factors affecting real estate investments

131 Pages·2011·0.43 MB·English

FACTORS AFFECTING REAL ESTATE INVESTMENTS

REAL ESTATE INVESTMENT

INDEX
1. Factors affecting Real Estate Investments
2. FAQs
3. Laws governing Real Estate
4. Indian Real Estate Trends 2008
5. Land records in Karnataka on Web
6. Agreement to sell
7. How to buy Agriculture Land
8. For Non-Resident Indians
9. Taxation and Real Estate Investment
10. Rent Control Acts in India
11. Stamp and Registration
12. Society Laws
13. Details of Home Loans
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FACTORS AFFECTING REAL ESTATE INVESTMENTS
14. Tips on Leasing Property
15. Sample Drafts / Forms
16. Financial and Property Calculators
I.FACTORS AFFECTING REAL ESTATE INVESTMENTS
Real estate sector in India is on upturn. Research estimates that Indian Real Estate market is expected to
grow from the current USD 14 billion to a USD 102 billion in the next 10 years. The main growth thrust
is coming due to favourable demographics, increasing purchasing power, existence of customer friendly banks
& housing finance companies, professionalism in real estate and favorable reforms initiated by the
government to attract global investors.
And, that is the undeniable verdict of a Price Waterhouse Coopers study conducted on the investment environment in terms
of Indian real estate. Ever since the Government of India gave its stamp of approval to 100% foreign direct investment (FDI)
in housing and real estate, NRIs, overseas real estate developers, hoteliers, and others have been tracking a path to the
sub-continent. Sensing the business potential for developing serviced plots, constructing residential /
commercial complexes, business centres / offices, mini-townships, investments in infrastructure facilities e.g.
roads, bridges, manufacture of building materials, etc., FDI is flooding in to take advantage of the tremendous real
estate opportunities.
Indian Real Estate: Growing Potential
The increasing demand for Indian real estate has not only generated employment, it has also been instrumental in the growth
of steel, cement, bricks and other related industries. Estimated to be in the region of US $12-billion, real estate development
in India is growing by as much as 30% each year. Already, eighty percent of Indian real estate has been developed for
residential space, and 20% comprises of shopping malls, office space, hospitals and hotels. Fuelled largely due to off-
shoring / outsourcing of BPOs, call centres, high-end technology consulting and software development and programming
firms, real estate growth in India has great investment prospectives.
Indian Real Estate: Investment Opportunities
Tax reform measures in the last few years have ensured real estate in India is one of the most productive investment
sectors, with money invested in real estate offering regular returns on investment including appreciating in value. And,
the Government of India by opening up 100% foreign direct investment, and fiscal reforms like stamp duty and property
tax reductions, setting up real estate mutual funds has turned real estate into a promising investment option.
Already, it has approved the first Rs. 100-crore FDI project in Gurgaon. With urban populations expected to grow from 290-
million to 600-million by 2021, housing requirements are expected to top 68-million by 2021, which means India 's urban
housing sector could do with an investment of US $25-billion over a 5-year period. Poised for rapid urbanisation, 3 out of 10 of
the world's largest cities are in India . An influx of jobs due to off-shoring / outsourcing has resulted in rising disposable
incomes, increased consumerism, factors responsible for changing the face of residential and commercial real estate in India.
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Wishing to take advantage of real estate investment opportunities, banks and housing finance companies are falling
over themselves to tie-up with developers or offer project loans at competitive rates.
Indian Real Estate: Foreign Direct Investment (FDI)
Recent government policies have seen to it that inbound FDI for housing, commercial premises, hotels, resorts,
hospitals, educational institutions, recreational facilities, city and regional level infrastructure, no longer requires prior
government approval, with the exception of the Reserve Bank of India (RBI). It is important that all inward remittances or issues
of shares to NRIs are reported to RBI within 30-days, and all FDI in the above areas is subject to the following conditions:
Minimum area for development under each project is as under: Serviced housing plots, minimum requirement of 10
hectares. Construction-development projects, minimum built-up area requirement of 50,000 sq. metres. Combination
project, either of the above two conditions suffices. Investment is further subject to the following conditions: Minimum
capital investment = US$10 million for a wholly owned subsidiary, and US$5 million for joint ventures with Indian
partners. Further, the funds have to be brought in within six months of commencing business.
It is not permissible to repatriate original investment before a period of three years from the date of minimum capital
investment. However, if the investor gets prior approval from the Government through FIPB, early exit is permitted.
Fifty percent of the project is to be completed within 5-years from the date of obtaining all legal clearances. No undeveloped
plots can be sold where roads, street lighting, water supply, drainage, sewerage and other conveniences are not
available. Serviced housing plots can only be sold if the investor has provided infrastructure and obtained a completion
certificate from the concerned local body / service agency.
Development has to be in accordance with town master plans, planning norms, standards, and local bye-laws.
The investor is responsible for obtaining all necessary approvals, including building / layout plans, internal / external /
peripheral area development, infrastructure facilities, payment for development and other charges. All development has to be
in compliance with State Government / Municipal / Local Body requirements that are prescribed under applicable rules /
bye-laws / regulations. Further, Non Resident Indians (NRIs) are allowed investment under the Automatic Route of FDI in
the following Housing and Real Estate Sector:
Services plot development and construction of built-up residential premises.
Real estate investment covering construction of residential / commercial premises including business centres, offices,
etc. Development of townships.
City / regional level urban infrastructure facilities, including roads and bridges.
Investment in manufacture of building materials. Investment in participatory ventures in (i) to (v) above
Investment in housing finance institutions.
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FACTORS AFFECTING REAL ESTATE INVESTMENTS
Permissible FDI private / joint / state investment in construction in the export processing zones (EPZS) / special economic
zones (SEZS) is as follows:
100% FDI real estate investment within Special Economic Zone (SEZ). 100% FDI for developing a township within the SEZ i.
e. residential areas, markets, playgrounds, clubs, recreation centres etc.
Standard Design Factory (SDF) building development in existing Special Economic Zones. SEZ land may be leased or
sub-leased to developers as per relevant guidelines for this purpose.
Full freedom to allocate developed plots to approved SEZ units on commercial basis including competent authorities for
provision of water, electricity, security, restaurants, recreation centres etc. along commercial lines.
As you read this, a wide spectrum of changes are and have taken place in Indian real estate. Various proposed reforms e.
g. removal of tenancy laws, computerization of land records, correction in taxation structure etc., are ensuring India emerges as
a favoured and profitable destination for real estate developers / investors, both domestic and international.
Why real estate investment stands out?
• Quantum of investment required is high

