Upscaling Indian Real Estate. Ushering in a Decade of Opportunities

Transcription

1 Upscaling Indian Real Estate Ushering in a Decade of Opportunities

2 Advance - Upscaling Indian Real Estate

3 Advance - Upscaling Indian Real Estate People always overestimate how much will change in the next three years, and they underestimate how much will change in the next ten years. Bill Gates, remarking on whether digital technology will eventually reverse global urbanisation An Unprecedented Scale of Urbanisation India is rapidly urbanising, not only in form and features but from within. While the metropolises are observing a fast evolving skyline with tall skyscrapers and iconic architecture, the smaller towns and cities are witnessing an unprecedented metamorphosis of the surface through expansion of roads, flyovers and open areas. This change is not irrational exuberance, neither it is an insane explosion of anyone s imagination, it is a necessity. According to United Nations, India has the highest rate of change of the urban population among the BRIC nations, which will remain above 2% annually for the next three decades (Figure 1). At this rate, an estimated 854 million people will live in Indian cities by 2050, a figure which is the combined population of present day USA, Brazil, Russia, Japan and Germany. Even in the coming decade ( ), India will add 95 million people to its already dense urban fabric, nearly one-fourth of its current urban population. India needs more cities, and it is a mere understatement to say that we might be misjudging the dimensions of the situation. in an Already Dense Urban India With a land area of one third the size of USA, India harbours nearly three times the population. Unsuprisingly, Indian cities are not only the most populous but also among the densest urban agglomerations of the world, which poses unique challenges to the development of infrastructure and real estate (Figure 2). Creation of dense informal settlements within the city, impractical low cost housing at the exurbs or high-rising verticals are nothing but a Figure 1: Average Annual Rate of Change of the Urban Population Average Annual Rate of Change of the Urban Population % Brazil Vietnam Russian Federation Egypt Source: World Urbanisation Prospects: The 2009 Revision, United Nations, Department of Economic and Social Affairs, Population Division Figure 2: Urban Density in Large Metropolitans People per sq km 5,000 0,000 5,000 0,000 15,000 10,000 5,000 0 Source: City Mayors 2010; Jones Lang LaSalle Research manifestation of this inevitable immigration of people from rural to urban areas. Thus, the time is right for Indian real estate to upscale itself for the coming decade in order to meet the challenges posed by this rapid urbanization. In this whitepaper, we discuss the roles of various stakeholders architects, builders and the government in upscaling and preparing the Indian real estate market to embrace the challenges of the coming decade China Turkey Colombia South Africa Kolkata Mumbai Karachi Shenzen Seoul Taipei Chennai Bangalore Shanghai Jakarta Delhi Hyderabad Manila Cairo London Moscow New York Indonesia India Population (million)

4 4 Advance - Upscaling Indian Real Estate Upscaling Indian Real Estate HOUSING SUSTAINABILITY INFRASTRUCTURE TRANSPARENCY URBAN BRANDING Architects Builders Government Design self-sustained communities Architect appropriate shelters for slum upgradation and rehabilitation schemes Design considering local and traditional design principles Explore pre-fabrication opportunities in housing to achieve efficient and rapid construction Plan projects across the economic pyramid Promote & develop rental housing in urban areas Provide incentives for affordable housing development Govt to act as a facilitator under the model Enable Shelter Strategies Facilitate easy financing to the urban poor for housing Plan new cities to cater to incremental population Estimated shortage of million housing units during Eleventh Five Year Plan ( ) - MoHUPA, Govt of India Design climate responsive buildings and reduce carbon footprint at a project level Utilise local methods and materials of construction to lower costs Masterplan using transect and compact models of urban growth to minimise commute Set sustainability targets at a project level and at a company level Commit to green leases with the occupiers to ensure sustainability in operations of the premises Provide incentives for sustainable real estate development Ensure further construction of public projects are sustainable Enact certain mandatory legislations such as rainwater harvesting or waste recycling Residential sector to contribute nearly 48% of the projected electricity consumption by Lawerence Berkeley National Laboratory Advise authorities and other stakeholders on urban infrastructural needs over long term Contribute in the development of infill infrastructure which is true to the image of the city Ensure adequate infrastructure per real estate needs before commencing on a project Suggest government for the localised needs for infrastructure improvement Employ global standards in infrastructure development Increase investment in urban infrastructure through schemes such as JNNURM Expedite the construction of major infrastructure projects metro, monorail, highways Facilitate FDI in infrastructure projects Capital investment of USD 1.2 trillion is required by 2030 to meet the projected demand due to urbanisation - McKinsey Global Institute Engage community in the masterplanning of projects of public importance Engage with urban planners and suggest them the effects of major changes in development control regulations Provide transparency in project level information, costs to the buyer, transaction details Provide information over financing of projects Provide accurate and timely sales and price information to authorities and buyers Establish a real estate regulator Streamline taxation Expedite GIS based Property Title Certification System, computerisation of registration records and other reforms under JNNURM Enact and promote REIT and REMF legislation Indian cities fall in the semi-transparent bracket, in terms of measurement of performance and market fundamentals and presence of listed vehicles Employ sympathetic infill principles in urban renewal projects to preserve imageability of heritage districts Ensure urban branding through unique design and marketing principles Combine global styles with prevalent local architecture to ensure global best practices with local aesthetics Ensure a holistic development of paths, edges and network along with nodes and landmarks Sensitise people about following urban design guidelines in construction of individual houses and campuses Urban branding required to bring investments, retain companies and skilled workers, promote tourism and market local goods and services Source: Jones Lang LaSalle Research

