. However, most robust demand is seen in tier II, III cities and outskirt of major

cities. Majority of developers launch products that cater the needs of customers in this segment of Indian

Real Estate market. Almost all leading developers offer units for the Middle Income Group buyers in the

range of INR 2.5-10 million in all major cities in India.

Luxury segment housing: Indias rapid advance from an emerging to a developed economy has given rise

to a new breed of luxury consumers, a highly opinionated and demanding set of consumers, which is

heavily influenced by global tastes and beliefs. The luxury housing segment is gaining momentum and

holds immense prospects for the new and existing players. With high profit margins this segment has been

the favorites of Real Estate developers. Luxury homes are centrally located, close to business centers;

therefore developers are able to charge a premium for these units.

2.4.2. COMMERCIAL SEGMENT

The commercial office space in India has evolved significantly in the past 10 years due to change in

business environment. The growth of commercial real estate has been driven largely by service sectors,

especially IT-ITeS.

Demand for office space is directly linked to addition in number of employees, which in turn is dependent

on economic growth. When economy slows down, companies hold their expansion plans leading to lower

demand for office space. The downturn in real estate sector in 2008-09 was largely the result of

postponement of expansion plans by corporate.

The office market of the top six cities have been recovering steadily over the last two years, with vacancy

levels falling from 21% in H2 2012 to less than 19% in H1 2014. The recovery has been led primarily by the

gradual increase in absorption across the L1 and L2 cities, namely, Mumbai, NCR, Bangalore, Pune,

Chennai and Hyderabad.



The IT/ITeS sector again played a major role in total absorption across all the cities, except for Mumbai

where manufacturing sector dominated. The share of other services, which includes companies from

consulting, retail, ecommerce, infrastructure and real estate among other, has been increasing steadily.

Currently other services contribute more than one-fifth of total office demand in majority of cities.



2.4.3. RETAIL SEGMENT

The Indian retail sector has witnessed an unprecedented growth over the last decade, driven by robust

economic growth, rapid urbanization and changing lifestyles and aspirations of the Indian retail consumer.

From less than 1 million sq. ft. of mall space in 2001, the Indian organized retail sector has increased

manifold. However, the ups and downs of the Indian economy had always taken its toll with changes in

absorption and vacancy over the years. Tier-III cities such as Jaipur, Nagpur, Ludhiana, Vadodara,

Aurangabad, Kochi etc., are emerging as the new hot spots of consumption. Organized retailers are

increasingly setting up stores in these smaller cities.

Consumerism in India is witnessing unprecedented growth driven by favorable demographics, a young and

working population, rising income levels, urbanization and growing brand orientation. This, in turn, is

reflected in Indias retail market, which in 2013, was estimated at US$520 billion and is expected to grow

at a CAGR of 13% to reach around US$950 billion by 2018. Organized retail penetration, currently

estimated at 7.5%, is expected to clock a 19-20% p.a. growth to reach 10% by 2018. Penetration in tier-II

and III cities, improvement in business models and operations, coupled with movement from unorganized

to organized trade are expected to play an integral role in driving this growth.

The organized retail industry accounts for almost 80% of the total retail trade. In contrast, in India

organized retail trade accounts for merely 8-10% of the total retail trade. This highlights a lot of scope for

further penetration of organized retail and hence is a tremendous opportunity for retail real estate in India

2.4.4. HOSPITALITY SEGMENT

The travel and tourism industry has emerged as one of the largest and fastest growing economic sectors

globally. Its contribution to the global Gross Domestic Product (GDP) and employment has increased

significantly. As per forecasts by the World travel and tourism Council its total contribution to GDP is

expected to witness a growth rate of 12 per cent per annum during 2014-2023. Rising income levels and

changing lifestyles, development of diverse tourism offerings and policy and regulatory support by the

government are playing a pivotal role in shaping the travel and tourism sector in India.

Revenue growth of premium hotel companies remained stagnant in FY13. This is because of declining

growth rate of corporate travelers as companies continued to cut travel cost on lower profitability amid

the ongoing economic slowdown. The demand slowdown has put pressure on occupancy and average

room rate (ARRs) across major cities limiting the ability of hotel companies to pass on an increase in input

costs, impacting their EBITDA margins negatively. With demand slowdown, the time taken for newer

hotels to improve occupancy level and ARRs has also increased. Thus, new properties are facing higher

stress and are primarily dependent on sponsors to repay their debt.