• Investment horizon is long

• Dual returns are available in form of rental income and capital appreciation

Investment Returns Volatility Liquidity Risk
avenues
Stock market High Very high High Very high
Bond/Notes Moderate Moderate High Low
Bank deposits Moderate Low High Low
Precious metals High Moderate Moderate Low
Real estate High Low Low Low

The promising avenues of real estate investment:
• Offices

• Shopping malls

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• Retail outlets

• Industrial warehouses

The following table gives a list of the factors to be considered in case of investing in either commercial
or residential real estate:
Factor Commercial Residential
Area • Prime areas with no new • Areas where affordable

supply ahead these areas will housing is available at a very
be more expensive. small premium over cost of
construction.
Location • An easily accessible • Slightly away from the

location, high visibility and
hustle-bustle, yet close to
availability of basic services
shopping areas.
(transport, water, electricity,
bank ATMs).
• Basic services remain very

important.
Quality of
• Infrastructure like • Infrastructure like water

construction
elevators in multi-storeyed and power supply, security,
buildings and generators maintenance services and car
determine yield potential. parking space are some of the
other issues to consider.
• Best to buy from reputed

developers. • But make a first-hand

evaluation and inspection.
Title • The ownership title of the • Some investors opt for

property must be loans only to ensure this as
indisputable, else you could banks do a thorough check to
end up fighting for your rights protect their interests.
for many years in court.
Lease status • A property that is already • Leased premises

leased out to a quality considered better than vacant
(reliable) tenant. This ensures ones (if there is no tenancy
immediate cash flows from dispute).
rentals.
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FACTORS AFFECTING REAL ESTATE INVESTMENTS
Tenant quality • A reputed and financially • Company or bank leases

sound tenant – a big usually preferred as a
corporate house or a bank, for safeguard against disputes.
instance. Banks are attractive
because of their releasability
potential.
Size • Fair to large size: Quality • Small, affordable

lessees will look at a certain
properties see greater liquidity
minimum area. Experts
and genuine user demand.
believe that such spaces will
on average cost more than Rs
• Easier to get tenants for
1 crore, though some good
such houses.
retail spaces could go for less.
Yields and • Normally, if you’ve got • Residential properties are

appreciation the area and location right, less volatile, but you get lower
this won’t give you worries. returns.
But remember to evaluate
yields before investing in
commercial property as prices
of such properties tend to be
a volatile, and capital
appreciation potential is
difficult to assess.

