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Indian Real Estate Sector - Handbook 2011
Indian Real Estate Sector - Handbook 2011
2012
Contents
03 | Foreword 05 | Key highlights - 2011 06 | Regulatory developments: the big picture
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Foreword
We are delighted to release the inaugural edition of "Indian Real Estate Sector - Handbook 2011", a publication focussed on providing a yearly round-up of the significant developments in the real estate sector in India. As expected, the year proved to be a mixed bag for the sector. Real estate companies continued to face a series of evolving challenges: protecting profits while continuing to invest; seizing international opportunities; differentiating their brand; retaining and attracting talent; and cultivating stronger relationships with lenders and fund managers. The volatility in markets reinforced the need to focus on core competence. In order to curb soaring inflation, the RBI raised interest rates 13 times in the past 19 months, seriously impacting demand for real estate which is primarily driven by bank finance. Pessimism in the Western economies continued influencing market sentiments and foreign capital inflow in the sector. Mounting debts, rising interest costs and correction in real estate prices further exacerbated the condition. Companies with stronger fundamentals and ability to make quick strategic decisions, however, continued with growth despite multi-pronged market pressures. In such a dynamic scenario, it has become critical for real estate companies to keep track of the key developments taking place in the sector.
Vishesh C. Chandiok National Managing Partner Grant Thornton India LLP
With this view, we have designed this handbook to provide you a quick summary of the key developments around the regulatory environment along with a snapshot of the investment scenario, and major challenges and issues, which made news in 2011. I hope you find it useful and welcome your feedback.
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Foreword
I am delighted to know that Grant Thornton has come up with a comprehensive handbook on the Indian real estate sector with an aim to provide a quick summary of the regulatory and investment issues during the year 2011. The importance of this sector lies not only in the fact that it is the fourth largest in terms of the FDI inflows in the country, but also the manner in which it has emerged as an integral part of every common mans dream. The burgeoning middle class in the country with high aspirations, access to loan capital and increasing disposable incomes, drives the demand for integrated township developments, across the countrys urban landscape. With a shortage of approximately 25 million dwelling units at the beginning of the 11th five-year plan, the private sector is going to play a major role in fulfilling this demand. On the infrastructure front alone, the country needs around US$ 1.2 trillion investments over the next 20 years. The very fact that by the year 2030, nearly 70% of the countrys GDP will be contributed by the cities, signifies the critical need of equipping our cities with quality real estate. Against this backdrop, such a contemporary handbook spreading awareness about the recent regulatory developments like Land Acquisition, Rehabilitation and Resettlement Bill, 2011 and the Draft Real Estate (Regulation and Development) Bill 2011, would serve as a guiding document for the stakeholders. On behalf of CII, I once again compliment Grant Thornton and hope that the information provided in this handbook would help in shaping an inclusive and sustainable growth path for the real estate sector in India.
Firdose Vandrevala Chairman, CII National Committee on Real Estate & Housing Chairman and Managing Director Hirco Developments Private Limited
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Coastal Regulation Zone and Island Protection Zone Notifications 2011 announced
DIPP & the Finance Ministry released consolidated FDI policy to tighten FDI norms for the sector
Ministry of Housing prepared draft legislation of Model Residential Tenancy Act, 2011
Villagers in Noida and Greater Noida called off their agitation over the issue of land acquisition
October
Maharashtra became the first state of India to get Real Estate Regulatory Authority
December
February
June
August
April
To promote affordable housing, Union Budget provided for 1% interest rebate on housing loans up to Rs 15 lakh
Gujarat government hiked minimum base rate for land by 400 to 1,000%
Maharashtra Government planned to reintroduce an additional 0.33 Floor Space Index (FSI) in the Mumbai suburban district
Revenue recognition
Reforms
Approvals
Affordable housing
Growth
Project costs
FDI in retail
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In a nutshell
Post acquisition, land cannot be transferred for any other purpose, except for a public use, such as government infrastructure projects Government cannot acquire land for private companies, or for private purposes Except as a demonstrably last measure, acquisition of multi-crop irrigated land should be avoided For rehabilitation and resettlement, owners of the acquired land will be offered subsistence allowance at Rs 3,000 a month for 12 months. In addition to this, land owners will also be provided Rs 2,000 a month a family as annuity for 20 years, Rs 50,000 for transportation, and mandatory employment for one member of a displaced family. The same provisions are proposed for those who lose their means of livelihood due to land acquisition If a private company succeeds in acquiring 80% of the land required for a project, the government may step-in to facilitate the acquisition of the remaining 20% of the land for the private project
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In a nutshell
The Bill mandates the establishment of the "Real Estate Regulatory Authority" in every state to oversee and regulate the real estate sector Apart from adjudicating disputes between real estate developers and consumers, the proposed Regulatory Authority will also be responsible for issuing registration certificates for projects that have a size of 43,052 square feet or more Before beginning the construction work on plots measuring 4,000 square metres or more, it is mandatory for real estate developers to register with the "Real Estate Regulatory Authority" The draft Bill makes it mandatory for promoters to stick to the approved plans and project specifications The Bill also proposes to make it mandatory for developers to deposit 70% of the amount realised for the real estate project from buyers in a separate account maintained in a scheduled bank, within 15 days of the realisation of the project It further specifies that developers would use this deposited amount only for the purpose of developing the property
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In a nutshell
This Guidance Note should be applied to all transactions in real estate, which are commenced or entered into on or after 01 April 2012. This primarily provides guidance on application of percentage of completion method as per Accounting Standard (AS) 7, Construction Contracts, in respect of transactions and activities of real estate which have the same economic substance as construction-type contracts. In respect of transactions of real estate which are in substance similar to delivery of goods, Accounting Standard (AS) 9, Revenue Recognition, is applicable.