5 Advance - Upscaling Indian Real Estate 5 Upscaling Design and Planning - The Works of an Architect Creation of Neo-Urban Agglomerations Historically, cities in India primarily developed organically either at the banks of the several rivers that flow through the sub-continent or along the long coastline. While the fertile river plains provided the right environment for an agricultural society, the coastal cities served as trading hubs to the outside world. Not all of these cities were planned but exemplary mentions would be Harappa and Mohenjo Daro (currently in Sindh area of Pakistan), which are among the earliest cities in the Indus Valley Civilisation. Supporting a large population of around 35,000 residents (by standards), Mohenjo-daro was built around 2600 BC and had a planned layout based on a street grid of rectilinear buildings. The city was complete with public facilities such as central market place, central well, waste water management, granary and a public bath. Later with the founding of the large empires, several planned fort-cities were established across the landscape to cater to the flourishing population or as administrative centres. The architecture of this medieval era is monumental in scale and reflects the pride of the mighty Indian empires. Many of these later settlements have far outgrown their initial size and are thriving as modern Indian cities, although the ensuing development is organic and lacks the grammar of the original plan. Several initiatives have been taken in India during the 20th century to create new and planned urban agglomerations due to various reasons. While some of them are industrial centres such as Jamshedpur, others are administrative capitals such as New Delhi, Bhubaneswar, Chandigarh and Gandhinagar or are need-based creations due to the burgeoning population such as Navi Mumbai and Noida. Recent planned developments in the last decade include the creation of hill cities such as Aamby Valley and Lavasa in western part of India, to serve as a retreat from the urban disorder (Figure 3). Figure 3: Instances of Major Planned Recent Urban Developments in India Cities Jaipur Old City New Delhi Jamshedpur Architects / Planners Year Area Planned Maharaja Sawai Jai Singh II & Vidyadhar Bhattacharya Edwin Lutyens & Herbert Baker Otto H Koenigsberger Planning 1727 NA Grid planning based on Vastu Shastra sq km Radial planning sq km Neighbourhood unit concept Bhubaneswar Otto H Koeingsberger sq km Grid planning Chandigarh Le Corbusier sq km Grid-iron planning Gandhinagar HK Mewada & sq km Grid planning Prakash Apte Punjab Urban 1966 NA Grid-iron planning Mohali Planning & Development Authority Auroville Roger Anger sq km Radial galaxy and sustainability Navi Mumbai Charles Correa sq km1 Multiple nuclei (polycentric) Noida NOIDA sq km Grid-iron planning Dwarka Sub City DDA NA 56.5 sq km Grid planning Rohini Sub City DDA sq km Grid planning Aamby Valley Burchill Partners (VDM Group) sq km Hill city around a lakeside development HOK Architects sq km Transect model of hill Lavasa city development around a lakeside Source: Jones Lang LaSalle Research Note: 1. Out of the sq km that is identified for Navi Mumbai by the Government of Maharashtra, sq km is under the jurisdiction of Navi Mumbai Municipal Corporation, making it one of the largest planned urban developments in the world Despite several pioneering urban planning and architectural concepts being employed in India since medieval times, a critical feature of the cities that were founded was the localisation of global styles and practices, wherein Indian, Islamic and Persian styles merged to form Mughal architecture, or a combination of elements from Indo-Islamic architecture with those of Neo- Classical or Gothic styles resulted in the Indo- Saracenic Revival architecture. 1 Vastu Shastra (The Science of Construction) is an ancient and traditionally followed Indian system of design (mostly building design) based on directional alignments.

6 6 Advance - Upscaling Indian Real Estate To upscale its real estate, India needs to add more cities, while strengthening existing ones, with an effective urban planning strategy which is sympathetic to regional needs and considerations. Through the years, there have been several models for urban growth proposed and implemented globally, which can be adapted to the Indian context. The prominent one existing in India is Multiple Nuclei Model or the polycentric model, which has been utilized in Mumbai Metropolitan Region and National Capital Region of Delhi, Bangalore, Hyderabad and other metropolitan cities, wherein multiple growth nodes have been created in the form of satellite towns to reduce dependency on the central region and decongest the city (Figure 4). With rising urban density, compact city models or smart growth with transit oriented development is required in several metropolitan cities, with a balance of adequate water, power, safety and transit infrastructure. Transect model of development is another relevant theory, which discourages long commutes and enables the growth of selfcontained communities. Figure 4: Major Models and Theories of Urban Planning Urban Planning Model Theorists and Planners Year Garden City Model Ebenezer Howard 1898 Howard s plan envisaged Garden Cities as self contained communities planned on a concentric pattern with open spaces, public parks and radial connectivity. A cluster of garden cities would be developed as satellites of a central city, linked by road and rail. Concentric Zone Model Ernest Burgess 1925 Also known as Burgess Model, it is a monocentric model of a city with six concentric zones. At the core is a central business district surrounded by an industrial belt, which is surrounded by a zone of low-income housing interspersed with industrial. It is surrounded by Zone IV comprising of residential for the working class, surrounded by zones of higher quality residential zone involving higher commuting costs. According to Burgess, urban growth is a process of expansion and reconversion of land uses, with a tendency of each inner zone to expand in the outer zone. Sector Model Homer Hoyt 1939 A modification over the Concentric Zone Model, Hoyt theorized that cities tended to grow in wedge-shaped patterns or sectors emanating from the central business district and centered on major transportation routes. Higher levels of access meant higher land values, thus, many commercial functions would remain in the CBD but manufacturing functions would develop in a wedge surrounding transportation routes. Residential functions would grow in wedgeshaped patterns with a sector of low-income housing bordering manufacturing/industrial sectors (traffic, noise, and pollution makes these areas the least desirable) while sectors of middle and high income households were located furthest away from these functions. Multiple Nuclei Model Chauncy Harris & Edward Ullman 1945 Multiple Nuclei model is a model of urban land use in which a city grows from several independent points rather than from one central business district. Each point acts as a growth center from a particular kind of land use, such as industry, retail, or high-quality housing. As these expand, they merge to form a single urban area. The CBD is not the only generator of change. Some centers or nodes include ports, universities, airports, parks and neighborhood business centers. Compact City Model George Dantzig & Thomas L Saaty 1973 Compact City focusses growth in compact walkable urban centers to avoid sprawl and advocates compact, transit-oriented, walkable, bicycle-friendly land use, including neighborhood schools, complete streets, and mixed-use development with a range of housing choices. It involves Transit-Oriented Development (TOD), to maximize access to public transport. Transect Model Andres Duany 1980 The transect model is a series of zones that transition from sparse rural farmhouses to the dense urban core. Each zone is fractal in that it contains a similar transition from the edge to the center of the neighborhood. The importance of transect planning is particularly seen as a contrast to modern Euclidean zoning and suburban development. In these patterns, large areas are dedicated to a single purpose, such as housing, offices, shopping, and they can only be accessed via major roads. The transect, by contrast, decreases the necessity for long-distance travel by any means. (Adapted from various sources)