Determining Real Estate Returns:
Real estate returns, like stocks, are determined by a combination of two factors:
• Income (lease rentals, like dividends in the case of stocks)

• Capital appreciation.

The only difference in the two is that in real estate, the lease rentals are fixed, largely predictable over a
period of time and a very significant component of overall returns. Investors wanting to earn rentals
from residential property can get an average yield of around 6-7 %, and this has been constant for a long
time. Most lease deals have an escalation clause that provides for close to 15% upward revision in rentals
after three years. This would further improve the returns beyond the existing tenure. For commercial
property, the lease rental yields are even better at 10-13 % and form the basis for investment.
To arrive at a correct and more realistic estimate of returns, an investor should consider the following
five factors:
• Acquisition cost: The buying costs are higher than other asset stocks. For instance, the transfer of

property requires registration and payment of a stamp duty. Some of the addiction costs involved are:
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• Stamp duty

• Broker commission

• Miscellaneous costs of drawing up legal documents

• Maintenance expenses: While the purchase is a one-time expense, maintenance is an important

recurring cost for preserving the value of your investment, maintenance expenses are normally Rs 5-20 per sq.
ft per month for commercial property depending on the quality of the property, and this needs to be
factored into yield calculations. Further, each lease contract is structured differently and a contract
may incorporate clauses that create some financial obligations for the lessor. To arrive at true it is
thus important to look at yields after deducting such expenses.
• Taxes: Property tax and taxes on capital gains are the two aspects one needs to familiarise oneself with

and consider when evaluating returns and comparing them with those on other asset classes. From the tax
point of view, the points to consider while buying are:
• Cost of acquisition : Apart from the cost of purchase (agreement value), the cost of acquisition

includes stamp duty, registration charges, legal fees, brokerage transfer charges payable to a housing
society, and payments made for parking space.
• Date of acquisition : For taxation purposes, the date of acquisition is taken as the date of execution of

the purchase deed or the date of possession, whichever is earlier.
When renting it out
As the owner, one will be taxed on the annual value under the head income from house property, provided
one does not use it for business or a vocation. The annual value will be the actual rent received/
receivable. When the actual rent is less than the expected rent, the income from the property is taxed on
the national rent (expected rent).
• Interest on borrowed capital : The interest payable is deductible up to Rs 1.50 lakh where a loan is taken

on or after 1 April 1999 and acquisition/construction is completed within three years from the end of the
financial year in which the loan is taken. Otherwise, the interest deduction is restricted to Rs 30,000. With
effect from 1 August 1998, interest paid for self-occupied property is eligible for a set-off against salary
income for the purposes of tax deduction at source by the employer.
• Section 88 : Principal repayments are eligible for a rebate at 15 or 20 % (depending on the income

bracket) of a sum of up to Rs 70,000. This is applicable for housing loans from specified sources like
banks, housing loan companies and most categories of employers.
When selling
• Taxation of capital gains: Gains from property held for less than three years are taxed as short-term

capital gains (STCG) and taxed at the normal tax rates applicable to the tax payer. For property held for a
period exceeding three years, the gains will be taxed as long-term capital gains (LTCG) at a concessional rate
of 20%. Further, in case of LTCG, the taxpayer can claim the benefit of indexation – increase the cost
of acquisition against the inflation index. For property acquired before 1 April 1981 will be taken as the cost
of acquisition.
• Section 50C : In computing capital gains, this section seeks to tax a notional amount in the hands of

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the seller. And so, where the consideration for the transfer of the property is less than the value adopted
or assessed by any State Valuation Authority (SVA) for determining the stamp duty liability, the
consideration actually received will be substituted by the valuation adopted for stamp duty for the purpose
of computing taxable capital gains.
• Exemptions : LTCG is not taxable when it id reinvested in another residential house property a year

before or two years after the date of transfer, or constructed within three years of the date of transfer.
The exemption is also available if the LTCG is reinvested in specified bonds of NABARD, NHAI, REC or
Sidbi within six months of the date of transfer. The quantum of LTCG that is exempt is the cost of the new
asset or the LTCG, whichever is lower.
• Loans: An important cost is the loan taken – including the processing charges and interest. Since real

estate entails a sizeable investment, many investors opt to leverage the asset value to part finance
the investment.
Funding sources supporting investment in real estate:
• Banks

