Indian Real Estate Sector - Handbook

Transcription

1 Indian Real Estate Sector - Handbook

2 Contents 03 Foreword 05 Key highlights Regulatory developments: the big picture 14 Investment scenario: the ins and outs 21 Major issues and challenges: caution and diligence 27 News round-up 32 The way forward

3 Foreword Pg 3 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 I hope you find it useful and welcome your feedback.

4 Foreword Pg 4 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 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 man s 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 country s 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 country s 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

5 February April June August October December January March May July September November Key highlights Pg 5 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 Land Acquisition Bill, 2011 cleared by the Union Cabinet New draft of the Real Estate Bill, 2011 released for public consultation 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 Benami Transactions (Prohibition) Bill, 2011 introduced in the Lok Sabha Delhi government hiked the circle rates across categories Maharashtra became the first state of India to get Real Estate Regulatory Authority

6 Reforms Revenue recognition Environment Land acquisition Development Rehabilitation Appellate Tribunal Land acquisition Affordable housing Regulatory environment Regulatory Authority Approvals Resettlement Land records Titles Barter transactions Transfer FDI in retail Project costs Growth Policies Governance Law Enforcement

7 Regulatory developments: the big picture Pg 7 The constant evolution of the organised segment of the Indian real estate sector, both in terms of size and growth, in the last two decades has drawn attention towards the need of introducing and improving the regulatory environment. While self-regulation will be the key for better governance and sustainability, 2011 witnessed introduction of a number of reform-oriented moves by the government. Here below is a snapshot of the significant regulatory developments that would affect the sector in the future. Land Acquisition, Rehabilitation and Resettlement Bill 2011 In order to address the issue of land acquisition along with rehabilitation and resettlement of the affected families, the new Land Acquisition and Rehabilitation and Resettlement Bill, 2011 was introduced to overhaul the Land Acquisition Bill of The significance of land acquisition issues in the country is evident from the disputes that impact a number of large projects amidst protests by the affected families. Currently, most land acquisition deals result in legal issues that get further exacerbated due to ill-documentation of title and ownership, especially in the case of agricultural land. 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

8 Regulatory developments: the big picture Pg 8 The Bill also empowers the village council to conduct social impact assessment of any land acquisition and define the timelines for providing compensation In case the land is acquired in an urban area, an amount not less than twice the market rate needs to be paid to the landowner In case the land is acquired in a rural area, an amount not less than four times the original market value needs to be paid to the landowner Draft Real Estate (Regulation & Development) Bill 2011 The Bill aims at promoting transparency and accountability in the real estate sector, and proposes to create a "Real Estate Regulatory Authority" in each of the states. The draft guidance of the Bill also possesses provisions that reduce the risk of a title dispute. In order to provide respite to end users, the Bill also proposes to make it mandatory for developers to register themselves before launching any projects, comply with the approved plans and refund money to homebuyers in case of any default. 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

9 Regulatory developments: the big picture Pg 9 In case of any default, the developers will be required to refund money to buyers. Further, if the project gets delayed, the developer is bound to pay interest, at an appropriate rate, to the buyers In case the developers fail to adhere to the provisions, they are liable to imprisonment of up to three years or a penalty of 10% of the estimated real estate price of the project If developers are unable to comply with the directions of the "Real Estate Regulatory Authority", they would be liable to pay a minimum penalty of Rs 1 lakh daily for each day during which the default occurs Draft Guidance Note on revenue recognition The Accounting Standards Board of the Institute of Chartered Accountants (ICAI) came out with a draft of the Guidance Note on Revenue Recognition by real estate developers. The proposed Guidance Note is comprehensive and considers various dynamics of the sector. It aims at removing the subjectivity and judgments in certain key accounting principles and attempts to bring consistency in the accounting for real estate transactions. 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 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

10 Regulatory developments: the big picture Pg 10 The current definition of project is very broad and identifies parameters for defining the project, in terms of common set of amenities available to the different unit holders in a township and accordingly, even a single tower can be treated as a project or a cluster of towers can be combined and designated as a project. It will be useful if the common set of amenities within a project can be clearly defined and then link it to the project definition. Revenue recognition under the percentage completion method is applied only when all the following conditions are fulfilled: (a) All critical approvals necessary for commencement of the project have been obtained. These include the following as applicable: Environmental and other clearances, approval of plans, designs, etc. Title to land or other rights to development/construction (b) When the stage of completion of each project reaches a reasonable level of development. There is a rebuttable presumption that a reasonable level of development is not achieved if the expenditure incurred on project costs is less than 25% of the construction and development costs (c) At least 25% of the estimated project revenues are secured by contracts or agreements with buyers (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