7 Advance - Upscaling Indian Real Estate 7 The Need for an Urban Renaissance at the Core Most of the Indian metropolitans are facing an urban design crisis with buildings and architecture at prime locations in these cities (closer to the city centre) in a decrepit state. Since these buildings and associated infrastructure were planned and built decades ago and had minimal upgradation over the years, they fail to meet the global Grade A standards of real estate. Lacking features of sustainability, there are higher costs of operations and maintenance of these premises as well. Despite this, they were much sought after by tenants in the last decade due to their prime location. Common problems in old office building stock at the city centres include Deteriorated facades Poorly maintained common areas such as lobbies and corridors Lack of 24/7 power back up and centralised air conditioning Outdated staircases and lifts/elevators, and a lack of efficient mechanisms for modification of the same Lack of new technology for building safety and security Poor mechanisms for energy efficiency However, the tide is turning as buildings in newer locations are providing better grade premises, amenities and infrastructure to the tenants. 2 There is a need for an urban renaissance in the coming decade in which massive investment is required to upgrade the internal infrastructure of the cities, as well as revitalize the existing buildings. The role of architects and designers assumes significance due to the heritage importance of these districts. Several buildings were built during the colonial period, which add to the imageability of the city. Since most of these redevelopment or retrofitting projects will be infill developments 3, a localisation of concepts including form, function and sustainability is required to preserve the character of the area, and harmonise with and complement the existing streetscape rather than compete with it. This sympathetic infill is vital in providing an imageability to Indian cities, which is lacking and prevents them from attaining a global standard. Urban Branding Architecting the Indian Image In his most important work, The Image of the City published in 1960, Kevin Lynch has studied how users perceive and organize spatial information as they navigate through cities. According to Lynch, city dwellers and visitors form mental maps with five elements: Paths, the streets, sidewalks, trails, and other channels in which people travel; Edges, perceived boundaries such as walls, buildings, and shorelines; Districts, relatively large sections of the city distinguished by some identity or character; Nodes, focal points, intersections or loci; Landmarks, readily identifiable objects which serve as external reference points. From Vastu to Vistas, Indian architecture has come a long way in amalgamating styles and grammar into its urban fabric. However, there is a serious imageability crisis in the Indian cities, due to near absence of implementation of guidelines, if any. While Indian cities are progressing in terms of nodes and landmarks due to iconic construction happening at places, paths, edges and districts require the attention of planners and designers. Instead of following global architectural styles, some of which are probably not appropriate for Indian cities due to different climatic conditions, materials of construction and cultural or aesthetic considerations of the local city, designers should architect an Indian image, which will create a unique branding of the urban fabric. Early examples of urban branding in India are the cities of Jaipur, Jodhpur and Udaipur (all in Rajasthan) in India, which follow distinct urban design considerations, in their old cities. While Jaipur is known as the Pink city due to the color of its avenues, Jodhpur is known as the Blue city due to the walls of the houses around the fort. 2 Read the recent whitepaper - Retrofitting India s Central Business Districts released by Jones Lang LaSalle in March Infill development is the development of a building among other old buildings with heritage value and character in an established streetscape.

8 8 Advance - Upscaling Indian Real Estate Udaipur, which is among the favourite tourist destinations of India, is known as the city of lakes and palaces. While traditional in nature, the architecture of these cities conjures the image of erstwhile kingdoms as well as the arid conditions of west India. Chandigarh, arguably the most planned city in India, reflects the grandeur of governance in its public architecture, while infusing a humane branding to its roads, residences and campuses. Urban branding strategies are vital for Attracting inward investments and international venture capital Attracting and retaining companies Attracting and retaining skilled knowledge workers Attracting new citizens Promoting tourism Sales and marketing of local goods and services Inward branding is concerned with identity building and strengthening the pride of the residents living in a place, thus creating an attractive environment with the ability to maintain its residents and business and in the long run also attract new citizens, tourists and business. Outward branding on the other hand is concerned with external communication and is directly related to attracting investments, knowledge workers, visitors and tourists to a place. Outward branding aims to help support the sales and marketing potential of goods and services produced in the local area. Figure 5: Major Indian Cities and their Urban Branding Due to Functions Cities Urban Branding Cities Urban Branding Mumbai Financial and Bhubaneswar Emerging IT Hub Entertainment Capital New Delhi Political Capital Guwahati Education Hub Bangalore Silicon Valley of India Jamshedpur Industrial Hub Chennai Established IT Hub & Ludhiana Industrial Hub Detroit of India Hyderabad Established IT Hub Nashik Emerging Industrial Hub Gurgaon Established IT & Industrial Hub Patna Emerging Education & Agricultural Hub Noida Established IT Hub Kochi Emerging IT Hub Kolkata Gateway to the East Nagpur Education Hub Pune Ahmedabad Established IT & Automotive Hub Commercial Hub in the West Indore Jaipur Commercial and Industrial Hub Tourism Hotspot Chandigarh Emerging IT Hub Surat Diamond Capital of India Coimbatore Emerging Industrial & IT Hub Source: Jones Lang LaSalle Research Vishakhapatnam Emerging IT & Logistics Hub Adapted from Image of the City (2006) by Johan Johnson and Dominic Power Despite the lack of urban imageability, Indian cities have attained a brand status due to the nature of their functions and policies (Figure 5). Further focus is required to strengthen and diversify branding.

9 Advance - Upscaling Indian Real Estate 9 Upscaling Development and Management - The Ingenuity of the Builder Market Transparency and the Role of Builders Rising levels of transparency make it easier for real estate investors, corporate occupiers and retailers to understand the pros and cons of a specific project and accordingly make investment decisions. This in turn facilitates an increase in foreign direct investment a powerful incentive for encouraging the free flow of information and the fair and consistent application of local property laws. Transparency of India s real estate markets 4 has been gradually improving and is largely driven by improvements in data availability on market fundamentals, the regulatory and legal environment, as well as governance of listed entities (Figure 6). The increasing presence of international real estate developers, investors and occupiers especially in the Tier II and Tier III cities has acted as a catalyst for the increase in transparency outside the Tier I cities. Figure 6: Jones Lang LaSalle Global Real Estate Transparency Index Transparency Level High Transparent Semi-Transparent Low 2010 Composite Rank Source: Jones Lang LaSalle Research, 2010 Tier I cities Mumbai, Delhi, Bangalore and Chennai Tier II cities Hyderbad, Kolkata and Pune Tier III cities 30 other prominent Indian cities Figure 7: Transparency of Indian Cities by Tier 1 Composite Performance Measurement Market 2010 Composite Score 1 Australia New Zealand Singapore Hong Kong Malaysia Japan Taiwan Thailand India Tier I South Korea Macau China Tier I Philippines India Tier China Tier India Tier Indonesia China Tier Vietnam 4.25 Market Fundamentals Listed Vehicles Legal & Regulatory Transaction Process I II III I II III I II III I II III I II III I II III Data on office market fundamentals is now more comprehensive in the Tier II cities as Hyderabad, Pune and Chennai develop into IT/ITES and manufacturing hubs. Data availability for the retail and residential sectors has improved across all tiers due to the rapid development of the residential sector and modern retail formats. Increasing Transparency 4 However, when compared to the other countries in the Asia-Pacific, Indian cities fall in the category of being semi-transparent. They rank differentially on various parameters of real estate transparency. 5 Source: Global Real Estate Transparency Index 2010, Jones Lang LaSalle Note: Tier I cities Mumbai, Delhi, Bangalore and Chennai Tier II cities Hyderbad, Kolkata and Pune Tier III cities 30 other prominent Indian cities 4 Read the whitepaper - Global Real Estate Transparency Index 2010 released by Jones Lang LaSalle.