The number of incremental foreign tourist arrivals fell below 0.3 million in 2012 and 2013 (2011: 0.53

million; 2010: 0.61 million) reflecting the slowdown in global markets. According to the Ministry of

Tourism, CAGR of foreign tourist arrival declined to 5.3% over 2008-2013 from 14.1% over 2003-2008.

However, an improvement in economic environment could lead to an increase in foreign corporate

travelers in 2014 onwards.

Aggregate RevPARs for premium segment hotels in India increased by mere 0.2 percent y-o-y in July 2014,

mainly on account of 100 basis points increase in the occupancy rates. While average room rates

decreased by 1.9 per cent during the same period.



2.4.5. SEZ SEGMENT

SEZ is considered as a sensitive outer skin of its host country. It is also regarded as a barometer to

anticipate impending macroeconomic trends. The Indian government introduced SEZ act 2005 and has

granted several incentives such as tax incentives and world class physical infrastructure to bolster the

production of manufactured goods.

Government provides various benefits for development of SEZ making it more attractive for developers to

take up these projects. They enjoy tax benefits and SEZ policy allow them to use as high as 50 % of area for

residential and infrastructure development projects. Also developing SEZ is cheaper compared to

developing a non SEZ project.

The new government is planning to restore the concessions provided to SEZs. UPA-II had levied 18.5 per

cent MAT on SEZ developers and DDT on developers on the grounds that they were leading to huge

revenue loss to the exchequer without adding significantly to the exports. Following the levy of the taxes,

the commerce department had argued that the gains from SEZs to the economy in terms of infrastructure

creation, employment generation and exports, outweighed the revenue foregone. The issue of tax MAT

and DDT has been taken up with the finance ministry and result is expected by November, 2014.



2.5. KEY GROWTH DRIVERS

2.5.1. RESIDENTIAL SEGMENT

Rising Urbanization: The share of urban population in total population has been consistently

rising over the years and stood at about 31 per cent in 2011, this trend in urbanization

has pushed the demand for houses in urban areas. People from rural areas move to cities for

better job opportunities, education, avail better life etc. A family living in rural area may migrate

to an urban area as whole or only few people (generally earning member or students) may

migrate; while a part of the family continues to hold their native house.

The pace of urbanization is now set to accelerate as the country sets to a more rapid growth. 300

million Indians currently live in towns and cities. Within 20-25 years, another 300 million people

will get added to Indian towns and cities. This offers tremendous opportunities for real estate

development, particularly for housing.



Growth in Household Income

Demand for housing is dependent upon income. With higher economic growth and rising incomes people

will be able to spend more on houses; this will increase demand and push up prices. In fact, demand for

housing is often noted to be income elastic (luxury good); rising incomes leading to a bigger % of income

being spent on houses. Similarly in a recession, falling incomes will mean people cant afford to buy and

those who lose their job may fall behind in their mortgage payments and end up with their home

repossess.

Easy finance and credit availability

Indian households now have easy access to loans; this has increased the purchasing-power of consumers.

The rising middle class and upper middle class aspires to have a high standard of living. Easy available

loans have made their housing dream affordable and achievable. Recently RBI reduced SLR to 22 % which

is now almost at the lowest level since independence. Major banks such as SBI, HDFC and PNB responded

by lowering their home loan interest rates. Also, residential units are one of the most favored investment

options of Indian household according to a report from RBI and as income rises many more will invest in

second home as investment vehicles



2.5.2. COMMERCIAL SEGMENT

Growth in Information Technology/Service Industry: Increasing demand for office space is one of

the major growth drivers for the domestic real estate market. The domestic office market has

been driven by the IT/ ITES sector where India has emerged as one of the key off shoring

destinations. Other growing industries such as financial services and telecom are also key

contributors. According to DTZ, a leading global real estate advisory and consultancy firm, Indian

IT and ITES firms account for 70% of the office space requirements, followed by financial services

and pharmaceuticals at 15%; the remaining 15% is divided between other industrial sectors.

Government Policies and FDI relaxation: The new NDA government is considered to be investor

friendly and has relaxed the FDI norms across different sectors. Foreign companies coming to India

would require office space giving tremendous opportunity for commercial real estate sector.

2.5.3. RETAIL SEGMENT

Increasing disposable income: As per the Centre for Monitoring Indian Economy (CMIE), close to 30%

of a total households income is spent on retail categories such as grocery, apparel and food &

beverage. So increase in individual income would boast the demand of organized real estate and

indirectly would drive the retail segment real estate.

Growth in organized retailing: Organized retail penetration, currently estimated at 7.5%, is expected

to clock a 19-20% p.a. growth to reach 10% by 2018. Organized retail market in India is still very low

compared to other developed and developing countries and hence there is lot of scope for

expansion. Increasing retail market is a big driver for retail segment real estate market.

