Saturday, September 23, 2017

The Real Impact of the RERA Act

It’s been over four months since the Real Estate Regulation Act (RERA) came into effect in India. While the much-welcome move from the Indian parliament came as a boon for home-buyers in the country, there were (and still are) a lot of teething issues for developers and builders and the real-estate sector as a whole.

As is known, the RERA Act covers all projects that were still being executed and hadn’t received a Completion Certificate as on the date of commencement of RERA Act, that is May 1, 2017. Thus, many under-construction properties have come under the ambit of the RERA Act. All of these projects had to be registered with the housing regulatory authority, and the developers or builders concerned had to provide regular updates on the approvals at various levels. All these registered properties have to follow the rules of RERA.


  • The Much-Needed Respite

One of the highlights in the RERA guidelines is that any real-estate property, be it a luxury apartment in OMR Chennai or a simple 2BHK in a suburban location of Mumbai, will be priced on the basis of the carpet area, and not the super built-up area. As per a report in The Economic Times, BMR & Associates LLP’s Manoj N Kumar, who is a Partner in Direct Tax, has clarified that the carpet area is 30–35% lesser than the super built-up area of a project. The sale of projects on a carpet-area basis can lead to a significant increase in the per-square-foot price of the project, he adds.


  • The WIP Bane

The newly introduced rules under the RERA Act bring about a major transformation in the way real-estate dealings have been taking place in India. Switching to the new rules was expected to take some time, especially in the case of under-construction properties that have already seen a lot of paperwork. And, as can be seen, the shifting of gears has slowed down the growth of the sector in many states. The properties that were under construction at the cusp of the switch to RERA are bearing the worst brunt as their regularization and documentation had to be changed midway. And, until these properties get completed, their respective builders and developers are not willing to start off with new projects. This means, there is a lot of pressure on them to complete the ongoing projects and sell them, failing which there will be a pile-up of unsold inventory.


  • The DeMon-RERA Impact

Experts express unison in the opinion that the demonetization drive by the Indian government in November 2016 was a blow to the real-estate sector because of the unprecedented and heavy cash crunch that made an appearance without any warning. Add to that, the RERA Act has forced builders and developers to mend their ways and set things straight, and bring about transparency at every level.

The back-to-back moves by the Indian government have taken the businessmen in the sector by shock, and it is only natural that they will need time to ensure things are in order. Until then, the sector is expected to continue facing a slowdown. However, given the motive of RERA to ensure thorough regularization and accountability in real estate, it is believed that the sector will start looking up gradually and that the benefits of the Act will be here to stay.


This is a guest post by Dinesh Dhawde

Saturday, September 16, 2017

Joint Venture agreement and registration process between a land owner and the real estate developer in India.

Author: Sachin Gupta | Find me on Twitter

In one of our earlier post, we covered the topic of joint venture agreement between landowner and the real estate developer. Keeping in mind the interest shown by audience in that article and the number of emails that we received about a sample joint venture agreement, we have decided to write another post covering sample agreement and registration process between a land owner and the real estate developer.

An owner of a piece of land (an individual or a company) can enter into an agreement with a developer to construct residential or commercial premises on land owned by the former, with the developer getting a right to sell the whole or part of the building to be built. The consideration payable to the owner in this case may be in the form of a lump sum (to be paid upfront or in installments) or alternatively in the form of a share in the property to be built or a combination of payment plus part of the property to be built.

Find below the sample joint venture agreement between a land owner and the real estate developer.




Source: National Housing Bank




Have any Questions?

Saturday, September 9, 2017

What are the main approvals you need from the concerned authorities in urban areas while constructing a house in India?

Author: Sachin Gupta | Find me on Twitter

Building one’s own house is what most people dream of. You are always filled with the excitement of designing your bedroom, drawing room, choosing the right set of tiles for the floor, bath fittings, modular kitchen design, etc.  However, in all this frenzy, one might lose track of important approvals that are required from the city planning bodies.

To ensure that your dream home takes a concrete shape in a smooth manner, you need to obtain certain approvals from the concerned authorities such as Municipal Corporation, Area Development Authority, Electricity Board, Water Supply and Sewerage Board, etc. You must submit relevant documents/certificates along with the design plan to the concerned authorities.

In case, you are not constructing your own house and rather you are buying it from the real estate developer in a group housing society, then again, you need to verify that your developer has approvals from the concerned authorities such as Municipal Corporation, Area Development Authority, Electricity Board, Water Supply and Sewerage Board, etc.



Here is a quick reference for the main approvals you need from the concerned authorities in urban areas while constructing a house:






Have any Questions?

Monday, September 4, 2017

Chennai Real Estate Crawls out of Lull; Witnesses Growing Demand and Cut in Inventory

The dampening effects of the demonetization policy on the real estate market in Chennai seem to have started to reverse. The policy, which was announced in November last year, coupled with the real estate bill and the devastating floods that shook the city in 2015, had a back-to-back blow on property rates in Chennai. The result was that the city started accumulating a lot of unsold inventory owing to paucity in demand, although, surprisingly, the rates were not going down.

Now, it seems, the rates of residential properties are coming down notably. And, taking advantage of this emerging trend of price fall, buyers are taking properties on rent instead of purchasing them. According to The Real Estate Management Institute, the average weighted rental value of residential properties in Chennai, as well as some other tier-I cities like Mumbai and Delhi,are on an upswing--somewhere in the range of 8% to 12%. Moreover, media reports suggest that banks and other financial institutions, too, are contributing to this positive development by bringing down lending rates for home loans.

Experts note that there has been about 15% increase in property sales in the first half of 2017 as compared to the same period last year. They attribute this growth to the demonetization policy of last year. A majority of the property rate hikes this year were seen in South Chennai, in relatively affordable places like Mahindra World City, Navalur, Padupakkam, Sholinganallur, and Thalambur.