10 10 Advance - Upscaling Indian Real Estate Figure 8: Real Estate Transparency Parameters and the Role of Builders Market Fundamentals & Performance Measurement Transparency Level Role of Builders Listed Vehicles Transparency Level Role of Builders Appropriate indices to measure market fundamentals and performance is a key indicator of market transparency. There is an absence of national indices on real estate sectors, due to lack of market data. In the past decade, International Property Consultants, online real estate portals and some government authorities such as National Housing Bank provide real estate market data, which is improving this facet of real estate transparency. However, available data has a grade bias which results in the performance and fundamentals of investment grade assets being reported. Also, there is a tier bias since there is relatively more transparency in the tier I and II markets and lesser in tier III cities. The transparency also differs by sectors as residential market has relatively more transparency, when compared to office and retail transactions. Builders should provide reliable information on prevalent rates through transaction data and construction data to enable assessment of market performance. In residential, there should be transparency in terms of overall costs to the buyer, sale velocities of the project, property area and amenities being offered (breakup of saleable area into carpet area and other constituents), minimisation of hidden costs such as parking, society and club charges and utilisation of maintenance charges. In office and retail sector, basic parameters such as transacted rents, common area maintenance charges, terms of agreement (such as rental escalation clauses and security deposits), type of space being offered and overall vacancy of the project should be made available. As of 15th April 2011, 15 real estate companies with a market capitalisation of INR 92, cr comprise the BSE Realty Index. In comparision, the total value of investment grade real estate under construction in India was assessed to be nearly INR 450,000 cr (or USD 100 Bn) in July These listed players are relatively transparent in terms of real estate information, when compared to other developers. India is yet to enact a REIT legislation, which would enable more listed vehicles, and hence increase transparency in the sector. However, there is an increased participation from private equity players, who are demanding more transparency. Listed players should make more reliable and granular project information available, in terms of sales and transactions. There should be an increased communication of project information to the clients and buyers from even non-listed players, to attain their trust and confidence. Transparent information on corporate real estate debt is also an issue and builders should make such data available to investors. Legal, Regulatory and Transaction Process Real estate sector in India is subject to multiple taxes such as corporate tax, service tax, minimum alternate tax, value added tax, stamp duty, property tax etc. Although there is transparency in terms of the enactment of legislations, certain key areas such as evaluation of property tax is a significant concern as reliable and easy methods of its calculation is not available. Also, there have been certain disputes in the taxes being levied onto real estate developers and buyers. Moreover, such regulations also differ between states.with the possible introduction of a single uniform GST (Goods and Services Tax) in FY , several of Transparency Level these issues pertaining to multiplicity of taxes and even double taxation will be resolved. The payment of unaccounted and protection money is also a key lacunae in the transaction process. There are legislations to regulate foreign investment in the sector, which are progressively being relaxed to cater to the increased demands for funding in the sector. Builders should responsibly educate their investors, clients and buyers about the various legal and regulatory aspects pertaining Role of Builders to real estate transactions. A fair and transparent transaction process is essential in upscaling Indian real estate in the next decade. Source: Jones Lang LaSalle Research In 2011, the Confederation of Real Estate Developers Association of India (CREDAI) has undertaken an important step towards introducing transparency in real estate sector under the initiative: Mission Transparency. The initiative entails the documentation of best practices in construction and real estate, along with a comprehensive checklist for the government to streamline the approval process. The five point agenda under Mission Transparency includes various aspects related to land acquisitioning, licensing, financing, and the stakeholders - developers and consumers. 5 Read the whitepaper The Investment Grade of Real Estate Under Construction released by Jones Lang LaSalle in August 2010.

11 Advance - Upscaling Indian Real Estate 11 Rapid and Efficient Construction Techniques Despite having large needs for rapid and efficient construction techniques, the Indian construction industry has not embraced pre-fabrication to the extent practiced in the developed countries. It has the benefit of planned mass production under factory conditions, safe from the weather fluctuations. Also, the economies of scale distribute several costs to a larger number of units. However, some of the issues that have been cited with pre-fabrication in the past include unavailability of skilled labour, expensive transfer of technology, perceived downsizing of human labour (from government s point of view) and simply lack of aesthetics and uniqueness due to mass production. However, pre-fabrication is the need of the hour for India, especially in the low-cost housing sector, where the targets and benefits are huge. One of the major inputs to pre-fabrication is freight cost, since modules have to be transported from the factory to the site. Since there is a large need for housing in almost every Indian city, a decentralised network of pre-fabrication factories can effectively reduce freight costs. Also, local materials such as fly-ash, lime and earth can be used extensively in pre-fabrication. While accelerating schedule of projects, pre-fabrication can help reduce construction costs as well and increase affordability to the home buyer. Figure 9: Benefits of Pre-Fabrication Better Quality Since components are factory manufactured it is possible to achieve much higher finishes and eliminate defects before completion. Shorter Construction Times - As parts are prefabricated, assembly on-site is quick. Significant time savings can be achieved as the wet work on-site is reduced. This can also help to overcome skill shortages. Costs Reduction - An off-site approach adopted for a single project will not achieve any cost saving as it is difficult to recover investment in manufacturing capacity on one project. However, if the approach is adopted for a number of projects or across a sector like schools, then significant savings can be realised. Waste Reduction - In a traditional construction project, about 15-20% of the materials arriving on-site are wasted. Off-site construction reduces site wastage significantly. As the industry develops a more sustainable approach to waste reduction it can enjoy the benefits of less land fill and associated transport costs.