FDI relaxation in single and multi retail industry: Central government decision to allow FDI in single

and multi retail market is a big boast as it would help converting the scattered, unorganized retail

market into organized one. The market sentiment has witnessed a significant positive development

since the declaration.

2.5.4. HOSPITALITY SEGMENT

Tourism and Hospitality Market set to surge: Tourism had a muted growth in FY13 owing to

financial downturn. Hospitality segment was hit badly by slow growth. As the economic conditions

are expected to improve in coming years tourism is expected to surge giving a hope of revival for

hospitality segment.



Low cost airlines and improvement of airports: Airport infrastructures play an important role in

the heart of the regions in which they are located, as well as in certain sectors of activity, such as

tourism. India plans to build 200 low-cost airports in the next 20 years to connect tier-II and tier-III

cities. Various low cost airlines such as Air Asia are entering into Indian market. Low-cost airlines

are significant for the development of weekend, city or short-break tourism and thus play an

important role in development of hospitality sector.

2.5.5. SEZ SEGMENT

Growing IT and manufacturing sector: IT and manufacturing sectors are maximum contributors to

the revenue from SEZ. India has emerged has key off shoring destination in IT/ITES which is an

encouraging sign for SEZ.

Favorable Government Policies: The new government is considered to be SEZ friendly and is

planning to restore the concessions provided to SEZs. UPA-II had levied 18.5 per cent MAT and

DDT on SEZ developers which impacted growth and development of SEZ.



2.6. KEY GROWTH DETERRENTS

Absence of Industry status: One of the major reasons for the real sectors demand for an industry

status is the increased land cost and lack of availability of funds. The real estate sector has been

kept away from the financial institution benefits, lower interest rates and easy approval processes

by not possessing the industry standard.

High Interest rates: Interest rate is one of the most important factors affecting the residential

property market. When rates rise, the amount borrowers can afford to pay for a property falls and

if rates rise too high, owners with a large mortgage may be forced to sell. RBI has reduced bank

interest rate from 10.25 to 9 % but its still high compared to other developed countries.

Low GDP growth: A countrys economic performance has direct repercussions on how its real

estate market behaves. India slow economic growth combined with widening fiscal deficit and

inflation affected real estate market adversely. GDP growth of 5.7 % for first quarter of FY15

indicates that Indian economy is back on track which is a good sign for Indian real estate sector.

Liquidity Crunch: Indian construction players accumulated huge debts and, with the economy

slowing, more big companies are struggling to repay their loans as profits decline. They are beset

by a faltering economy, weak home sales in key cities and high interest rates, leading to liquidity

crunch and prompting them to scale back or put on hold projects planned during the boom years

of 2005-2007.

Degradation of ratings: Increased debt and loan defaults degraded the ratings of major real estate

players which made it tough for these firms to get more leverage. Even if loans are available, they

are provided at high interest rate.

Lack of clear land title: Modified land acquisition act, 2013 made it mandatory for real estate

firms to get consent form 80 % owners in rural and 70 % in urban area. It increased cost and time

of acquisition since land titles are not clear.

Differing opinion of Central and State government: A real estate firm needs number of clearances

from central and state government before starting a project. There are number of process where

central and state governments differ in opinion increasing the time for clearance. New

government is working towards digitalizing the clearance process. This could be a game changer

for real estate sector.

High CAD and fiscal deficit: Wide budget deficits have kept India's inflation high and contributed

to a widening current account deficit, which heightened exchange rate and volatility resulted in



higher domestic interest rates. It also resulted in low foreign investors confidence in Indian

market resulting in lack of liquidity.

Rupee depreciation: Rupee depreciation indirectly affects cost of services and raw materials like

steel, consultancy, outsourcing of architects or engineers, cement, wages of labor, transportation

etc. This raises the cost and time index of project and in turn becomes the major reason of project

delays.



2.7. KEY ANNOUNCEMENTS IN BUDGET 2014-15

With a stable Government at the Center led by Narendra Modi, the Union Budget 2014-15 sent a positive

sentiment to the investors and provided the much-needed impetus to the economy. Real Estate and

Infrastructure were perhaps the biggest winners after Budget 2014. Mr. Arun Jaitley and team have done

plenty to boost these sectors and have ensured that investor sentiment stays positive for the next few

years. If implemented as planned, this budget will infuse more capital, ease FDI investments in Real Estate

and ensure housing for all parts of society.