Scope
The exposure draft encompasses various types of models/ structures which are in practice and the related accounting in respect of: - Sale of land/ plots with or without any development - Development of residential/ commercial units - Acquisition, utilisation and transfer of development rights - Re-development of existing buildings/ structures - Joint development arrangements
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(d) At least 10% of the total revenue as per the agreements of sale or any other legally enforceable documents are realised at the reporting date in respect of each of the contracts and it is reasonable to expect that the parties to such contracts will comply with the payment terms in the contracts
In a nutshell
Definition of Project Project is defined in terms of a group of units/ plots/ saleable spaces and its linkage with the common set of amenities in a manner that both are clearly dependent on each other for the intended effective use. Revenue recognition conditions prescribed Key approvals to be obtained Percentage threshold (rebuttable presumption of 25%) Sale of project to the extent of 25% of the project size Collection to the extent of 10% of the total revenues as at the reporting date
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Updates
In January 2012, the Department of Industrial Policy and Promotion (DIPP) permitted 100% FDI in Single Brand Retail Trade (SBRT) under Government approval as against the current limit of 51% FDI in SBRT. All the key features of the policy liberalisation have been retained in this Press Note along with the following additional clarifications/ modifications: With respect to proposals involving FDI beyond 51%, mandatory sourcing of at least 30% of the value of products sold would have to be done from Indian 'small industries/ village and cottage industries, artisans and craftsmen' 'Small industries' would be defined as industries which have a total investment in plant & machinery not exceeding US$ 1 million The earlier press release dated 25 November 2011 had indicated that such small industries could be located anywhere in the world
In a nutshell
India's retail sector is estimated at US$ 450 billion, growing at the rate of 15% a year Currently, India permits 51% FDI in single-brand retail and 100% FDI in cash-and-carry The Bill was meant to allow foreign investment in multi-brand retail, which is not permitted in India at present
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In a nutshell
The Bill mandates the establishment of a "Real Estate Regulatory Authority" and an "Appellate Tribunal", while also offering provisions for preventing the diversion of money received from home buyers It makes it compulsory for developers to use the money received from homebuyers to timely execute the residential project, instead of using it for the acquisition of new land To appeal against the orders of the "Appellate Tribunal", the applicant can approach the State High Court
The developer would be required to maintain a separate account of the money received from the buyers and, if required, provide usage details of the same to the "Real Estate Regulatory Authority". In case developers contravene the provisions of the Bill, the Bill proposes to make them liable to a penalty ranging from a minimum of Rs 1,000 per day to a maximum amount of Rs 1 crore, along with an imprisonment for a term extending to three years
Updates
The State Cabinet has recently approved establishment of "Housing Regulatory Authority" and the "Housing Appellate Tribunal" in Maharashtra. The Bill is expected to be presented before the State Legislature in March 2012. After being passed by the State Legislature, all property transaction disputes will be handled by the three-member "Housing Regulatory Authority" followed by the "Housing Appellate Tribunal".