The spurt in demand has brought about a major reduction in unsold inventory in Chennai, with a supposedly 30% drop in the past two years, according to Knight Frank India. Because there was a bulk of unsold inventory over the past 1.5 years, there were no new flats coming up in Chennai. The real estate consultancy believes that the unsold inventory in the city can easily be exhausted in another six years.

With the real estate market scenario getting better after the demonetization drive, commercial office space demand is slowly increasing. This, according to Knight Frank India, is a sign of employment prospects, which will lead to increasing incomes and housing needs, which means need for more residential properties. The vacancy levels of office space has come down to 10.8% in Jan-Jun 2017 from 22.5% in the same period in 2015. The highest rental growth has been witnessed in the Old Mahabalipuram Road or OMR Business District, in locations such as Guindy and Taramani.

The major contributor to the commercial real estate market in Chennai has almost always been the IT sector. This sector alone accounted for 0.7 million sq ft of office space in the city in this year. However, demand from the banking and financial sector is also increasing. With the limited office space now, and the increasing demands, the weighted average rental values of commercial real estate have increased to about Rs. 55 a month for one square foot.

This is a guest post by Dinesh Dhawde.

Saturday, August 26, 2017

HRA Exemption, Rent Deduction and Tax Benefits for Home Loan in India

Author: Sachin Gupta | Find me on Twitter

Many a times, we are all confused with tax calculations on House Rent Allowance (HRA) and tax benefits on home loan, etc. Believe it or not, planning your HRA carefully can go a long way in your financial planning and therefore studying and understanding the various guidelines related to HRA is paramount for a salaried class and a business person.


  • HRA Exemption:

According to section 10 (13A) of Income Tax Act, 1961 read with rule 2A of Income Tax Rules, least of following three is exempt from tax:

  1. Actual HRA received 
  2. Rent paid in excess of 10% of salary (Basic + DA) 
  3. 40% of salary (50% if residing in a metro i.e., New Delhi, Kolkata, Chennai or Mumbai) Salary for the above purpose means BASIC + DA.


Let’s take an example. 
Suppose that you’re residing in Mumbai and paying a rent of Rs 20,000 per month and that your salary package comprises of the following: 
  1. Basic — Rs. 50,000 per month
  2. DA — Nil 
  3. HRA — Rs. 20,000 per month (40% of basic)

Now, the exempted amount of HRA will be least of the following three figures: 
  1. HRA received i.e., Rs. 20,000 
  2. Rent above 10% of basic i.e., Rs. 15,000 (Rs. 20,000 – Rs. 5,000) 
  3. 50% of basic i.e., Rs. 25,000
The least of the three is Rs 15,000; therefore, in this particular case you’re entitled for HRA tax exemption of Rs. 15,000 p.m. (per month) out of total HRA received of Rs. 20,000 per month.


In other words, net taxable portion of the HRA works out to be Rs 60000/- per year. 
net taxable portion of the HRA = Total HRA received per year – HRA Tax exempt per year
                                                    = (HRA received per year Rs 240000/-) - (HRA tax exempt per year Rs 180000/-)
                                                   =Rs. 60000 per year


There are four variables in HRA tax calculations namely, salary (i.e. basic pay plus DA), HRA received, rent paid and the city of residence (whether metro or non-metro). In case all of the four elements remain same throughout the year, the HRA tax exemption calculation is to be done on ‘annual’ basis. On the other hand, if there is a change in any of the variable during the year then HRA tax exemption calculation is to be done on monthly basis.

In case the place/city of residence and place/city of working is different, for the purpose of HRA calculation, place of residence will be considered and not place of working. Suppose that you’re working in a factory or a company located in Meerut (near New Delhi) while residing in New Delhi. So, for the purpose of HRA, your maximum entitlement for tax purpose will be 50% of the basic instead of 40% because for metros HRA tax entitlement is 50% and for non-metros it is 40%.

If the employer refuses to allow the HRA tax benefit, then in that case just claim it while filing your return of income and get the refund of excess TDS deducted from your salary. Further with effect from AY 2014-15 a person claiming HRA of more than INR 100000/- will have to submit the PAN of the landlord to claim the exemption. 

Both the working spouses can claim HRA tax benefit separately, if both of them are paying rent and landlord issues either two separate rent receipts or only one receipt specifying the amount or proportion paid by each, then both husband and wife are entitled for HRA exemption according to the amount of rent paid. 

One can avail tax benefit of HRA if the person is living in the house of his/her parents. In such a case, one will be entitled for HRA tax exemption, but the owner of the house who may be the father/mother is assessable for the rental income derived from the house, provided such transaction should be genuine & not with an intention to evade tax. However tax benefit of HRA will not be available if one is living in the house of his/her spouse as no commercial transactions can occur between Husband & wife.



  • Deduction for Rent Paid

A self-employed person can claim tax benefit for the rent paid for his residence and can claim a deduction under section 80GG of the income tax act. As the self-employed person doesn't receive any salary, so there is no HRA and consequently question of HRA exemption – under section 10 (13A) of Income Tax Act, 1961 read with rule 2A of Income Tax Rules –doesn't arise.


As far as home loans are concerned following tax benefits are available to the tax payer:
  1. Tax benefit on principal repayment under Section 80C – Repayment of Housing Loan subject to maximum limit of INR 100000/-. (Maximum deduction under section 80C is INR 100000/-).
  2. Tax benefit on interest payment under Section 24(a) & (b). For self occupied property INR 150000/- and for let out property or deemed to be let out property there is no monetary limit to for interest payments.

  • Claiming both HRA and Home Loan Tax benefit
You can Claim both HRA and Home Loan Tax benefit provided you have a house in one city for which you have taken a home loan and you reside in another city due to work or similar reasons, then you are eligible to avail all the benefits including HRA, tax benefits on principal repayment of home loan and tax benefit on interest payments of home loan. But, if your house is vacant then you still have to pay notional rent income.

In this case the following situations will arise:

Your own house remains unoccupied while you stay in any other accommodation due to employment/business/profession reasons.  You may stay at a place – it may be a different city or a different location within the same city - different from the place where your own house is situated.  