The real estate sector remained on the priority list, with the budget giving ample hints about the Modi

government sticking to its promise of assuring housing for all by 2022. Concessions provided on housing

loans, increase in allocation under Rural Housing Schemes and several incentives announced to promote

affordable housing echoed the governments desire towards this endeavor.

FDI policy requirements regarding built up area and minimum capital norms to be reduced from

50,000 square meters to 20,000 square meters and USD 10 million to USD 5 million respectively,

with a three year post completion lock-in.

The relaxation of FDI would give opportunities for cheaper capital for the smaller projects giving

ample scope for improving quality and delivery for low-cost and affordable housing projects.

Although, this is meant for the big projects that have higher investment needs, foreign investors

would be able to provide a lot of capital support to the real estate builders in the country.

Projects with minimum 30% of its total project cost for low-cost affordable housing to be exempt

from built-up area and minimum capital under FDI policy, however, the three year lock-in shall

apply.

A sum of Rs 4,000 crores for the National Housing Bank has been set aside to provide cheaper

credit facility under the affordable housing scheme for the urban poor/EWS/LIG segment

This has been done to increase the flow of cheaper credit for affordable housing to the urban

poor/ EWS/ LIG segment.

A sum of Rs 7,060 crores has been allocated for developing 100 Smart Cities.

Conducive tax regime framed for Infrastructure Investment Trusts and Real Estate Investment

Trusts with a view to attract large scale investment in income bearing assets in real estate and

construction sectors.

Deduction for interest paid on capital borrowed for acquisition/construction of a self occupied

house proposed to be increased from Rs 1.5 lakh to Rs 2 lakh under section 24 of the Act.



Increase in deduction limit for investments under Section 80C from Rs 1 lakh to Rs 1.5 lakh

Deduction for principal amount repaid on capital borrowed for acquisition, construction of house

proposed property is available under Section 80C of the Act.

Unlisted shares to remain short-term capital asset for 36 month

Long term capital assets enjoy a beneficial rate of tax. Until now, unlisted shares were considered

to be long-term once held for a period of 12 months. Budget proposes to amend the definition of

short-term capital asset and now shares of an unlisted domestic company would remain a short-

term capital asset for 36 months. This will have immense impact on the sector where

reorganizations are common

As per the existing provisions, deduction from capital gains on transfer of certain assets is

available, in case investment is made in a residential house. There has been uncertainty whether

deduction will be available only in respect of one or more than one residential house properties.

The Budget puts an end to this ambiguity by proposing the benefit of exemption from capital gains

only if the capital gain arising on transfer of specified long-term capital asset is invested in one

residential house situated in India.



2.8. REAL ESTATE CYCLE

Real estate is thought to be a sound investment. The stock market is volatile and is full of ups and

downs. These extremes occur not only in the long term, but quite often on a daily basis. The real estate

market on the other hand is thought to be more stable, not relying on short term swings in market

conditions but instead on long term investment and capital growth.

Much like the business cycle, housing prices tend to follow a trend. Also, much like business cycles, these

housing trends, or bubbles, periodically repeat themselves. That may be why when housing prices fall so

many people remain optimistic. Their rationale then shifts from making a substantial gain now to having

to wait a little while to make those gains in the future, when the bubble gets larger and markets are once

again prosperous. Now these trends should not be overlooked, as they have been shaping up for years.

According to experts, Indian real estate market is presently in climbing phase and with economy improving good returns can be expected in near future.



2.8.1. SUB PRIME CRISIS: AN EXAMPLE OF REAL ESTATE BUBBLE BURST

The central element in the current financial crisis is the housing bubble. The housing bubble in the United

States grew up alongside the stock bubble in the mid-90s. The logic of the growth of the bubble is very

simple. People who had increased their wealth substantially with the extraordinary run-up of stock prices

were spending based on this increased wealth. This led to the consumption boom of the late 90s, with the

savings rate out of disposable income falling from close to 5.0 percent in the middle of the decade to just

over 2 percent by 2000.

After the mid-1990s real house prices went on a sustained surge through 2005, making residential real

estate not only a great investment, but it was also widely perceived as a very safe investment.

There were two trends developing at that time that contributed to the housing bubble. The Federal Reserve Board, to combat the recession of 2000-01 and the economic effects of the September 11 terrorist attacks, began drastically slashing interest rates. Consequently, it was very easy to borrow money, especially if you wanted to buy a home.