Crisis in Europe
Volatility
Investment scenario
Exits Transactions Project viability
Challenges
Opportunities
Sustainability
Returns
FDI inflows
Depreciation in rupee
Market consolidation
Growth
Deals
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1,500
1,000
1,227
453 500 0 2009-10 (April - March) 2010-11 (April - March) FDI Inflows ( in US$ in million) Source: Department of Industrial Policy and Promotion, Government of India 2011-12 (April - September)
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Further, a recent report published by Jones Lang LaSalle India (JLL) states that within the past four years, PE investors reaped average returns from the sector that were 1.21 times, or 20% higher than the global average of 0.8 times. The report, which also states that Mumbai and Kolkata accounted for returns of 1.4 and 1.3 times, respectively, within the past four years, has lifted the aura of gloom hanging over the sector for quite some time now.
The report goes on to prove that even amid the bleak scenario of property markets between 2008 and 2011, when investors failed to profit from their investment in the sector in other economies, India has provided far better returns than the global average. Moreover, although commercial real estate is a riskier option as compared to residential, the former has given returns of 1.2 times, while residential has given returns of 1.1 times. The report has also analysed the profits from PE exits in the sector, and states that out of the overall PE exits worth US$ 3 billion in the past four years, 65% have been profitable. The key findings from various avenues are expected to serve as a shove for real estate investors for bolstering their confidence in the Indian real estate sector.
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Sun Apollo
Parsvnath Developers
Rs 100 crore
Acquisition of a DLF firm owning a SEZ in India The deal financed a residential project in Gurgaon by developing a 108-acre township
Delhi Heights
Undisclosed
A mixed use development having more than 2,000 residential units is planned to be developed
Logix Group
Rs 80 crore
The investment financed the development of Blossom Greens - a 2,500-unit residential project
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Since 2009, Kotak Realty has exited from about US$ 175 million worth of investments. However, even amid the enhanced momentum of exits, PEs found it difficult to exit with good returns, largely due to volatile stock markets in 2011. As per a report by Bain and Co, about 120 PE funds, with a potential to raise approximately US$ 34 billion were impacted by the bleak economic scenario in 2011.
Further, according to JLL, 2010 and 2011 in combination witnessed real estate PE exits worth US$ 3 billion. The low PE exits in the year can also be attributed to high inflation, steep interest rates and slow economic growth. As per a survey conducted by Protiviti India and Asian Venture Capital Journal, secondary and strategic sales were the preferred exit choices, while IPOs and multiple exits, once the most popular routes for exits, lost their charm to investors in 2011.
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Rs 385 crore
The PE firm sold its stake in Peepal Tree Properties, which it had purchased in 2007 for Rs 95 crore. The deal was made with Tata Realty Initiatives Fund-I The entire paid-up share capital of Udhay GK-Realty was purchased by Godrej Properties Ltd Milestone Capital Advisors exited from Stone Arc, a residential project located at Thiruvanmiyur, Chennai, where it owned 26,800 square feet of saleable area
The PE exit involved the sale of 29,490 square feet of area in commercial property Raheja Titanium in Mumbai by IL&FS Milestone Fund I The fund, sponsored by HDFC, sold its 21% stake in Manyata Business Park, a 7.7 million square feet infotech SEZ in Bangalore, to the Embassy Group
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Growth strategies
Vacancy rates
Buyer interest
Revenues
Sales
Declining margins
Demand
Opportunities
Correction
Sustainability
Market expectations
Future prospects
Finance
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8.25
Source: RBI
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On the other hand, during the first half of the year, rents of malls and high-streets increased by 15-20%. No price/ rent correction was seen in completed projects in both the residential and commercial segments in the year, despite the slump in demand. Depreciation of rupee evoked the interest of NRIs in purchasing property in India.
City-wise housing price index - Tier I cities
350 300 250 200 150 100 50 0 Jan June 2008 July Dec 2008 Jan June 2009 July Dec 2009 Jan March 2010 April June 2010 July Sept 2010 Oct Dec 2010 Jan March 2011 April June 2011 July Sept 2011 Oct Dec 2011
Chennai Bangalore
Kolkata Delhi
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200
200
150
150
100
100
50
50
0 Jan - July - Jan - July - Jan - April - July - Oct - Jan - April - July - Oct June Dec June Dec March June Sept Dec March June Sept Dec 2008 2008 2009 2009 2010 2010 2010 2010 2011 2011 2011 2011
0 Jan - July - Jan June Dec June 2008 2008 2009 July - Jan - April - July - Oct - Jan - April - July - Oct Dec March June Sept Dec March June Sept Dec 2009 2010 2010 2010 2010 2011 2011 2011 2011 Patna Kochi Bhopal
Ahmedabad Pune
Jaipur Faridabad
Lucknow
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During 2011, real estate sector witnessed a slump in transaction activity, reduced launches of new projects and stagnant property prices. As per a report released by Knight Frank India, residential property prices depreciated by up to 10% across Mumbai, NCR, Bangalore and Chennai. With a substantial number of prospective homebuyers deferring their plans of buying property, almost 3,06,859 units of residential property are currently lying unsold. Further, the NCR market had the highest proportion of vacancy rate for residential property in 2011. The lack of buyer interest is also evident from the fact that in 2011, 40,660 housing units remained unsold in Mumbai. In 2011, the unsold inventory levels of residential real estate stood at 46,596 units for Bangalore and 40,734 units for Pune. In the July-September quarter, demand for office space across the top six cities in India was 8.5 million square feet. With a number of corporates deferring their hiring plans, demand for office space in 2011 across the top seven cities also remained muted.