  • Rented accommodation – You are paying rent:  In this case, you can claim HRA tax exemption while your house will lose the status of self-occupied property and will be treated as deemed to be let out, and thus its notional rental income will be taxable in your hands. However you'll get all the housing loan tax benefits i.e. both interest deduction u/s 24(b) and principal repayment under section 80C.

  • Non-rented accommodation i.e., you're not paying rent as the rent is not being paid, the question of HRA tax exemption does not arise. However, your house will be treated as self-occupied and you'll get the housing loan tax concessions i.e. interest deduction under section 24 and deduction for principal repayment under section 80C. 


In a nutshell, if you have a house, either stay in it or rent it out. Don't leave it vacant else notional rental income of your house (even if it is the only house you own) becomes taxable in your hands although you continue to get the interest deduction on housing loan u/s 24(b) and deduction for principal repayment of loan u/s 80C. Furthermore, as regards the HRA, you will be getting the tax exemption under section 10(13A) so long as you are staying in a rented accommodation and actually making the rent payment, irrespective of whether you are having your own house(s) or not.




Have any Questions?

Saturday, August 19, 2017

Resale Vs. New property – 10 Things to think about

Buying a resale property differs from buying a newly constructed one, both in terms of legality as well as the buying process. The properties listed on resale are often priced higher than the original cost considering factors like new amenities, pricing trends in the vicinity, ease of commuting to the city, malls, schools and hospitals, overall civic amenities in the area, etc.

However, there are several advantages of buying a resale property, such as…

  1. Immediate possession of the property
  2. Escaping the rent and EMIs simultaneously
  3. Getting to see the desired specifications completely
  4. No construction delays
  5. Time for planning your move-in
  6. Tax sops on home loan from the beginning 


In spite of the advantages at a higher price level, it is imperative to know what to expect and what you will get in a resale-apartment deal. 

  • Talk to the experts 
There’s definitely a friend or acquaintance who has invested in a resale apartment in the past, and is evidently happy with the purchase. Ask how they went about the purchase. Also try to understand the general legal procedure. Apartment specific details may not be similar to your desire, but certain basics always match. 

  • Check for clarity in the ownership context
Although one feels it’s easy to hire a lawyer or an estate agent, it’s better to be well versed in certain areas for your own understanding. Check the title of the property, as its clearance is highly essential to avoid any sort of fraudulent selling. 

  • Documents
Check for all documents available with the purchase. Some of them are project commencement certificate, completion, occupancy and sale deed. Also check for the authenticity of the same with a lawyer or an agent of your choice.

  • Clearance of loans taken 
Check whether the property is completely free of past loans taken by the builder. Check with bank personnel to conduct this verification because they have the necessary network to do so. 

  • Eligibility to apply for a new loan
Considering that you need to fund your purchase through a loan, and this would be a resale property, cross check with your bank about the amount that you are eligible to receive as a loan. Verify that you have the all-important documents to process your loan application. Sometimes it is better to fund the property partly through a loan, even if you can afford the entire payment. Outsource the due diligence to bank authorities and stay rest assured about the safety of the investment. 

  • Conduct an evaluation of the property
It is important to get your desired property evaluated for its market value. This is required firstly to ensure that the finances are planned properly. Secondly, check whether the property prices are predicted to fall, which would discourage the banks from granting you a loan amount that you are eligible for. 

  • Down-payment amount
Make prerequisite arrangements to pay an initial lump sum amount as a down payment for the purchase. The banks usually give you close to 80% of the total price on the property as a loan. 

  • Age of the property
The ratio of loan amount received and the amount of down payment varies based on the relative age of the property. Older properties tend to be valued away from your advantage because banks try to safeguard their interest. Thus, the down payment for an older property would be a larger amount with respect to the loan you can avail.

  • Maintenance fees charged by the society
This is a monthly recurring expense after you occupy the purchased apartment. Ensure that your budget can accommodate it with the EMI that you would be scheduled to pay every month to the bank for some years as well. 

  • Reason for the sale
This should have appeared much higher in the list, but you can find out the reason for sale only after you build a rapport with the owner. Try finding out the reason behind the sale. Although it is not always necessary that you get authentic information, do ask to understand the intentions.

This is a blog post by Bharath Joshi who is the Marketing Executive for Unishire Signature in Bangalore.

Monday, August 14, 2017

Due - Diligence: A must do exercise before investing in a property

Author: Sachin Gupta | Find me on Twitter
 
Sumit Sharma was ecstatic having done renting vs. owning and home loan analysis and was now all set and ready to go for his dream home. All of a sudden he got to know from various sources such as newspapers, radio and his colleagues about some cases where builders have failed to deliver the project on time, or there were litigation issues and deviations in homes from what was promised. That was a cause of concern and since, buying a home is a lifelong decision and therefore nothing should be left to luck. He decided to go for a comprehensive check with the help of a real estate agency. The agency adopted the L BID (Lets Break It Down) approach and came out with following verification:

Verification of the Project:

1. The agency got the copy of most important documents in verification of a new project such as Copy of intimation of disapproval (IOD) and commencement certificate (CC) from builders. Only after complete verification, they recommended the client.
2. They asked for and studied the copy of approved drawings of the project for an under construction project and recommendations were made accordingly.
3. Land title verification is crucial in a sense that land should be free of litigation and any kind of associated debt. The agency with a team of legal professionals verified the land documents.
4. They also checked the copy of functional water connection, electricity connection, and occupation certificate in order to make sure that deal was hassle free and transparent.
5. The agency also checked if the property to be bought is mortgaged with the lender (such as bank, or housing finance companies). If that was the case, they asked for a NOC (no objection certificate) from the lender.