Mortgage-backed securities (MBSs) are simply shares of a home loan sold to investors. : A bank lends a

borrower the money to house and collects monthly payments on the loan. This loan and a number of

others -- perhaps hundreds -- are sold to a larger bank that packages the loans together into a mortgage-

backed security. The larger bank then issues shares of this security, called tranches to investors who buy

them and ultimately collect the dividends in the form of the monthly mortgage payments. These tranches



can be further repackaged and sold again as other securities, called collateralized debt obligations (CDOs).

Home loans in 2008 were so divided and spread across the financial spectrum, it was entirely possible a

given homeowner could unwittingly own shares in his or her own mortgage. MBSs helped minimize risk

for the local bank because it was no longer responsible for the loans it made to the local homebuyers.

Some banks and other institutions were even eager to lend money to prospective homebuyers with poor credit and a spotty financial history who would not typically qualify for loans. These transactions are known as "subprime" mortgage loans. They generally have interest rates that are above "prime" interest rates available to borrowers with good credit. As long as everyone was paying their mortgage things were fine but they didnt into account that with these mortgages people might lose their jobs, the interest rate might go up and the housing prices may go down and unluckily all three happened.

Housing prices started trending downward and interest rates went up. Many subprime borrowers failed to pay the debt and value of house hold by mortgages lost value globally. As stockholders found out about the bad loans these firms were carrying, they pulled their money out. The markets plummeted.



2.9. GOVERNMENT REGULATIONS AND FRAMEWORK/ EXPECTED POLICY

CHANGES

2.9.1. REITs

Overview of REITs

The Real Estate Investment Trusts in India have been in the news for some time. The World Bank1 describes REIT as a security sold to investors for the purpose of investing in real estate. REITs generally pledge high yields to investors. They receive favorable tax considerations and are more liquid than investments made directly in a property.

The REIT system was designed to provide a real estate investment structure similar to the kind that mutual

funds provide for investment in stocks. REITs can be publicly or privately held, but only public REITs may

be listed on public stock exchanges The Securities and Exchange Board of India had come out with draft

guidelines for the new investment vehicle in October 2013. The regulator deferred a final decision on

account of ambiguity on the taxation of the new vehicle. It was feared that REITs may be subject to

double-taxation; paying tax whenever income was generated at the fund level, and then again in the

hands of the investor.

Arun Jaitley cleared the doubts and mentioned in his budget 2014-15 speechI intend to provide

necessary incentives for REITs, which will have pass through for the purpose of taxation. The passing

through of the tax liability to investors is significant as it removes double taxation for REITs and allows

investors to plan their taxes.

Type of REITs

There are internationally three types of REITS. In India however, a beginning is made with the third type, the hybrid one.

Equity REITs: Equity REITs invest in and own properties (thus responsible for the equity or value of their real estate assets). Their revenues come principally from their properties' rents.

Mortgage REITs: Mortgage REITs deal in investment and ownership of property mortgages. These REITs loan money for mortgages to owners of real estate, or purchase existing mortgages or mortgage-backed securities. Their revenues are generated primarily by the interest that they earn on the mortgage loans.

Hybrid REITs: Hybrid REITs combine the investment strategies of equity REITs and mortgage REITs by investing in both properties and mortgages. REITS in India will be predominantly of the Hybrid type.



Important aspects of REITS as per SEBI guidelines

Eligibility Criteria: The REIT shall be set up as a trust and a trust deed shall be registered under the

provisions of the Registration Act, 1908. The REIT shall have parties such as trustee, sponsor,

manager and a principal valuer. The trustee shall hold REIT assets in the name of the REIT for the

benefit of the investors. To ensure that the activities of the REIT are managed professionally, it has

been specified that the manager needs to have at least 5 years of related experience together with

other requirements such as minimum net worth of INR 5 crore. The sponsor needs to have at least

INR 20 crore net worth and experience of at least 5 years in the field.

Raising of Funds and Listing of Securities of REIT: The trust shall be registered with SEBI post which

it can raise funds through an initial offer and once listed, may subsequently raise funds through

follow-on offers. The value of REIT assets shall not be less than INR 500 Crores. This is to ensure

that only established players enter the market. The minimum initial offer size and minimum public

float of INR 250 crore and of 25% respectively has been specified in order to ensure adequate

public participation and float in the units. Further, minimum size of one unit of REIT shall be INR 1

lakh and minimum subscription size shall be INR 2 lakhs. It shall be mandatory for all units of REIT to

be listed on the exchanges and shall continue to be listed on the exchange unless delisted under the

Draft Regulations. Further, the funds may be raised by REITs from resident or foreign investors.