11 Regulatory developments: the big picture Pg 11 The recognition of project revenue by reference to the stage of completion of the project activity should not at any point exceed the estimated total revenues from 'eligible contracts'/other legally enforceable agreements for sale. This is definitely a good thought in terms of linking the collection to the point of revenue recognition The transaction of barter has been rightly picked up in the scope of this Guidance Note, wherein the developer is giving a share in the built up property to the land owner in consideration of land / development rights in the project. For this purpose, fair market value may be determined by reference either to the asset or portion thereof given up or to the fair value of the rights acquired whichever is more clearly evident. In a nutshell Revenue recognition linked to collections 'Eligible contracts means contracts/agreements where at least 10% of the contracted amounts have been realised and there are no outstanding defaults of the payment terms in such contracts. Where the recognition of revenue due to this condition is lower than the revenue determined by reference to the stage of completion, the project costs to be matched with such revenue are also proportionately adjusted. Barter transactions Where development rights are acquired by way of giving up of rights over existing structures or open land, the development rights should be recorded either at fair value or at the net book value of the portion of the asset given up.

12 Regulatory developments: the big picture Pg 12 FDI in retail sector The Union Cabinet, in December 2011, permitted 51% of Foreign Direct Investment (FDI) in multi-brand retail and 100% FDI in single-brand retail. However, the decision was suspended due to widespread opposition from the unorganised retail market and absence of political consensus. 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 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

13 Regulatory developments: the big picture Pg 13 Maharashtra Housing Bill 2011 Maharashtra Housing Bill, 2011 aims at replacing the Maharashtra Ownership Flats (Regulations of promotion of construction, sale, management, and transfer) Act, Also known as the Regulation and Promotion of Construction, Sale, Management and Transfer Bill, it contains provisions meant to safeguard the interest of homebuyers. 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 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".

14 Volatility Crisis in Europe Special purpose vehicles IPOs Challenges Joint ventures Capital markets Investment scenario Opportunities Market sentiment Private equity Returns Global slowdown Exits Transactions Growth M&A Deals Project viability Market consolidation Depreciation in rupee FDI inflows Sustainability

15 Investment scenario: the ins and outs Pg 15 Real estate is the fourth largest sector in terms FDI inflows in the country. As per DIPP, the sector attracted investment to the tune of US$ 453 million between April and September ,500 Year-wise FDI Inflows ( in US$ in million) Further, the period from January to May 2011 also stood witness to various prominent Private Equity (PE) and Mergers & Acquisitions (M&A) deals. Some of the prominent deals that formed the chunk of the 20 deals worth US$ 1.3 billion occurring during this period include investment made by Oceanus Real Estate and Ascendas India (US$ 190 million), Tata Realty (US$ 86 million), etc. However, the global economic scenario remained volatile due to unfavourable economic environment in the US and Euro zone. Owing to this, foreign investors were seen becoming relatively cautious. 3,000 2,500 2,000 1,500 1, ,935 1, (April - March) (April - March) (April - September) FDI Inflows ( in US$ in million) Source: Department of Industrial Policy and Promotion, Government of India

16 Investment scenario: the ins and outs Pg 16 Since equity inflows are largely sentiment driven, the pessimism in the US and the UK, which form the major sources of equity inflows to the sector, was largely responsible in reducing the FDI inflows to the sector. Apart from the US and the UK, the sector also attracts equity from economies, including the Netherlands, Japan, Germany, Mauritius, Singapore, and the UAE. However, the Indian real estate sector still occupies the topmost position among all the major sectors for PE investment in As per our research, along with automotive, power and energy, banking and financial services and information technology, real estate and infrastructure management accounted for 67% of the total PE deal value for the year. The data shows growing importance of developing economies to the world economy, and enhanced engagements of foreign investors with the sector through a broadening array of investment models. Further, a survey conducted by a leading advisory firm also shows that while planning to invest in various avenues in India, 55% of the investors expect to achieve their target returns, while 45% investors are optimistic to reap a return which is higher than their existing portfolio. 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.