Verification of the price of home:

1. In addition to the base selling price, there are other additional costs associated with the project. The agency hired by Sumit Sharma also verified the total cost of home in addition to project verification.
2. Stamp duty verification: to check if the rates quoted by builder are on the super built up area or carpet area.
3. Registration Fee: to check if the rates quoted by builder are on super built up area or carpet area.
4. Floor rise: to check for the prices with the builder
5. PLC charges: to check for the prices with the builder
6. Infrastructure development cost (IDC): to check for the prices with the builder
7. External development charges (EDC): to check for the prices with the builder
8. Car parking charges: to check for the prices with the builder
9. Society and club membership: to check for the prices with the builder
10.Electricity and water charges: to check for the prices with the builder
11.Power Backup charges: to check for the prices with the builder
12.Lease Rent one time: to check for the prices with the builder
13.Interest Free Maintenance Security (IFMS): to check for the prices with the builder
14.Fire Fighting Charges (FFC): to check for the prices with the builder
15.EEC: to check for the prices with the builder
16.Extra space in storage rooms and lawns: to check the prices with the builder

The agency verified all these charges with the builder and asked for them to be included in the builder buyer agreement in order to avoid future escalation of the price.

Verification of other important elements:

1. Monthly maintenance charges
2. Ratio of carpet area to super area
3. Delivery date and what are the penalties if project is delayed?
4. Penalties for deviation in size of the house
5. Who is the supervisory authority and legal dispute authority?
6. Possibility and ratio of loan availability.

The bottom-line is to carry out property & builder assessment, verify the charges, legal terms and get them included in the sale agreement.

So friends, have a look at this checklist and if need be take the services of a professional real estate agency or lending institutions in order to make sure that your lifelong savings are being invested in the right property.


Have any Questions?
 

Monday, August 7, 2017

Tips for landowners before they enter into a joint venture agreement with real estate developers

Author: Sachin Gupta | Find me on Twitter

Recently, our team was interacting with some of the landowners who have entered into a joint venture agreement with real estate developers in Delhi NCR region. Now, believe it or not, most of these landowners are inheritors of ancestral property and have no clue about the legalities of a joint venture. They go as per the words of their confidants and sometimes find themselves into trouble. Take this, a landowner who entered into a joint venture agreement with a real estate developer in 2006 still finds that his land has been locked by the developer and there are no signs of the proposed group housing project taking off. What can you as the owner of land do before entering into a joint venture with a property developer?

1. First of all, what is a joint venture between a landowner and a real estate developer?
Joint ventures are formed by at least two parties with the objective of achieving a specific investment return. Unlike many other business agreements, when the objective is achieved, the joint venture is usually terminated. Following are the attributes of a joint venture.

  • Risk sharing: A single investor may be unwilling to undertake a real estate venture because of its size, location, capital requirements, and/or duration. However, by sharing the risk, two or more parties may be willing to undertake the venture.
  • Combining expertise with capital: Joint ventures are frequently formed as a way to pool equity capital from one or more sources, as well as a means of bringing parties with different expertise to the venture. A joint venture could also involve purchasing existing properties and operating them. In this case, one of the parties may be responsible for acquisition, leasing, and management, and others may provide capital.
  • Speculative objectives


2. Organizational forms
Participants in joint ventures may include any combination of individual investors, partnerships, corporations, or trusts. However, a joint venture in and of itself is not a legal form of organization. In order to specify capital contributions, rights, duties, profit sharing, and the like, a joint venture agreement or a business entity must be created. The choice of organizational form used to accommodate those various groups of investors could be a partnership, corporation, Pvt. Ltd, or trust. Partnerships are frequently the vehicle of choice in real estate joint venture.


3. Profit sharing
Because the parties to a joint venture may contribute different things, and possibly in different proportions, a partnership must be structured such that it provides economic incentives for all parties. Differences in tax status of investors also may affect the way partnerships are structured.

A joint venture can take on a number of different partnership forms. The most common is the limited partnership. As is the case with all partnerships, there must be at least one general partner and any number of limited partners. Generally, in real estate, limited partners are the investors that provide most of the equity capital, while general partners are usually responsible for managing the partnership assets and may contribute a relatively small portion of the required equity capital.


4. Following factors are considered by potential investors for structuring a joint venture.
  • How much initial capital will the parties contribute and how will the parties contribute additional capital if needed in the future?
  • How will the parties share in the annual cash flows to be produced from operating the property?
  • How will the parties share in the cash flow received from sale of the property?
  • Will some of the parties receive a preferred return? Will the preferred return be paid from annual cash flows and/or from sale?
  • Will taxable income (or losses) and capital gain (or loss) be shared in the same proportion that operating cash flow to be distributed?
  • Who will have control over the operation of the property and decisions involving capital improvements, approving leases to tenants, financing and possibly refinancing the property, and when to sell the property?

5. Points you as the owner of the land must keep in mind:
  • Check the credentials of the developer. His past record and success in achieving targets.
  • Before entering into a joint venture agreement with a builder, register your company and transfer the land on the book of this new entity. You can hold 100% of shares of this new entity or shares can be held by various promoters depending on their claim in the land. The new entity formed should ideally be registered as private limited company under the company’s law act of India.
  • Now, enter a joint venture agreement with a builder’s company. Therefore, the agreement is between two companies. One providing land for the development of the project and other providing capital and expertise to develop the project.
  • How do you decide on profit sharing? Well, we have defined it above. However, Recent trends in India indicates a 1/3rd – 2/3rd rule. 1/3rd of the project outflows going to the landowner and 2/3rd of the project outflows going to the real estate developer.
  • As a landowner, make sure that the number of housing units or the developed area of the project is assigned to you and is clearly mentioned in the joint venture agreement. For example, in case of housing project, you should have the housing unit number, size, and floor in the joint venture agreement.
  • As an example, a landowner enters into a joint venture agreement with a ABC real estate developer Pvt. Ltd. The plot of land measures 20 acres and about 600 housing units would be developed. As a thumb of rule, 200 units should be assigned to landowner and remaining 400 to the builder. For a landowner, this kind of agreement is safe and can result better returns for his/her land as opposed to the agreement wherein builder pays the 1/3rd of the cash inflows to the landowner on the sale of housing units.
  • Hire a professional legal company with expertise in real estate joint agreements, and due-diligence.