Investment Conditions and Dividend Policy: It has been mandated that 80% of the value of the

REIT assets shall be in completed and rent generating properties and 20% can be invested in other

assets as specified under the Draft Regulations. The investment by a REIT shall only be in assets in

India. The REITs are not permitted to invest in vacant land/ agricultural land/ mortgages other than

mortgage backed securities. REITs have been allowed to invest in properties directly or through a

SPV. REIT shall invest in atleast 2 projects with not more than 60% of the value of assets invested in

one project. Further, to ensure regular income to the investors, it has been mandated to distribute

90% of the net distributable income after tax of the REIT to the investors at least on a half yearly

basis.

Taxability structure of REITs

The Finance Minister Arun Jaitley, has said that the government would allow 'pass-through' status for

REITs .A 'pass-through' status means that the income generated would be taxed in the hands of the

investor, and that the fund itself would not have to pay tax on the same.



Benefits for Indian Real Estate

REITs will enable retail investors to participate in the real estate space with small investment sizes. This

will unlock a new source of project financing for real estate. As of now there is very little holding power

available with the developers. Therefore, there is little interest with them to create high-grade

commercial, retail or any other income generating assets.

Even large developers strata sell commercial or retail projects to multiple HNI investors. Such a situation

creates complexity in maintaining and promoting these spaces, apart from creating title issues and many

other complications. Once a REIT takes charge of a commercial property, the scenario improves

significantly.

Smaller developers will also be encouraged to create lease-hold assets, because REITs will provide them

with exits and an incentive to develop high-grade buildings. This would have a very positive impact on the

overall real estate industry, since developers who are currently doing only residential projects would be

able to diversify their portfolios and achieve a more balanced growth.

There would definitely be more momentum on the market, and various new asset classes hitherto

considered non-viable by many developers would emerge in strength for instance, student housing,

senior living projects and rental housing schemes.



Challenges for REITs

There are several challenges to overcome before the successful implementation of REITs in India. To begin

with, title certification in India is an ambiguous and cumbersome process, and this complexity discourages

many potential foreign and domestic investors from buying into income-yielding properties.

Another issue is the valuation mechanism. Real estate valuation in India is largely unregulated and lacks a

standard code of practice or ethics. In order to implement REITs, the government will have to address

these issues via making and amending multiple legislatures.

It is to be hoped that the new government will seriously look into the urban development and focus on

the creation of right kind of built infrastructure that is the key for sustainable growth. REITs and the

associated changes in the legislature need to find a place on a priority list that aims for larger

developments and subsequent employment creation.

Conclusion

REITs will provide investors an opportunity to invest in income generating and completed properties. This

will be less risky as compared to under-construction properties as the investment will provide a safety net

to investors against any delay in project completion and disputes. It will provide guaranteed returns in the

form of dividends to the investors from rental income earned. Further, it will offer the advantage of

liquidity and reduced transaction costs of owning real estate assets in India. The process of buying or

selling a REIT will be transparent and flexible.

2.9.2. REAL ESTATE BILL, 2013

Overview of Bill

The Bill applies to residential real estate i.e. housing and any other independent use ancillary to housing.

However it shall not apply where the area of land proposed to be developed does not exceed 1000 square

meters or the number of apartments proposed to be developed does not exceed 12, inclusive of all

phases, or an area or number of apartments as notified by the Central Government on recommendations

from the appropriate Government, which may be different for different States or Union territories but not

more than 1000 square meters or 12 apartments.

Applicability of bill

The proposed Bill has limited its applicability to residential real estate only i.e. housing and any other

independent use ancillary to housing. The Bill defines



"real estate project" as the development of a building or a building consisting of apartments, or

converting an existing building or a part thereof into apartments, or the development of a colony

into plots or apartments, as the case may be, for the purpose of selling all or some of the said

apartments or plots or buildings and includes the development works thereof

''apartment" whether called dwelling unit, flat, premises, suite, tenement, unit or by any other

name, means a separate and self-contained part of any immovable property located on one or

more floors or any part thereof, in a building or on a plot of land, used or intended to be used for

residential purposes, or for any other type of independent use ancillary to the purpose specified

and includes any covered garage, whether or not adjacent to the building in which such apartment

is located which has been provided by the promoter for parking any vehicle, or as the case may

be, for the residence of any domestic help employed in such apartment

Major Highlights of bill

The provisions of this Bill are applicable only to residential projects.

Prior approval before launch and advertisement- This bill contains provisions restricting launch of

projects or advertisements unless all approvals are received and all the agents are not expected to

facilitate the sale of immovable property which are not registered with the Authority and to

maintain books of accounts, records and documents.