17 Investment scenario: the ins and outs Pg : Prominent deals in Indian real estate sector Investor Investee Investment Purpose Warburg Pincus Lemon Tree Hotels Rs 1,400 crore An affordable housing venture was financed by the JV called Oceanus Real Estate Sun Apollo Parsvnath Developers Rs 100 crore A residential project SPV Blackstone DLF Rs 810 crore Acquisition of a DLF firm owning a SEZ in India Red Fort Capital Ansal Properties & Infrastructure Rs 200 crore The deal financed a residential project in Gurgaon by developing a 108-acre township Red Fort Capital Delhi Heights Undisclosed A mixed use development having more than 2,000 residential units is planned to be developed ICICI Prudential Asset Management Logix Group Rs 80 crore The investment financed the development of Blossom Greens - a 2,500-unit residential project Source: Grant Thornton research

18 Investment scenario: the ins and outs Pg 18 As per the research firm Venture Intelligence, during 2011, PE firms invested US$ 2.68 billion in the real estate sector. Further, the year also witnessed an increment in deal activities of domestic fund managers such as Kotak, Indiareit, and ASK Investment Holdings. During the year, PE firms made 69 investments, of which 53 transactions were announced, making the cumulative worth US$ 2.68 billion. The research firm also states that of the total investment, 57% were made in residential projects, while commercial projects accounted for 19% of the chunk. Real estate sector had witnessed a flood of PE investments between 2006 and 2008, which headed to a natural end in due to the typical three-five year investment horizons. During Q1 of the year, a total of 11 real estate focused PE funds exited the market. A report released by a leading advisory firm states that during 2011, real estate and the infrastructure sector witnessed nearly 22% of the total PE investments. As per the research firm VCCEdge, Q1 witnessed six exits worth a combined US$ 124 million, largely through equity buybacks and secondary sales. During this period, returns from real estate investments ranged between 1.4 and 4 times. Since 2009, Kotak Realty has exited from about US$ 175 million worth of investments. However, even amid the enhanced momentum of exits, PE s found it difficult to exit with good returns, largely due to volatile stock markets in 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 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 IPO s and multiple exits, once the most popular routes for exits, lost their charm to investors in 2011.

19 Investment scenario: the ins and outs Pg : Prominent PE exits in Indian real estate sector PE funds Value Background Indiareit Fund Advisors US$ 100 million Exit of an office project in Kurla, in suburban Mumbai. In 2006, Indiareit Fund Advisors made an investment of Rs 145 crore Kotak India Real Estate Fund-I HDFC India Real Estate Fund Milestone Capital Advisors Rs 385 crore Undisclosed 2.04 times of the initial investment 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 IL&FS Milestone Fund I 1.51 times of the initial investment 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 HDFC Property Fund Rs 540 crore 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 Source: Grant Thornton research

20 Investment scenario: the ins and outs Pg 20 In a nutshell Investment in the Indian real estate sector between April and September 2011 stood at US$ 453 million PE funds invested US$ 2.68 billion in the Indian real estate sector during 2011 Major PE and M&A deals that were witnessed in the sector from January to May 2011 include investment of Oceanus Real Estate and Ascendas India (US$ 190 million), Tata Realty (US$ 86 million), etc The 53 transactions announced in 2011 had a cumulative worth of US$ 2.68 billion. The materialisation of deals at a time when the sector found it tough to receive bank funding stood testimony to the optimism in investors NRIs, whose share of real estate buying in India accounts for about 4% every year, rose to 8% in 2011, largely due to depreciation in the value of rupee

21 Growth strategies Vacancy rates Interest costs Profitability Loans Revenues NRI transactions Market sentiment Declining margins Issues and challenges Finance Market expectations Sales Correction Prices Projections Oversupply Buyer interest Demand Opportunities New avenues Sustainability Future prospects