12 12 Advance - Upscaling Indian Real Estate Embracing Sustainable Development and Management Green Leases, Green Buildings, Green Townships to Green Cities According to an analysis done by Ernest Orlando Lawrence Berkeley National Laboratory, electricity consumption in India is expected to increase fast, driven by the demand of the residential and commercial sectors that add to the already increasing demand from the industry sector. The residential sector will contribute nearly 48% of the projected electricity consumption in India in 2020, increasing from 33% recorded during 2005 (Figure 10). Per household electricity consumption is likely to quadruple in the 20 years between 2000 and Services, which includes office, retail and hospitality industry is projected to contribute nearly 13% of the total electricity consumption in Rising energy needs in India have made sustainability in real estate an imperative necessity rather than an option. India s green real estate footprint has been growing exponentially from 0.02 million sq ft in 2004 to over 23 million sq ft of green space operational in various cities of India in However, this growth is not homogeneous across the country. The Tier I cities Chennai, Mumbai, Hyderabad, NCR, Bangalore, Pune and Kolkata are ahead in the race towards a greener footprint (Figure 11). India currently has two major rating systems for energy efficiency in building design LEED India, managed by the Indian Green Building Council (IGBC); and Green Rating for Integrated Habitat Assessment (GRIHA), a system developed by The Energy and Research Institute (TERI) and the Ministry of New and Renewable Energy (MNRE). The GRIHA rating system is gradually strengthening its presence along with the more popular LEED India. By April 2011, five projects have been rated by GRIHA and 108 projects across industrial, commercial and residential sectors are registered and being evaluated. Apart from the rating systems being put in place, Figure 10: Projected Electricity Consumption in India in 2020: Real Estate Industry will be a Major Contributor Other Industries 15% Ammonia 1% Aluminium % Cement 1% Steel 7% Services 1% Freight Transport 1% Public Transport 1% Agricultural Pumping 10% Residential Fans 7% Residential Lighting 16% Residential Television 3% Residential Refrigeration 5% Residential Other Appliances 17% Source: India Energy Outlook: End Use Demand in India to 2020, Ernest Orlando Lawrence Berkeley National Laboratory, January 2009 Figure 11: Number of LEED Certified and Pre-Certified Projects (As of 2010) Others 18 Bhubaneshwar Kochi Sriperumbudur Kolkata 7 Pune 10 Bangalore 11 National Capital Region (Delhi) 1 Chennai 6 Hyderabad, 15 Mumbai Metropolitan Region 19 Source: Indian Green Building Council (IGBC), December 2010 Note: The number of projects includes New Construction, Core and Shell, Existing Buildings & Green Homes but excludes Commercial Interior Projects Government of India has initiated certain steps towards a sustainability led industry. The Bureau of Indian Standards (BIS) has developed the Energy Conservation Building Code (ECBC), which specifies the energy performance requirements for all commercial buildings that are to be constructed in India. It provides for building norms for Building envelope, including thermal performance requirements for walls, roofs, and windows Lighting system, including daylighting, and lamps and luminaire performance requirements HVAC system, including energy performance of

13 Advance - Upscaling Indian Real Estate 13 chillers and air distribution systems Electrical system Water heating and pumping systems, including requirements for solar hot-water systems. Government of India has proposed to lead by example and develop all public buildings as energy efficient spaces. Government of Maharashtra is considering the proposal to provide both financial and non-financial incentives including higher Floor Space Index, reduction in consent fee, rationalization of property tax and reduction in state taxes including VAT and Octroi and other incentives, for the development of green projects in the state. Apart from Maharashtra, several state governments are planning to develop their own green building byelaws. Builders should respond to the initiatives taken by the government and plan to include more green buildings to their portfolio. Also, they should be active participants in guiding the government towards the enactment of these byelaws, since they have a better understanding of the ground realities. Figure 12: Future Trends in Real Estate Sustainability in India In the coming decade, real estate development and management has a responsible role in achieving sustainability led construction, which thrives on climate responsive design, materials and processes. Advent of Green Leases - A sustainable lease, often referred to as a green lease is any lease that has a sustainability outcome built into it. This can include criteria around energy, waste and water. The introduction of these sustainability criteria does not replace the need to consider the implications of the base lease clauses. Essentially, the green lease schedule reflects the parties desire to improve and be accountable for sustainability in the building. A sustainable lease should meet the unique objectives and challenges faced for every individual situation reflecting the profile of the building, current building performance, willingness of parties to share savings in outgoings and the intended use and fit-out of the space. Penetration into Tier II Cities Till now, the Tier I metropolitan cities are leading the sustainability drive in Indian real estate industry. As occupiers become more responsive and builders initiate, green concepts will penetrate into Tier II and III cities as well. Increased Certification to Green Homes and Townships Since the largest contributor to the demand for electricity in India is the residential sector, it is imperative that both government and builders focus on building a sustainable housing sector, banking on low energy needs. Indian Green Building Council (IGBC) recently rolled out Green Homes, which is its first rating programme, exclusively for the residential sector. Also, the IGBC Green Townships Rating System, a pilot version of which has been launched, should be beneficial at a larger scale for certifying residential townships (Figure 13). Adopting Local Materials and Construction Techniques Large scale sustainability in construction, especially in the unorganized residential sector, can be achieved by mainstreaming the local materials and techniques of construction, which are utilised in several parts of India. Engineered bamboo and compressed earth blocks are being explored for mass housing, and the next decade will witness increased research and implementation of such traditional and now un-conventional materials.