Have any Questions?

Monday, July 31, 2017

How Will Real-estate Buyers Benefit From the RERA Act?

After over a year since the Real Estate Bill was presented in the Rajya Sabha, the Real Estate Regulatory Authority (RERA) Act is finally here. The much-awaited Act, which was implemented nationwide on May 1st this year, is aimed at bringing about the required accountability and transparency in the real-estate sector, which has so far been unregulated. Buyers across the nation, including those investing in expensive properties such as villas in Electronic City in Bangalore, are expected to be in the know of projects, right from the get-go.

A day before the implementation of the Act, M Venkaiah Naidu, Union Minister for Urban Development, Housing and Urban Poverty Alleviation, Information & Broadcasting, had tweeted, "#RERA promotes accountability, transparency & efficiency in the sector. Buyer set to be King. Promoter benefits from king’s confidence."

Here are a few benefits that buyers of real estate are expected to gain from the newly implemented RERA Act:
  • The Act will regulate the development work of projects that were ongoing as on the date of commencement of the Act, that is May 1, 2017, and for which the Completion Certificate was not issued. Which means, all ongoing and upcoming real-estate projects will have to be compulsorily registered by the developers. And, the registrations will need to be done before the projects can be marketed.

  • The term ‘carpet area’ has been given a clear meaning in the new Act. It states that the term covers usable spaces, including all areas covered by the internal walls—such as the kitchen and toilets—and excludes areas covered by the external walls—such as balconies and open terrace areas. And, buyers will need to pay for only the carpet area.

  • Unlike earlier days when there was not much transparency in the development work undertaken by developers and promoters, under the new RERA Act, all project-related details, including layout, sanctioned FSI, and number of floors/wings/buildings will need to be shared with buyers.

  • Quarterly updates on the development of the projects will need to be posted by the developer or promoter on the RERA site. The updates will concern the government approvals granted, overall status of the project, etc.

  • In case the developer provides false information regarding the project or breaches any of the provisions of registration, he will be liable to pay up to 5% of the estimated cost of the project.

  • Developers cannot take more than 10% of the project cost as advance without entering into a written agreement for sale.

  • To prevent misuse of the money invested by real-estate buyers, developers and promoters will have to transfer 70% of the received money to an escrow account. This money will be withdrawn for covering construction and land costs, and that too after the necessary certificates are issued by the architect, engineer, or CA concerned, stating that the said repairs are imperative. This measure is aimed at curbing developers’ practice of using buyers’ money for a project other than the one for which the money was reserved.

  • In case the developer does not hand over the possession of the property to the rightful allotted person, the latter can withdraw from the project and seek 100% refund of the amount paid, along with interest.

  • Any structural repair costs in the property will be borne by the developer for five years, as against two years earlier.

  • Non-compliance with the RERA Act will lead to up to three years of imprisonment or a fine of up to 10% of the estimated cost of the project, or both.

This is a guest post by Dinesh Dawde.

Tuesday, July 25, 2017

Rent vs Buying a house? What should I look for?

Author: Sachin Gupta | Find me on Twitter

This piece of the blog is primarily meant for residential end users/occupiers who will either end up owning or renting a house. Now, owning or renting is a dilemma which most of us face sooner or later in our careers. As easy as it may sound, but the decision is never without its fare share of glitches. Sumit Sharma, 29 years old, got recently married. He moved to Gurgaon 3 years ago and is currently working in a reputed company with decent salary and like most people of his age group he was stuck with this dilemma of owning vs. renting. On one hand there is easy access to home loans and plentiful of home supply with most builders screaming aloud from the rooftop to sell their real estate projects across India (oops...Houses) but on another hand there are some worries such as monthly installments, maintenance issues, locality, property valuations, and so on.

So, what are the factors that encourages owning as compared to renting and vice versa. Let’s Break It Down (L BID) to smaller elements. The core elements in this dilemma are:

- Down Payment element
First thing first, the most important element of making a decision to own a house boils down to down payment issue. In most cases, 15-20% of house value is paid towards down payment while the remainder is provided by the bank loan if credit worthiness of the person in consideration is good. Now, minimum price for a ready to move apartment in low rise or high rise building in Delhi NCR region (check the prices for other regions) ranges from 35 lacs to 40 lacs (prices vary for different locations). So, one has to have a minimum of 6-8 lacs in his/her pocket before even thinking of owning a house.

- Cash Flow element
Now, having passed through the first element with flying colors one has to do some cash flow calculations before going to the builder. Minimum rent for a similar apartment in Delhi NCR region (check rentals for other regions) ranges from 12 to 18 thousands with no overheads of property taxes, maintenance, insurance etc, whereas cost of owning will include loan installments + property taxes + insurance + maintenance charges. Monthly loan installment for the remaining 29 to 32 lacs will dent one’s pocket by at least 25 to 30 thousands depending upon the interest rate and tenure of the loan. Globally, housing is considered affordable if it is accessible at 25 to 40 percent of gross monthly household income for either rent or loan installments.

- Bubbles in House Price/Future Value
Bubbles normally lead to exorbitant prices when considered in relation to the underlying fundamentals. In Delhi NCR region, one would have noticed that residential property prices have appreciated sharply compared to the rentals. In most areas of NCR, the prices have appreciated by about 3-4 times in last 5 years whereas rental appreciation had been rather weak. What does this suggest; I guess you guessed it right, the price appreciation in property is not indicative of the actual demand & supply elements. Rather it’s the result of expectations that investors, builders are placing on the region due to forecasted economic growth. Now, when expectations are multiplied by expectations year after year, it leads to bubbles and you & I can only be the victims of the bubbles positively or negatively (in case the bubble bursts).

- Flexibility element
Flexibility element is crucial for those who tend to relocate because of employment, family, or other reasons. It doesn’t make any sense for a person to buy a house for 2-3 years and then again have to sell it because of relocation unless the house is purchased with an investment perspective.