22 Key issues and challenges: caution and diligence Pg 22 Along with the rest of the global economy, the commercial property sector is in a period of rapid change, with both owners and builders questioning current strategies and future expectations. In the current business environment, real estate developers face many obstacles to their pursuit for growth. Yet, industry leaders are largely optimistic about their business prospects, as they strategically plan for higher revenues and profits in Interest rate hike In order to address the issue of rising inflation, the RBI hiked the repo rate a number of times in the year. The increase in prime lending rates at commercial banks and other housing finance institutions became a major deterrent for homebuyers to take loans for buying residential real estate, as a result of which, residential sales slumped markedly. In addition to its impact on property buyers, the hike in interest rate resulted in liquidity crunch for real estate developers. Apart from decreased profitability from projects due to reduced demand, developers also faced difficulty in raising finance from banks. Further, the debt-to-equity ratio of developers also increased during the year due to increase in the cost of construction, building material and labour Source: RBI Hike in repo rate Repo rate (%)

23 Key issues and challenges: caution and diligence Pg 23 Pricing trends According to National Housing Bank (NHB), during Q4, property prices of residential units in Kolkata and Mumbai registered a decline of about 0.5%, as compared to Q3. At 15.5%, Kochi registered the maximum decline, followed by Hyderabad (6%), Jaipur (1.5%), and Patna (0.7%). Among all the cities covered under the NHB Residex, six cities witnessed a decline in prices, while nine cities observed an increasing trend during Q4, as compared to Q3. 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 During the fourth quarter of the year, prices in Delhi rose by 8.4%, as compared to Q3. In addition to Delhi, other cities that witnessed a positive movement in property prices include: Surat: 9.4% Chennai: 9.2% Pune: 8.9% Bangalore: 7.5% Lucknow: 7.1% Faridabad: 5.8% Ahmedabad: 2.5% Bhopal: 1.4% Jan - June 2008 July - Dec 2008 Source: NHB Residex Jan - June 2009 July - Dec 2009 Jan - March 2010 April - June 2010 July - Sept 2010 Oct - Dec 2010 Jan - March 2011 April - June 2011 Hyderabad Chennai Kolkata Mumbai Bangalore Delhi July - Sept 2011 Oct - Dec 2011

24 Key issues and challenges: caution and diligence Pg 24 City-wise housing price index Tier II cities Tier III cities 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 Ahmedabad Jaipur Lucknow Pune Faridabad July - Sept 2011 Oct - Dec 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 Patna Kochi Bhopal April - June 2011 July - Sept 2011 Oct - Dec 2011 Source: NHB Residex

25 Key issues and challenges: caution and diligence Pg 25 Increased vacancy rates 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 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.

26 Key issues and challenges: caution and diligence Pg 26 In a nutshell 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

27 Benami transactions Urban infrastructure Sale deed mandate Stamp duty Evasion Revenues Black money Market sentiment Growth projections 2011 News round-up Finance Customer grievance Public offers Circle rates Affordable housing Interest rate subsidy Priority sector landing Land acquisition Environment Overseas projects Green building New rating system

28 News round-up: regulatory Pg 28 Supreme Court mandated the sale deed In a landmark judgment, the Supreme Court held that General Power of Attorney (GPA) is not a valid instrument for transferring property rights. The decision is expected to curb evasion of duties, use of black money and unscrupulous transactions that often result in disputes. Benami Transactions (Prohibition) Bill, 2011 introduced The Finance Ministry introduced the Benami Transactions (Prohibition) Bill, in August The Bill prohibits benami transactions done in someone else's name, except in the case of transactions in the name of a spouse, brother or sister or any lineal ascendant or descendant. Circle rates hiked in Delhi by up to 250% The Delhi government hiked the circle rates by up to 250% in October This was the second hike in circle rates in 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. The Bill intends to replace the existing Benami Transactions (Prohibition) Act, 1988, and proposes provisions for confiscation of such property and imprisonment.