14 14 Advance - Upscaling Indian Real Estate Figure 13: Existing and Upcoming Residential Projects with IGBC Green Homes Rating in India Project Name Developer Location Built-up Area (sq ft) Rating Achieved Camelot Tata Housing Kansal-Mohali 4,229,000 Pre - Certified, Gold Palais Royale Shri Ram Infrastructure Mumbai 2,500,000 Pre - Certified, Platinum Aqua Lily Mahindra Lifespaces Chengulpet 1,300,000 Pre - Certified, Platinum Aliens Space Station I Aliens Group Hyderabad 853,776 Pre - Certified, Platinum Aquila Heigths Tata Housing Development Bangalore 650,950 Pre - Certified, Gold Nitesh Columbus Nitesh Estates Bangalore 567,365 Pre - Certified, Gold August Park Mr Biju P John Bangalore 408,379 Pre - Certified, Gold NOEL Greenature NOEL Villas & Apartments Kochi 245,745 Pre - Certified, Gold Springs Appaswamy Real Estate Limited Chennai 195,028 Pre - Certified, Gold BCIL T ZED Homes BCIL Bangalore 175,350 Platinum Megapolis Pegasus Properties Pune 139,364 Pre - Certified, Platinum Raisina Residency Tata Housing Gurgaon 120,774 Pre - Certified, Gold Green Grace S&S Construction Limited Hyderabad 92,903 Pre - Certified, Platinum Shem Park Yuga Homes Chennai 90,610 Gold Mahindra Splendour Mahindra Lifespaces Mumbai 80,000 Pre - Certified, Platinum Kalpataru Riverside Kalpataru Developers Mumbai 68,596 Pre - Certified, Platinum Srishti Kalpataru Developers Mumbai 68,596 Pre - Certified, Platinum Mahindra Chloris Mahindra Lifespaces Faridabad 42,735 Pre - Certified, Platinum Kalpataru Hills Kalpataru Developers Thane 37,966 Pre - Certified, Platinum Mahindra Royale Mahindra Lifespaces Pune 35,990 Pre - Certified, Platinum Kalpataru Pinnacle Kalpataru Ltd Mumbai 13,471 Pre - Certified, Platinum La Residency ACC Limited Mumbai 12,000 Pre - Certified, Gold Park Infinia Kumar Properties Pune 3,642 Pre - Certified, Platinum Source: Indian Green Building Council (IGBC), December 2010 Planning across the Pyramid The income pyramid in India is heavy at the bottom, with over 60% of the households earning averagely less than INR 80,000 per year (Figure 14). Nearly 19% of the households (at the Bottom of the Pyramid) can t afford any type of housing through their income. Another 44.6% of the households in the Lower Middle Income Group can t afford a house in Tier I or II cities. Builders, architects and government have to plan real estate development, which conforms to the needs of the income pyramid of India. Income Groups Households (Thousand) (% Share) Per Household Income in (INR) Affordable Ticket Size for Housing (INR) Rich 2, % 1,021,825 5,000,000 Higher- Middle Income Middle Income Lower- Middle Income - I Lower- Middle Income - II Bottom of Pyramid - I Bottom of Pyramid - II 35, % 309,950 1,250,000 48, % 134, ,000 48, % 79, ,000 55, % 50, ,000 27, % 32,692 50,000 16, % 18,851 25,000 Figure 14: Income Groups and Housing Affordability ( ) Rich Higher- Middle Income Middle Income Lower- Middle Income - I Lower- Middle Income - II Bottom of Pyramid - I Bottom of Pyramid - II (Per household income in INR) 1,01,85 09,950 14,79 79,5 50,085,69 18, million 48.4 million million million 7.46 million million (Number of Households).4 million Source: Consumer Pyramids, Centre for Monitoring of Indian Economy (CMIE); Jones Lang LaSalle Research

15 Advance - Upscaling Indian Real Estate 15 Upscaling Investment and Facilitation The Guidance of the Government Increased Investment in Urban Infrastructure and Real Estate According to McKinsey Global Institute, a total spending of USD 2.2 trillion including a capital investment of USD 1.2 trillion is necessary by 2030 to meet the projected demand due to the high urbanization rate (Figure 15). This equates to an annual USD 250 per capita investment over the next 20 years. Transportation (including roads and mass transit) and affordable housing for low-income groups are the most capital intensive sectors and will need 83% of the capital expenditure. Mass transit (including fares of metro, subways and bus systems) dominate the required operating expenditure. Due to lack of available land parcels within the cities, suburbanization has accelerated in several metropolitan areas during the past decade. Several office, retail and residential developments have dotted the suburban landscape. Unaffordable land prices have resulted in leapfrogging of residential development to even suburbs of suburbs or exurbs. By 2012, 60% of the operational office space in the metropolitan cities will be at suburban locations. The retail market has been suburbanized earlier than office, with more than 50% of the operational retail space at suburban locations since 2004 (Figure 16). The residential construction activity is even more skewed in the metropolitan cities, with over 95% of the housing projects being constructed at suburban locations. Funding Required (in USD billion, 008 prices) Figure 15: Funding Required (in USD billion) by Indian Cities Over the Next 20 Years,400,100 1,800 1,500 1, Water Sewage Solid Waste Storm Water Drains Source: India Urbanisation Funding Model; Detailed Project Reports from the JNNURM; McKinsey Global Institute Analysis Note: 1. Net of beneficiary contribution, Operating costs of rental stock included separately Figure 16: Share of Office and Retail Stock Across Indian Markets Share of Micro-markets in Overall Office Stock Share of Micro-markets in Overall Retail Stock 70% 60% 50% 40% 0% 0% 199 Urban Roads 9 Mass Transit 95 1,18 Affordable Capital Housing [1] 1,040, Operating Total Expenditure ExpenditureSpending FORECAST Suburbs SBD 10% CBD 0% 4Q04 4Q05 4Q06 4Q07 4Q08 4Q09 4Q10 4Q11 4Q1 4Q1 70% 60% 50% 40% 0% 0% 10% FORECAST 0% 4Q04 4Q05 4Q06 4Q07 4Q08 4Q09 4Q10 4Q11 4Q1 4Q1 Suburbs Secondary Prime City Source: Real Estate Intelligence Service (JLL), 4Q10 Note: Figures are representative of the top seven metropolitan cities of India NCR, Mumbai, Bangalore, Chennai, Hyderabad, Pune and Kolkata

16 16 Advance - Upscaling Indian Real Estate While this is inevitable due to urbanisation, it also poses significant challenges as these leapfrogged locations lack in terms of physical and social infrastructure. It poses a great risk in terms of sub-grade development due to unacceptability by occupiers as a habitable district as well as a probable poor Housing + Transport (H+T) affordability 6. Government needs to improve connectivity to these suburbs and exurbs through road and mass transit networks. Also, social infrastructure in terms of schools, hospitals and green parks need to be built along with commercial office and retail to ensure the emergence of sustainable urban pockets beyond the cities. Jawaharlal Nehru National Urban Renewal Mission (JNNURM) JNNURM is the largest city modernization scheme launched by the Government of India in , and has two Sub Missions Urban Infrastructure & Governance and Basic Services to Urban Poor. Under Sub Mission 1 Urban Infrastructure & Governance, a total INR 60,212 Cr has been approved till February 2011 across 530 projects in 62 cities. Of this, INR 27,941 Cr is committed and INR 12,220 Cr has already been released. Over 100 projects related to the following sectors have been completed under JNNURM in the past 5 years: Development of Heritage Areas Drainage and Storm Water Drains Mass Rapid Transport System Other Urban Transport Parking Preservation of Water Bodies Roads and Flyovers Sewerage Solid Waste Management Urban Renewal Water Supply Figure 17: Statewise Commitment of Approved Costs under JNNURM - Urban Infrastructure & Governance Kerala % Rajasthan % Jharkhand % Madhya Pradesh 5% Karnataka 5% West Bengal 7% Tamil Nadu 8% Others 14% Source: Jawaharlal Nehru National Urban Renewal Mission, February 2011 State Commitment of Approved Costs (in INR Cr) Maharashtra 5, Uttar Pradesh 2, Andhra Pradesh 2, Delhi 2, Gujarat 2, Tamil Nadu 2, West Bengal 2, Karnataka 1, Madhya Pradesh 1, Jharkhand Rajasthan Kerala Others 3, Total 27, Gujarat 9% Increased investment is required to upgrade the urban infrastructure to global standards and Government of India should increase JNNURM outlays to cater to the increasing funding needs. The improving quality of infrastructure in Indian cities will have a significant effect on the real estate market of these cities. Maharashtra 18% Delhi 9% Uttar Pradesh 10% Andhra Pradesh 7% 6 H+T Affordability considers both the cost of housing as well as transportation, thereby assessing not only the property but also its location in determining its affordability for the home buyer.