- Credit Quality element
Those who are just starting their career with limited salary and no previous bank record will find it difficult to get the loan unless one has sufficient equity at his/her disposal and hence renting is the most likely choice for them.

- Ease of transportation
In metros and especially in Delhi NCR region, home-office-home travel is getting longer by the day. Buying a house nearer to the office is being considered a vital element. However, that comes with a heavy price tag. However, renting a house close to the office could be a serious consideration if one’s primary focus is the proximity to the office.

- Recreational activities
With changing lifestyle, recreational activities play an important role in one’s decision to own or rent a house. Other facilities such as shopping malls, schools, local connectivity also adds to decision making process of buying/renting the house. However, all these facilities come with a price tag especially in case of buying.

So friends, having considered all the above elements, a certain weightage can be given to each element and final result should be evaluated in favor of owning vs. renting. The analysis can yield different results for different individuals depending upon how much weightage they assign to each element.



 
Have any Questions??

 

Monday, July 17, 2017

What are Real Estate Investment Trusts and why do we need them badly in India?

Author: Sachin Gupta | Find me on Twitter

Recently, Securities and Exchange Board of India (SEBI) has put up Real Estate Investment Trusts (REIT) for public comments in order to draft the final set of guidelines.

So, what are REITs and what benefits can they provide to small investors with 2-3 Lacs of invest-able income? Can these investors invest small amounts in REITs? We explore here.

A real estate investment trust is basically a creation of the internal revenue code. It is a real estate company or trust that has elected to qualify under certain tax provisions to become a pass-through entity that distributes to its shareholders substantially all of its earnings in addition to any capital gains generated from the sale or disposition of its properties. Because the individual investor has the opportunity to pool his/her resources with those of persons of like interests, funds are assembled to permit purchase of buildings, shopping centers, and land in whatever proportion seems to offer the most attractive returns. Investments must be approved and management activities reviewed by a board of trustees who are accountable to shareholders and are ordinarily well qualified to make such decisions.


Following are the requirements to qualify as trust in countries where REITs are in existence for years:

Asset requirements:

  1. At least 75% of the value of a REIT’s assets must consist of real estate assets, cash, and government securities.
  2. Not more than 5% of the value of the assets may consist of the securities of any one issuer if the securities are not includable under the 75% test.
  3. A REIT may not hold more than 10% of the outstanding voting securities of any one issuer if those securities are not includable under the 75% test.
  4. Not more than 20% of its assets can consist of stocks in taxable REIT subsidiaries.


Income requirements:

  1. At least 95% of the entity’s gross income must be derived from dividends, interest, rents, or gains from the sale of certain assets.
  2. Minimum of 75% of gross income must be generated from rents, interest on obligations secured by mortgages, gains from the sale of certain assets, or income attributable to investments in other REITs.


Distribution requirements:

  1. Minimum of 90% of REIT taxable income must be distributed to shareholders.


Stock and ownership requirements:

  1. Be taxable as a corporation
  2. Board of directors or trustees should manage the REIT
  3. Fully transferable shares
  4. REIT shares must be transferable and must be held by a minimum of 100 persons


REITs that are not listed on an exchange or traded over the counter are generally called private REITs.



Various types of REITs:

Industrial/Office: 
These REITs are further subdivided into those that own industrial, office, or a mix of office and industrial properties. Some analysts further segregate these REITs by property location (i.e., whether they are in CBD or suburban locations). For example, if REITs were to become reality in India, the REIT with focus on Office Space in Gurgaon can result in attractive returns for investors.

Retail:
These REITs are further subdivided into those that own strip centers, regional malls, outlet centers, and free standing retail properties.

Residential: 
These REITs are further subdivided into those that own multifamily apartments and manufactured home communities. Some analysts further segregate those REITs that own student and military housing.

Diversified: 
REITs that own a variety of property types.

Lodging/resorts: 
REITs that primarily own hotels, motels, and resorts.

Health care: 
These REITs specialize in owning hospitals and related health care facilities that are leased back to private health care providers who operate such facilities.

Self storage: 
These REITs specialize in ownership of self storage facilities.

Specialty: 
These REITs specialize in numerous types of properties, including prisons, theaters, golf courses, cellular towers, and timberland. Specialty REITs have been a rapidly evolving segment of the industry.



Have any Questions?

Friday, July 14, 2017

A typical real estate project development process

Author: Sachin Gupta | Find me on Twitter

Once the land development process has been completed successfully, a developer will focus his/her energies on the project development process. Developing and delivering a real estate project successfully is challenging and it lasts for several years passing through various phases. Primarily any real estate project can be divided into 5 phases:


Phase I – Land acquisition
The details about land acquisition process can be found in our earlier post of land development process.


Phase II – Construction
Construction phase requires applying for license (permitting), and project development.

  • Permitting/Licensing:

The permitting process usually begins with an application which identifies the site, its location, and a preliminary design of the improvements to be constructed. This application is then used by public officials to verify compliance with its current zoning classification. If it complies, the permit is granted and the construction of the project may commence subject to building codes and inspections. If the permit is denied, the applicant will usually clarify or amend the application and will ask the city planning staff/director to review it again.

  • Preliminary checklist – Project development:

This checklist is usually the first step that a developer reviews when evaluating a site for possible development.

    1. Allowable uses per zoning classification.
    2. Minimum lot size per zoning classification.
    3. Maximum floor to area ratio (FAR).
    4. Building bulk/density limits.
    5. Setback/building line.
    6. Building height limits.
    7. Building footprint/envelope.
    8. Parking ratios.