29 News round-up: regulatory Pg 29 Budget highlights The Union Budget presented various initiatives for the real estate sector, especially focusing on affordable housing. Some of these initiatives include: Raising the limit on housing loans eligible for a 1% subsidy in interest rates Widening the scope for housing under "priority-sector lending" for banks, making interest rates cheaper on them Earmarking a substantial amount to the Urban Development Ministry for spending on extension of Metro networks in Delhi, Bangalore and Chennai Allocating US$ million for the urban infrastructure development project. The Urban Development Ministry received US$ 1.5 billion, an increase of US$ million from the last fiscal Increasing allocation for Bharat Nirman to US$ billion. Bharat Nirman consists of 6 flagship programmes, the Pradhan Mantri Gram Sadak Yojana (PMGSY), Accelerated Irrigation Benefit Program, Rajiv Gandhi Grameen Vidyutikaran Yojana, Indira Awas Yojana, National Rural Drinking Water Program and Rural telephony Developments in Tamil Nadu and Haryana In July 2011, the government of Tamil Nadu revised the ceiling on stamp duty from Rs 5,000 to Rs 25,000. Applicable exclusively for title deeds, the guidelines also revised the cap on registration fee from Rs 1,000 to Rs 5,000. On the other hand, the ceiling on non-agricultural land was waivered by the state assembly of Haryana, in an attempt to facilitate land assembly for apartments and townships.

30 News round-up: financial Pg 30 Public offers deferred by a significant proportion of real estate companies As per SMC research, at least 28 companies deferred their IPOs in 2011, including a number of real estate companies such as Lodha Developers, Lavasa Corporation, Ambiance Real Estate, Kumar Urban Developers and Neptune Developers. The IPOs were called off due to unfavourable market conditions. 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. 15% growth estimates in 2011 As per media reports and expert estimates, the Indian real estate sector registered a growth rate of about 15% in Albeit the trends were not-so-negative despite the slowdown in the Western economies, the growth rate was lower than 25-30% as projected during the beginning of the year.

31 News round-up: miscellaneous Pg 31 Major land acquisition dispute in Greater Noida The Supreme Court upheld the High Court decision cancelling allotment of 156 hectares of land in Greater Noida. The decision was taken following the writ petition filed by farmers expressing dissent on the massive difference in buying and selling rates. The land was acquired by Greater Noida Industrial Development Authority (GNIDA) and UP government at Shahberi Village at the rate of Rs 850 per square metre and allotted to private developers at rates ranging from Rs 10,000 to Rs 12,000 per square metre. 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. 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 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.

32 The way forward Pg 32 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$ 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

33 About Grant Thornton Pg 33 Grant Thornton International Grant Thornton International is one of the world's leading organisations of independently owned and managed accounting and consulting firms. These firms provide assurance, tax and specialist advisory services to privately held businesses and public interest entities. Clients of member and correspondent firms can access the knowledge and experience of more than 2500 partners in over 100 countries in order to consistently receive a distinctive, high quality and personalised service wherever they choose to do business. Grant Thornton International strives to speak out issues that matter to business and which are in the wider public interest. Its aim is to emerge as a bold and positive leader in its chosen markets and within the global accounting profession. Grant Thornton India LLP Grant Thornton India LLP is a member firm within Grant Thornton International Ltd. The firm has today grown to be one of the largest accountancy and advisory firms in India with nearly 1,100 professional staff in New Delhi, Bangalore, Chandigarh, Chennai, Gurgaon, Hyderabad, Kolkata, Mumbai and Pune, and affiliate arrangements in most of the major towns and cities across the country. The firm specialises in providing audit, tax and advisory services to growth-oriented, entrepreneurial companies.

34 About CII Pg 34 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 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.

35 Our real estate solutions Pg 35 Our real estate practice Real estate is a complex business. Owing to its capital intensive nature, any turbulence in the economic and business environment can affect a real estate business in a number of ways. With its depth of knowledge and global experience, Grant Thornton India can assist you in mitigating these inherent risks. At the same time, we can help you identify and leverage potential opportunities as well. Assurance, tax and advisory services are just the beginning of our suite of services for real estate companies. Please contact our real estate experts at realestate.solutions@in.gt.com to know more about how Grant Thornton can assist you achieve your objectives. Financing your business analysing funding requirements preparing submissions to financiers benchmarking terms and pricing considering alternative sources 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 Communication and compliance advising on financial reporting requirements clarifying directors responsibilities mitigating fraud risk evaluating and designing controls 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

36 Thought leadership publications Pg 36 Through our thought leadership publications, we strive to provide leading-edge insights to the industry and the markets at large. These publications draw on our industry expertise, clients experience and our commercial know-how, and are designed to keep dynamic business leaders apprised of issues affecting their organisations. Future cities RealtyReality 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.

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