17 Advance - Upscaling Indian Real Estate 17 Role of Public Private Partnerships It is estimated that the total investment in infrastructure in the Eleventh Plan would be around INR 2,054,205 Crore, equal to 7.55 per cent of GDP for the Eleventh Plan as a whole. Out of this projected investment, the Centre, State and Private sectors are expected to contribute 34%, 30% and 36% respectively, which indicates an investment of INR 742,912 Crore from the private sector. To enable a sustained and successful partnership of the private sector in the coming decade, government should focus on: Creating a synergistic environment for private participation; Improving the delivery of public sector projects; Adopting standard documents and processes for accelerating competitive investment flows; Leveraging budgetary resources & multi-lateral loans for PPPs; Accelerating the roll-out of PPP projects; and Developing world-class infrastructure. Facilitate Foreign Direct Investment The country has been successful in receiving foreign direct investment (FDI) after the introduction of the New Economic Policy in To date, majority of the FDI is absorbed by the service sector followed by computer software and hardware as well as telecommunications. It also includes construction activities and housing and real estate, which have all shown phenomenal growth in FDI in the recent years. The share of FDI directed towards the real estate sector has increased from 17.7% in FY to 22.1% in FY During the first seven months of FY , the country has received a total FDI of USD 12.3 billion; out of which, housing, commercial and retail real estate have attracted FDI worth USD 716 million, whereas construction activities (including roads and highways) has drawn USD 718 million. The reason behind the increasing FDI flow into real estate in the recent years has been the Figure 18: Growth Trends of FDI in Indian Realty Sector 14.0 % of Total FDI * indicates FDI inflow during April-January Source: Department of Industrial Policy & Promotion, Govt of India relaxation of FDI rules for foreign investors in India. The revised investor-friendly policies allow foreigners to own property, with the minimum size for housing estates built with foreign capital lowered to 25 acres from 100 acres. In July 2010, the Department of Industrial Policy and Promotion (DIPP) has proposed that if a foreign investor earns any profit on the investment over and above the original investment of USD 5 million in real estate can be repatriated after lock-in period. The original investment of USD 5 million is allowed through a joint venture (JV) with an Indian entity, while the rest of the investment can be brought in later. As per the proposal, a minimum of three years of lock-in period will be applied only to the original investment and not the entire investment. As far as retail real estate is concerned, FDI is allowed up to 51% in single-brand retail products. The objective of this policy has been to enhance the competitiveness of Indian enterprises through access to global designs, better practices and technology. Additionally, 100% FDI is permitted via the automatic route in cash-and-carry wholesale trading. This is aimed at improving the distribution infrastructure between manufacturers and retailers. During July 2010, the government has released * Construction Activities Housing & Real Estate

18 18 Advance - Upscaling Indian Real Estate a discussion paper pertaining to the debate on FDI in multi-brand retail in India. The discussion paper argues that the opening of the FDI into multi-brand retail products would enhance efficiency and generate employment in the country. Moreover, it has been suggested in the paper that foreign retailers with modern cold storage facility could minimise the wastage of fresh products and check food inflation. The apprehension is that it may hurt the kirana (local mom & pop) stores that dominate India s retail landscape and employ about 30 million people in India. However, the central government has provided more liberal FDI policies in residential real estate segments. 100% FDI is allowed under the automatic route in townships, housing, built-up infrastructure and constructiondevelopment projects including commercial premises, hotels, housing, resorts, hospitals, educational institutions, recreational facilities as well as city and regional infrastructure Monetization of Land Assets Few urban development authorities in India have, so far, attempted the monetization of land assets as a measure to earn revenue for other infrastructure projects such as road, mass transit and affordable housing. A prime example is the auction of developed land banks by Mumbai Metropolitan Region Development Authority (MMRDA) at Bandra Kurla Complex (BKC). BKC, a planned commercial district, has now attained the status of a secondary CBD in Mumbai, where office rents are equable to office properties at Nariman Point. Similarly, City and Industrial Development Corporation of Mahrashtra (CIDCO) has been successfully monetizing developed greenfield sites at Navi Mumbai and Vasai-Virar, thereby fostering the growth of these new urban agglomerations near Mumbai. Appropriate monetization of land assets by providing increased Floor Space Index (FSI) to developers where adequate infrastructure is available or can be made available is also a viable solution. Streamline Property Taxes for Better Revenues The methods for assessing property taxes in several states are ambiguous and hence collections falter due to non-compliance. A stricter implementation and easier modes of payment of property taxes, which are calculated in a transparent manner, can generate sizeable revenues which can be ploughed back as investments into the urban infrastructure. Under JNNURM, the reform of property tax using Geographical Information Systems (GIS) has been made mandatory for the beneficiary cities. The target is to achieve 85% coverage of urban properties and 90% collection efficiency of property taxes. Over one-third of the cities had accomplished the reform of 85% coverage for property taxes by Addressing Affordable Housing for All According to the Ministry of Housing and Urban Poverty Alleviation, there is an estimated shortage of million housing units during the 11th Five Year Plan Period ( ) in urban India. During the National Sample Survey 65th Round done in for Housing Condition and Amenities in India, it was recorded that nearly 4% of the households in urban areas undertook some form of housing construction during the past year, which infers that an estimated 2.85 million households are directly involved annually in the construction of their houses in urban India. Nearly 14% of those constructions related to new building, which infers that 0.4 million or 400,000 of the houses being constructed are new construction (Figure 19). According to estimates by JLL, nearly 1,500,000 housing units are delivered every year in urban India by private developers, which brings the total housing units being constructed in India to 1.9 million. At this rate, meeting the current shortfall of million housing units will require a staggering 14 years,