  • Important terms/project development:
    1. Setback/building line – requirement to construct building a specified number of feet (setback) from the right-of-way line or other landmark.
    2. Right-of-way line – area designated for a public street or alley that is dedicated for traffic, public use, utilities, etc.
    3. Building related terms:
          • Footprint – it is the shape or outline of the primary building slab or foundation as it will be constructed on the site.
            • Envelope – the total outside perimeter of a structure, including footprints and any exterior patios, mall ways, landscaping, etc.
              • Facade – the exterior, usually the main entrance of a structure
                • Bulk – a three dimensional space within which height, width, footprint, and number of structures/elevations/shapes are viewed in total relative to the land area upon which it will sit to determine land use intensity.
                  • Building codes – refer to required materials and methods used to construct improvements within a jurisdiction.
                    • Permit- document executed by the director of planning authorizing the construction, restoration, alteration, repair, etc., of a structure and acknowledging that it conforms to requirements under the applicable zoning ordinance.
                1. Floor to area ratio (FAR) – it is usually calculated as gross building area divided by square footage of land area.
                2. Height restrictions – used to limit the vertical height of a structure to be constructed.
                3. Allowable use – user activities permitted in a zoning classification
                4. Impact fees – charged by public entities to cover added public sector expenses expected to be caused by the development such as traffic control, drainage, etc.
                5. Incentive zoning – used by city planners to accomplish community goals simultaneously with private sector development.
                6. Inclusion zoning – part of a zoning ordinance that requires that a specified type of development be included in order to obtain permit for that site.
                7. Minimum lot size – per zoning classification
                8. Parking ratio – required number of parking spaces per sq. ft of gross building space or per number of apartment units.
                9. Site plans – drawing done to scale depicting the placement relative to other requirements
                10. Traffic counts – number of vehicle trips per hour past a specific site.
                11. Encroachment – occurs when the construction of improvements extends over a property line on to an adjacent property.
                12. Property tax abatement – forgiveness of taxes for a specified number of years.
                13. Land to value ratio – calculated as rupee value of land to total project value (including land) anticipated upon completion of project.


              Phase III – Completion and occupancy

              There are certain risks in any real estate project development. Once the construction has been completed, there is an additional risk of selling and handing over the project to clients or bringing in tenants in case of rental property. Risk begins with land acquisition and increase steadily as construction commences until cash flows from the leasing phase materialize. It should be noted that factors determining the demand for type of space (such as office, retail, warehouse) being developed are critical to project risk. These factors may manifest themselves in current market indicators, such as vacancy rate levels, rent levels, or the extent of leasing commitments from the tenants.

              A very good understanding of the underlying economic base of an urban area or region is critical when assessing the viability of real estate development.  The point is that investors must examine the demand for space in terms of the characteristics of the demand by end users (tenants) in a given market. This demand in turn depends on the type of employment in the local market and the nature of the functions tenants will perform. Only by understanding the local economy and the nature of employment can developer anticipate demand accurately and produce and supply the quantity and quality of space in the proper combination to satisfy market demand.


              Phase IV – Management

              Once the property is occupied by clients/tenants, there is need for professionally managed facility management team. This team can look into the property management tasks such as maintenance, HVAC, parking management, security, civil works, housekeeping, landscaping, etc. These tasks are equally important and ascertain the long life of property and thus ensure positive rental income as well as capital appreciation. 


              Phase V – Sale
              The developer may choose to sell the property from construction phase onward as happens in residential development in India. Or he/she may choose to hold the property in case of commercial developments provided rental income from the commercial properties is significant enough to justify retention.




              Have any Questions?

              Friday, July 7, 2017

              How to Choose Building Materials and Estimate their Cost and Quantities for House Construction?

              Building material is any material which is used for the construction purposes. Building materials can be categorized into two sources, natural and synthetic. In order to construct a good quality house in the amount you have budgeted, a thorough understanding of the quality parameters, cost and quantities of these building materials are required.

              The cost of construction depends majorly on the following factors:
              1. Architectural Design opted (like Open Top, Sloped Roofs, terraces with add-on features etc.,)
              2. Structural Design (depends upon type of strata available for foundation and numbers of floors / configurations (basement, stilt,G+2 etc.)
              3. Specification of Building materials selected (Quality/Brand of materials used for painting, flooring, woodwork, Bathroom, Electrical etc.)
              4. Exterior Finish chosen (i.e. front elevation design, stone cladding, facade, etc.)
              5. Peripheral external developments (such as compound wall, driveway, landscape, hardscape, Gate etc,).

              The other minor cost head would be cost of liaison, charges for construction permits & building approvals.

              The Construction cost can be broadly split into Labor and Material Cost. The extremely increasing construction trends are considered the driving force behind this fast upraise of total building construction costs. Taking this trend, the material manufactures have raised the prices of materials considerably in last decade or so.

              Before planning for a bungalow/individual construction unit, one must be aware of the quantities and cost of building materials as they constitute around 55-60% of the total construction cost of a house. While taking a personal round of the nearby market, one should also avail services of construction turnkey solution providers and then take a judicious decision before the start of the construction.

              Refer the info graphic attached in the article to get the building material consumption and their costs for a 1000 Sqft budget house construction. The material quantities can be extrapolated based on the built up area of construction you are planning for.




              The Major raw material, intermediately and finished construction materials contributing major pie to overall material cost are:

              1. Reinforcing Bars(Rebars) / Steel:

              Reinforcement steel is the most important structural material in construction. Steel is used in RCC (Reinforcement cement concrete). Generally rebars available in the market are manufactured through Thermo mechanical treatment (TMT). Rebars comes in different grades (i.e, Fe415, Fe500, etc.,). Fe500 is generally recommended by structural designer for structural requirement fulfillment.

              The approximate Steel consumption per sq.ft built up area (BUA) is 4 kg (for low rise construction i.e., less than 4 floors of construction). Steel contributes the most among all individual materials, about 25% of total material cost. So, a price rise of Rs.5 per kg can make big difference in the total cost of construction.

              2. Cement:

              Cement is an important construction material and when mixed with materials like sand, aggregates (stone chips), and water, it binds them together. It is used in concrete, in brick masonry work, in tiling, and in plaster works.