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The frequent interest rate hikes led to liquidity squeeze, thereby making cost of credit expensive for the real estate developers The hike in home loan rates compelled buyers to postpone their buying decision, leading to a drastic reduction in sale of residential units across segments Due to the reduced availability of capital to real estate developers, the year also witnessed widespread delays in construction projects The slowdown in the demand of residential units was also evident from the NHB Residex, with Tier I cities such as Kolkata and Mumbai witnessing a downward trend in the prices of residential properties As a result of the tough market conditions, numerous cities such as Kochi and Hyderabad witnessed a decline in prices of residential units during Q4 Demand for office space also slumped during the year, resulting in an increase in vacancy levels The NCR market registered the highest vacancy rate for residential property during the year
Public offers Black money Growth projections Market sentiment Sale deed mandate Circle rates Stamp duty Affordable housing
Revenues
Urban infrastructure
Benami transactions
Land acquisition
Environment
Evasion
Finance
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Circle rates hiked in Delhi by up to 250% The Delhi government hiked the circle rates by up to 250% in October 2011. This was the second hike in circle rates in 2011. Earlier in February, the rates were increased by up to 100%. While the move aims at curbing the use of black money in property transactions, it would also help garner an additional revenue of Rs 800 crore a year, mainly through stamp duty and registration fees.
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Top 11 listed real estate companies accumulated a debt of over Rs 5,000 crore According to Edelweiss Securities report, the total debt of the top 11 listed real estate companies of India increased by over Rs 5,000 crore to Rs 38,500 crore.
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India's largest hill city, Lavasa stalled on charges of violating green laws Lavasa Corporation came under the Ministry of Environment scanner for allegedly violating environmental norms in its hill city project. The company was later provided conditional approval by the Ministry.
Affordable housing scheme Rajiv Awaas Yojana In order to boost affordable housing schemes, the government proposed an exemption of service tax for the construction or finishing of new residential complex under Jawaharlal Nehru National Urban Renewal Mission and Rajiv Awaas Yojana in the Union Budget 2011-12.
The Court also ordered the seven real estate developers to return all the payments received from over 6,500 people towards the booking of flats over disputed pieces of land.
New green building rating system introduced To rate the level of environment friendliness and sustainability of buildings, an upgraded Leadership in Energy and Environmental Design 2011 (LEED 2011 for India) rating system has now been introduced in the country. The new rating has come into effect.