Mandatory deposit of fund- It makes mandatory upon the promoters to deposit 70 per cent or

such lesser per cent as notified by the government to cover the construction cost of the project of

funds in a separate bank account to ensure timely completion and prevent fund diversion.

Registration of real estate project and real estate agent - The bill also ensures mandatory

registration of real-estate projects and real-estate agents with the Authority, except when the

land proposed to be developed is less than 1000 square meters. This provision is likely to provide

another level of protection to buyers while also preventing concerns regarding money laundering

by the non-organized broker community.

Disclosing of mandatory information - The real - estate agents / developers are now required to

disclose material information such as details of the promoters, project, layout plan, plan of

development works, land status, carpet area (as opposed to super area) and number of the

apartments booked, status of the statutory approvals and disclosure of proforma agreements,

names and addresses of the real estate agents, contractors, architect, structural engineer etc on

the Authority's website.

Restriction on taking advance - Prohibition on taking more than ten percent as advance from the

buyers without a written agreement and also the developers/ agents are required to refund to

buyers the full amount in case of delay of projects.

Liability/ Penalty The Bill prescribed for Civil and criminal liability for the contravention of

various provisions of the Bill, such as, imprisonment up to three years or a penalty up to ten per



cent of the estimated cost of the real estate project for projecting out misleading information in

advertisements or prospectus

Real estate regulatory authority The Bill give the power to establish one or more Real Estate

Regulatory Authority in each State/UT, or one Authority for two or more States/UT, by the

Appropriate Government, specifying their functions, powers, and responsibilities to exercise

oversight of real estate transactions. The Bill shall also appoint adjudicating officers to settle

disputes between parties, and to impose penalty and interest.

Benefits and Advantages of Bill

Timely delivery of flats: Developers often make false promises about the completion date of the

project, but hardly ever deliver. As per the bill, strict regulations will be enforced on builders to

ensure that construction runs on time and flats are delivered on schedule to the buyer. If the

builder is not able to deliver the flats on time, he/she will have to refund the purchaser with

interest.

Furnishing of accurate project details: In the construction stage, builders promote their projects

defining the various amenities and features that will be part of the project. But not everything

goes as per plan, with several features missing. As per this bill, there can't be any changes to a

plan. And if a builder is found guilty of this, he/she will be penalized 10% of the projects costs or

face jail time of up to three years.

Specifying carpet area: Generally, builders sell flats on the basis of built-in area, which includes a

common passage area, stairs and other spaces which are 20-30% more than the actual flats area.

But, not all buyers are aware of the concept of carpet area. With this bill it will become mandatory

to declare the actual carpet area.

All clearances are mandatory before beginning a project: Builders often attract buyers with huge

discounts and pre-launch offers. And, the buyer, enticed by the offers, does not bother about the

clearance. But, due to delays in getting clearance, the buyer does not get the flat on time. This bill

ensures that developers get all the clearances before selling flats.

Each project should have a separate bank account: Developers raise funds through pre-launch

offers and use them to purchase some other land or invest it in other projects. This bill will make it

compulsory that a separate bank account be maintained for each project.

After sales service: As per an interesting clause in the bill, if the buyer finds any structural

deficiency in the development of the building, the buyer can contact the builder for after sales

service. But, the buyer should approach the builder within a year of purchase to rectify such

defects without further charges.

Disadvantages of the bill:

Past real estate projects not included in the bill: Only new projects are covered by the bill.

Projects that are ongoing, completed or stuck due to clearance or financial issues, dont come

under this. Hence, many buyers will not be benefitted by it.



Delay from government agencies: There can be delays caused by the government, which

sometimes takes a lot of time to clear a project. It is up to government bodies to follow strict time

frames to approve projects, so that developers can launch, complete and deliver them on time.

No compulsory regulation for projects less than 1000 square meter: Registration with the

regulator will not be mandatory for projects less than 1000 square meter. So, small developers will

not be bound to register.

New project launches expected to be delayed: Because a project will not be allowed to launch

without the requisite clearances from the government (which generally takes two to three years),

projects will automatically get delayed.

Conclusion:

Few practical problems in implementation of the Bill include the setting up of regulatory authorities at

national and state levels, which is likely to be a long-term process. Developers may structure their projects

so that each phase is less than 4,000 square meters to escape the reach of the proposed Bill; as each

phase developed separately would be considered as a stand-alone project. Furthermore, the provision in

the Bill for opening a separate bank account for funds collected for a project may not serve its purpose as

State Governments may allow developers to maintain even less than 70 per cent of the funds collected for

the project, thereby allowing for utilization of funds for some other purpose.