              Good quality cement should feel smooth when rubbed between fingers. If a small quantity of cement is thrown into a bucket of water it should sink and not float. Cement should always be kept free from moisture. Its storage should have finished floor raised to at least 300mm above ground level and should have airtight storage. Use of cement older than 2 months should be avoided as cement loses strength with increase in its shelf life.

              OPC 53 grade is generally used for concrete works and blended cement (PPC & PSC) for masonry, tiling and plaster works.

              The approximate cement consumption per Sq.ft built up area (bua) is 0.4 bags. Cement as a construction material contributes about 16% of total material cost.

              3. Sand:

              Sand is used mainly in Concrete, Masonry, Plaster and Flooring. Good sand should be well graded i.e., particle size ranging from 10mm to 0.150 mm for concrete and masonry works, and 5mm to 0.150 for plaster. It should be free from slit/clay and organic matter.

              Natural Sand (also called River Sand) is obtained from River Beds. Due to environmental impacts and stringent laws by the government, Natural sand is slowly and gradually being replaced by Crushed sand (for concrete and masonry works) & Plaster sand (for plaster works). Crushed Sand and Plaster Sand are manufactured from Quarry Stone using latest production technology.

              Sand consumption per sq.ft built up area (bua) is 1.8 cft and contributes about 12% of total material cost for building construction.

              4. Aggregate:

              Crushed rocks are used as coarse aggregates and are generally used in making concrete. Coarse aggregates are normally available in two fractions 20mm and 10mm for concrete making.

              Aggregates should be clean, dense & hard. The aggregate should be neither flaky nor elongated. Flaky and Elongated aggregates decrease the strength of the concrete and demands more cement. Aggregates should be stored properly and different fractions must not be intermixed. Both these aggregate fractions should be used invariably.

              Coarse aggregate (chips/gravel) consumption per sq.ft built up area (bua) is 1.35 cft. Aggregate as a construction material contributes about 8% of total material cost.

              5. Bricks:

              Bricks, in old days, were commonly made of clay and were known as burnt clay bricks. Now a days, bricks are made of other materials such as fly ash. But clay bricks are still widely used in low rise residential constructions today. Bricks are used for masonry wall construction. Other substitute materials to bricks are Concrete solid/hollow blocks, Autoclaves Aerated Concrete (AAC) Blocks and Cellular light weight concrete CLC Blocks.

              The clay bricks should have uniform size, uniform copper color, plain (without undulated surfaces), rectangular surfaces with parallel sides and sharp straight edges. Well burnt brick should give a metallic sound when struck with other brick. Good bricks should not exceed +/- 3 mm tolerances in length and +/- 1.5 mm tolerances in width and height. Water absorption should not exceed 20% by weight.

              Bricks approximately cost Rs.7000 per 1000 units (Nos). Bricks contribute to about 5% of total material cost and are consumed approximately at 1.45 brick per sqft of built up area (BUA).

              6. Tiles:

              Ceramic tiles are generally made from red or white clay fired in a kiln. They are finished with a durable glaze which carries the color and design. Ceramic tiles are manufactured for both wall and floor, having varying degrees of wear resistance and water absorption. High strength and Low water absorption ceramic floor tiles are commonly known as Vitrified tiles. Tiles prices vary according to their types and quality.

              Tile should be easy to clean, strong, sturdy and stain resistant. Tiles in wet area like bathroom should be of anti-skid floor type.

              Tiles consumption per sq.ft built up area (BUA) is 1.3 sq.ft. Tiles contribute about 8.0% of total material cost.

              7. Paints:

              Paints can be broadly classified into water based or solvent based. They come in thousands of shades and gives multiples finishes like Matt, satin and glossy finish. Certain Paints also have washables, anti-algae/fungal, crack bridging properties.

              When selecting an interior paint, try choosing water-based paint instead of oil-based gloss paint. Water-based paints have less odor than conventional oil-based paints.They are much easier to clean up and are durable.

              When selecting an external paint look for waterproofing, anti-algae, and dirt pick resistance properties.

              Paints (Internal- Emulsion and external grade) consumption per sq.ft built up area (BUA) is 0.18 liter (0.14 liter for internal painting and 0.4 for external painting).

              Paints contribute about 4.1% of total material cost.

              The Finishers (Bricks, Tiles, and Paints) collectively contribute 16.5% of total material cost.


              8. Fittings Category:

              Window, Door, CP Fittings, Sanitary wares, Plumbing and Electrical fittings when combined contribute to 23% of total material cost considering budget brands. Top brand options may increase this category cost to 30 – 35% of the total cost of construction. Fittings can be selected based on one’s requirements and choice. In branded fittings quality should not be a concern.


              Conclusion:

              Other than estimating the cost and quantities of construction materials, one should also have knowledge of current labor cost in local markets. This is because the labor component constitutes to 40-45% of the total cost of construction of a house. An unskilled labor charges Rs. 350 to 400 per day whereas skilled labor such as mason, carpenter, painter, electrician etc., charges between Rs. 800 to 1000 per day. The total cost of construction (including both design, material and labor) per square feet may vary anywhere between Rs.1250 and Rs.2500 per square feet depending on the specifications of the building materials you choose for you house.

              Now that you have the total cost of construction, you can start sourcing the funds required for the project. Your source might be personal savings or loan from banks/ friends. Although this sounds like a naive step, lack of resources during construction might sometime over shoot the budget. Contractors will charge for De / Re-Mobilization. Some of the construction materials like Cement etc., might expire/loose its strength if the project is delayed by long. So sourcing the funding before the start of the project is just as important step as any other. A detailed cash flow for purchasing construction materials has been shown in the info-graphic to ensure smooth construction flow with time.



              This is a guest post by Vinod Kumar Singh

              Friday, June 30, 2017

              World's leading architects - Series 1



              Dear readers, from now on, we will be presenting a series of leading architects and their works spread across the world. In the first edition, we present Sir Norman Foster, a British born architect. Here is the info-graphic showcasing his projects.

              Other leading design houses, architects, consultants looking to reach out to wider audience can submit their entries at nirrtigo@nirrtigo.com

              ”Leading