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Tata Housing forays in the international market, announcing a Rs1,000 crore MoU with the Government of Maldives
By 2014, Vijay Shanthi Builders will develop projects worth Rs 2,100 crore, beginning with a residential project
Lodha Group will invest over Rs 10,000 crore in a new project, titled New Cuffe Parade, in Mumbai, over the next 5-7 years
With an investment of Rs 500 crore, Malabar Builders will launch its first township project in Mangalore shortly
Larsen and Toubro (L&T) plans to construct the first residential high-rise building of the country on a pre-cast basis
Following the opening up of FDI in retail sector, DLF will invest a sum of US$ 570.2 million for developing malls over the next 5 years
Royal Institution of Chartered Surveyors (RICS) launches India edition of the 'Red Book' which lays down mandatory rules for its members and serves as best practice for industry professionals
CREDAI releases a code-of-conduct for its members and also recommends setting up of consumer grievance redressal cells to address complaints and disputes
To streamline brokerage practices and bring transparency in property transactions, National Association of Realtors-India and the Confederation of Real Estate Developers' Associations of India (CREDAI) signs an agreement of cooperation
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About CII
The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the growth of industry in India, partnering industry and government alike through advisory and consultative processes. CII is a non-government, not-for-profit, industry led and industry managed organisation, playing a proactive role in India's development process. Founded over 116 years ago, it is India's premier business association, with a direct membership of over 8100 organisations from the private as well as public sectors, including SMEs and MNCs, and an indirect membership of over 90,000 companies from around 400 national and regional sectoral associations. CII catalyses change by working closely with government on policy issues, enhancing efficiency, competitiveness and expanding business opportunities for industry through a range of specialised services and global linkages. It also provides a platform for sectoral consensus building and networking. Major emphasis is laid on projecting a positive image of business, assisting industry to identify and execute corporate citizenship programmes. Partnerships with over 120 NGOs across the country carry forward our initiatives in integrated and inclusive development, which include health, education, livelihood, diversity management, skill development and water, to name a few. CII has taken up the agenda of Business for Livelihood for the year 2011-12. This converges the fundamental themes of spreading growth to disadvantaged sections of society, building skills for meeting emerging economic compulsions, and fostering a climate of good governance. In line with this, CII is placing increased focus on Affirmative Action, Skills Development and Governance during the year. With 64 offices and 7 Centres of Excellence in India, and 7 overseas offices in Australia, China, France, Singapore, South Africa, UK, and USA, as well as institutional partnerships with 223 counterpart organisations in 90 countries, CII serves as a reference point for Indian industry and the international business community.
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Working capital management managing your cash forecasting and re-forecasting optimising tax cash flow savings improving management information
Protecting profits product portfolio analysis optimising pricing strategy enhancing terms of trade identifying overhead savings Operations and cost reduction establishing cost reduction programmes improving supply chain enhancing operational efficiency outsourcing back office functions
Human capital management optimising pension and benefit schemes retaining the right talent devising tax efficient packages enhancing reward packages Strategic direction benchmarking against competitors entering new markets identifying acquisition opportunities reviewing business plans
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A thought-provoking research-based report on urban governance and management, developed in knowledge partnership with the Confederation of Indian Industry (CII).
A topical publication focussed on the emerging trends, challenges and issues in the real estate sector of India. www.wcgt.in/publications
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To know more about Grant Thornton, please visit www.wcgt.in or contact any of our offices as mentioned below: Confederation of Indian Industry The Mantosh Sondhi Centre 23, Institutional Area, Lodi Road New Delhi 110 003 (India) T: 91 11 24629994-7 F: 91 11 24626149 E: ciico@cii.in W: www.cii.in NEW DELHI National Office Outer Circle L 41, Connaught Circus New Delhi 110 001 T +91 11 4278 7070 CHENNAI Arihant Nitco Park, 6th floor No.90, Dr. Radhakrishnan Salai Mylapore Chennai 600 004 T +91 44 4294 0000 KOLKATA MBC 6th floor Block A 22 Camac Street Kolkata 700 016 T +91 33 4019 2219 BENGALURU Wings, First floor 16/1 Cambridge Road Ulsoor Bengaluru 560 008 T +91 80 4243 0700 GURGAON 21st Floor, DLF Square Jacaranda Marg DLF Phase II Gurgaon 122 002 T +91 124 462 8000 MUMBAI 16th floor, Indiabulls Finance Centre Elphinstone Mill Compound 612/ 613, Senapati Bapat Marg Elphinstone Road, Mumbai 400013 T +91 22 2367 1623 CHANDIGARH SCO 17 2nd Floor Sector 17 E Chandigarh 160 017 T +91 172 4338 000 HYDERABAD 7th Floor, Block III White House, Kundan Bagh Begumpet Hyderabad 500 016 T +91 40 6630 8200 PUNE 401, Century Arcade Narangi Baug Road Off Boat Club Road Pune 411 001 T +91 20 4105 7000
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Disclaimer: The information contained in this document has been compiled from various public sources believed to be reliable, but no representation or warranty is made to its accuracy, completeness or correctness. The information contained in this document is published for the knowledge of the recipient but is not to be relied upon as authoritative or taken in substitution for the exercise of judgment by any recipient. This document is not intended to be a substitute for professional, technical or legal advice or opinion and the contents in this document are subject to change without notice. Whilst due care has been taken in the preparation of this report and information contained herein, Grant Thornton does not take ownership of or endorse any findings or personal views expressed herein or accept any liability whatsoever, for any direct or consequential loss howsoever arising from any use of this document or its contents or otherwise arising in connection herewith. Grant Thornton India LLP. All rights reserved. www.wcgt.in