The impact of the proposed regulatory Bill can be only assessed over time as to whether it is able to

effectively address the issues facing the housing sector including standardization of sale agreements,

efficacy in resolution of complaints and encouragement of private equity through effective regulations.

This would also depend on the extent to which the major players are able to find loopholes, the

Governments resolve to plug them and its commitment to regulate growth of the real estate housing

sector.



2.9.3. LAND ACQUISITION, REHABILITATION AND RESETTLEMENT ACT, 2012

This act lays down various provisions and directions to be followed while acquiring land anywhere in the

country. The term 'land acquisition' means forcible acquisition of land from an unwilling seller and is

distinct from a land purchase from a willing seller.

Major Highlights of this act:

Compensation: Given the inaccurate nature of circle rates, the Bill proposes the payment of

compensations that are up to four times the market value in rural areas and twice the market

value in urban areas.

Compensation for livelihood losers: In addition to those losing land, the Bill provides

compensation to those who are dependent on the land being acquired for their livelihood.

Retrospective operation: To address historical injustice the Bill applies retrospectively to cases

where no land acquisition award has been made. Also in cases where the land was acquired five

years ago but no compensation has been paid or no possession has taken place then the land

acquisition process will be started afresh in accordance with the provisions of this act.

Share in appreciated land value: Where the acquired land is sold to a third party for a

higher price, 40% of the appreciated land value (or profit) will be shared with the original

owners.

Consent: In cases where PPP projects are involved or acquisition is taking place for

private companies, the Bill requires the consent of no less than 70% and 80% respectively (in both

cases) of those whose land is sought to be acquired. This ensures that no forcible

acquisition can take place.

Cap on Agriculture land acquisition: Caps on acquisition of multi-crop and agricultural land: To

safeguard food security and to prevent arbitrary acquisition, the Bill directs states to impose limits

on the area under agricultural cultivation that can be acquired.

Return of unutilized land: In case land remains unutilized after acquisition, the new Bill

empowers states to return the land either to the owner or to the State Land Bank.



Exemption from income tax and stamp duty: No income tax shall be levied and no stamp duty

shall be charged on any amount that accrues to an individual as a result of the provisions of the

new law.

Safeguards against displacement: The law provides that no one shall be dispossessed until and

unless all payments are made and alternative sites for the resettlement and

rehabilitation have been prepared. The Third Schedule even lists the infrastructural amenities that

have to be provided to those that have been displaced.

Recent Developments: Real Estate and construction sector was worst hit by this law. It increased the price

of land acquisition and many a times made the project unviable. Though the prime motive of this law was

to safeguard the rights of land owners particularly in rural areas, it directly affected the real estate sector.

Industry had expressed concerns over the implementation of land acquisition law saying it is impacting

economic development in the country.

Narendra Modi led NDA government is contemplating changes in the land acquisition law to make it more

flexible, a move which could help in kick starting the stalled projects both in real estate and infrastructure

sector.

The following clauses are expected to be amended/ removed

Consent clause for PPP project

The definition of affected family

Retrospective clause for compensation

Penalty provisions against civil servants

Return of unutilized land to original owner

This is just a tentative list based on all party discussion and many other clauses may be amended

depending on final decision.

2.9.4. AMENDMENT IN SECTION 54 OF INCOME TAX ACT

Section 54 Any Long Term Capital Gain, arising to an Individual or HUF, from the Sale of a Residential

Property (whether Self-Occupied or on Rent) shall be exempt to the extent such capital gains is invested in

the

1. Purchase of another Residential Property within 1 year before or 2 years after the due date of

transfer of the Property sold and/or

2. Construction of Residential house Property within a period of 3 years from the date of acquisition

Provided that the new Residential House Property purchased or constructed is not transferred within a

period of 3 years from the date of acquisition



If the new property is sold within a period of 3 years from the date of its acquisition, then, for the purpose

of computing the capital gains on this transfer, the cost of acquisition of this house property shall be

reduced by the amount of capital gain exempt under section 54 earlier. The capital gain arising from this

transfer will always be a short term capital gain.

Modifications in section 54 in Budget 2014-15

Exemption under Section 54 is available if the amount is re-invested in one Residential House

situated in India.

The exemption under Section 54 would also be available if the amount is invested in an under

construction residential house. However, Service Tax is levied on purchase of under construction

property.

With these restrictions government is attempting to deter investors from buying properties overseas and

also trying to deter investors from investing most of their savings in real estate.


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Unnati_Infrastructure Construction & Real Estate_2014

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