• Financial institutions

• High net worth individuals

• Real estate mutual funds

• Security: When property is rented out, the investor also gets an interest free security deposit and

advance rent. The returns from this also should be considered. The key to investing in real estate lies
in identifying growth areas and factoring in demand and supply for property.
Tips while Buying Property
A buyer should exercise utmost caution while buying property in India, be it for residential or commercial
interests. Below is a real estate purchase checklist that includes tips for property buyers, discussed under
specific categories:
Buying with preliminary research:
It is advisable to identify the property in terms of:
1. Nature of property:
(cid:0)m Whether residential/commercial/industrial
(cid:0)m Whether plot of land/flat/floor/commercial space
(cid:0)m Whether the plot of land on which the building is constructed or is about to be constructed is freehold or leasehold.
2. Type of Seller:
Whether individual/partnership/HUF/joint stock company/Association of persons. Reputation of the builder or seller.
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FACTORS AFFECTING REAL ESTATE INVESTMENTS
3. Potential resale value or the potential rental income of the property.
4. Proximity afforded:
Whether close to central business district, entertainment centres hotels, restaurants, transport hubs, hospitals,
market, schools, etc.
5. Quality of construction:
Whether structural stability of the building, electrical systems, plumbing systems, drainage, sanitary fittings,
roof, walls, ceilings, floors, paint work, foundation, doors and windows is sound or not.
Determining the title and interest of the Seller:
1. Thoroughly check and satisfy yourself with the marketability of the property title in terms of whether the owner is
the original owner and whether the title deed is original. Obtain legal opinion through an Advocate of repute, who
can examine the deeds to establish the ownership of the property by the Seller.
2. Similarly, if you are buying a resale flat, ask for the Purchase Agreement, which is the Agreement between the
current seller and the previous owner and get it scrutinized by an Advocate. He/she will identify whether the seller
is truly entitled to sell the property, whether any mortgage exists on the property and if it has been paid off
and whether there is any lien on the property.

Retain a copy of this document and also check the original.
3. Avoid engaging in negotiations over a disputed property.
Documentation:
1. Ask for all the legal documents in original. Check whether a 'No Encumbrance Certificate' has been obtained to
ensure that no mortgage exists/has been existing on the property. Get a 'No Objection Certificate' from the
Builder/ Society.
2. Check for authentic approvals from government agencies like the land development, planning authority and
Income Tax Department. Ask for original documents and certificates.
3. Get a full and true disclosure of all outgoings such as municipal and other local taxes, taxes on income, water
charges, electrical charges etc.
4. Take a declaration from the seller on what add-on, if any, he is giving along with the property.
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5. Make sure to include every conceivable clause in the Sales Agreement. A Sale Agreement is the only written
evidence of the deal so it should include everything from payment terms to exact description of the title.
6. Understand the finer details of the sale contract properly to arm yourself with knowledge that shall be beneficial
during and after the transaction is complete.
7. Learn about the advantages of Caveat and put one on the title.
8. Take care that all the duties that are to be paid on the property like Stamp duty, Registration fees and taxes is
included in the Sale Deed/Agreement to Sell.
9. Ask for any other information and documents as may be prescribed under the law.
Post Registration Activities:
Subsequent to the registration of the Sale Deed, you should:
Verify that all the taxes, statutory payments in respect of the property including power, water charges are paid till date.
●
Collect deposit receipts given by power and water supply agencies from the Seller. Without delay, apply to the
●
power/water supply authorities to transfer the meters and deposits in your name.
Ensure that the 'Khata' in the records of the Local Bodies, Gram Panchayats or the City Corporation is transferred
●
in your name. The original authorization letter of the Seller and a copy of the new 'khata' have to be enclosed with
the application of transfer.
(A Khata is a document that includes complete details of the land or property in question for the payment of tax.)
Get a good idea of the costs of various components like monthly outgoings, costs of utilities. Do research on the
●
mode of payment and the tenure for which you will be liable to pay taxes.
It is useful to obtain periodical Encumbrance Certificates at least once a year, and make it a routine exercise.
●
You can use the services of a real estate expert to complement your efforts in an effective manner, saving time
and energy and money.

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