19 Advance - Upscaling Indian Real Estate 19 even if we disregard the accretion to that shortfall due to increasing urbanization and the fact that residential supply from private developers is skewed towards mid-income and high-income population 7. Against this backdrop of severe housing shortage in the country and the need for a rapid increase in homeownership, especially in lower-income groups and economically weaker sections, government has focused efforts towards Affordable Housing for All. Rajiv Awas Yojana (RAY) Rajiv Awas Yojana is an urban housing scheme launched in 2009 by the Government of India under JNNURM Sub Mission II Basic Services to Urban Poor and Integrated Housing and Slum Development Programme (IHSDP). The RAY Slum Free City Planning was approved with an initial budget of INR 120 Cr and a budget of INR 1,270 Cr was allocated in FY for the scheme. It has identified 30 cities across 16 states for initial implementation. The $1000 House Even though land acquisition for housing is a key concern in urban areas, the cost of construction is also a barrier for low participation of private players in low-cost housing. The question is how low can you go? In the age of $3000 Cars and $100 laptops, we have not explored a solution for that mass produced house, which probably costs $1000 to build. Figure 19: Houses Under Construction by Individual Households (in millions) Rural Urban Total Population (Assuming 70:30 split in Rural:Urban) Average Household Size (Per 2001 Census) Number of Households (Estimated) Observations in NSS 65th Round ( ) Inferences - Number of Households that Undertook Construction During (in million) Observations Rural Urban Total Nearly 12 per cent households in rural areas and 4 per cent households in urban areas undertook constructions during the last 365 days. In both rural and urban areas, nearly 14 per cent of the constructions related to new building. In rural areas, for nearly 9 per cent of the completed constructions some amount was financed from institutional agencies, while in urban areas it was for nearly 11 per cent of the constructions. Financing from non-institutional agencies was almost of the same order in both rural and urban areas: in rural areas nearly 27 per cent of the constructions had some amount financed from non-institutional agencies while it was nearly 26 per cent in urban areas. India has a deep rooted history of constraintbased or frugal innovations, which can be effectively employed in the construction industry. Government, builders and architects need to explore adaptive methods and materials of construction, which are suitable in Indian conditions as well as lower cost of construction Source: Housing Condition and Amenities in India ( ), National Sample Survey 65th Round; Jones Lang LaSalle Research The 1K House project is an innovative and visionary project at Massachusetts Institute of Technology Centre for Real Estate, which is attempting to design a low-cost affordable house for people worldwide who face extreme poverty. Targeting to reach the USD 1,000 mark, the team has already achieved USD 1,800 in China and USD 2,000 in Philippines in terms of construction costs of housing prototypes. The relevance of the mark is remarkable in Indian context, where the allocated ceiling for the construction of a house under Indira Awas Yojana (the largest scheme for rural housing) is INR 45,000 or USD 1,000. The Concept of Enabling Shelter Strategies Propounded by UN-Habitat, the concept of enabling shelter strategies calls for a fundamental shift in the role of government, from being a provider to becoming an enabler. According to the strategy, an effective and large scale outcome in housing can be achieved if government s role is an enabling one mobilizing the resources of other actors and facilitating their deployment for the efficient provisioning of housing. It involves facilitating the participation of formal and informal private sector, housing cooperatives and NGOs into the housing sector. 7 The analysis has not considered the number of houses that are built annually by the government bodies or through Slum Rehabilitation Schemes. 8 Census of India 2011 Provisional Population Totals

20 20 Advance - Upscaling Indian Real Estate The Need to Lower Process and Funding Costs to Developers and Buyers Indian real estate developers grapple with archaic laws and a lengthy approval process, which increase the costs of project, and make real estate development inefficient. Streamlined Approval Process In India, as many as 52 approvals are required for housing and real estate projects, which can take up to two years to clear, as several agencies are involved in providing clearances. With land and housing being a state subject, and every state being unique in its clearance procedures, there should be a movement towards merging the cumbersome procedural process into a single window clearance mechanism which will enable time-bound and a streamlined approach to clearances. Administrative delays in project sanctioning also adversely impacts consumer confidence. The proposed Model Real Estate (Regulation of Development) Bill should also contain provisions for streamlining the approval process, which is currently lacking. A single-window clearance mechanism, which is integrated with e-governance and provides for online submission and resolutions of conflicts, will reduce barriers to entry for new developers, make the approval process transparent and faster, reduce process costs and thus ultimately costs to the buyer Uniform Stamp Duty Rates Under JNNURM, nearly 35% of the states had already rationalised stamp duty rates to 5% by mid Since, this is an additional cost in the transaction process, respective state governments should expedite its reform and levy a uniform stamp duty rate of 5% across the country. Service Tax and Value-Added Tax (VAT) on Real Estate Projects The Central Government proposes to impose service tax on real estate, whereas some state governments are imposing value-added tax (VAT). This will create a double taxation regime, and in all cases the extra burden will be passed on to the consumer. The government should consider clearly defining real estate property as either a product or service and determine tax accordingly. This issue merits attention in view of the impending introduction of goods and service tax (GST). A uniform tax regime or rationalised tax structures will go far in ensuring affordable real estate development in India. Enhance Funding to Real Estate Developers Reduce bank provisioning for lending to real estate - Reserve Bank of India (RBI) has increased provisioning for lending to real estate, which has adversely affected the availability of bank funds for massive amounts of real estate construction happening in the country. Authorities should look into reducing the provisioning for a smoother and timely execution of realty projects. Infrastructure status to housing - The Insurance Regulatory and Development Authority (IRDA) regulations mandate insurance companies to invest up to 15% in the social and infrastructure sector. If the housing sector is granted infrastructure status, it could benefit from greater access to long-term finance 9. 9 Realty Decoded Investing Across Borders, Ernst & Young & FICCI (2010)

21 Advance - Upscaling Indian Real Estate 21 Relaxing FDI norms - By lowering the minimum area requirements, especially for Tier I cities, where land is not available in plenty, more real estate projects can garner funding through Foreign Direct Investment (FDI). Also, early exits should be allowed in cases where either the project has been completed or is uninitiated due to lack of statutory clearances. Streamline and relax the provisions of REMFs and REITs - REMFs and REITs can be excellent funding opportunities for real estate development. However, due to lack of clarity on taxation and levy of additional transaction costs such as stamp duty, they have failed to gain momentum. Government should streamline and relax the issues related to the enactment of legislations, which enables the creation of a viable REIT and REMF market in India. Slums Eradication, Upgradation, Rehabilitation? According to Government of India, a slum is a compact settlement with a collection of poorly built tenements, mostly of temporary nature, crowded together usually with inadequate sanitary and drinking water facilities in unhygienic conditions in that compact area. Slums are a reality in the urban morphology of India s large metropolitan cities. During , about 49,000 slums existed in urban areas of India, with Maharashtra housing 35% of the slums, followed by Andhra Pradesh (11%) and West Bengal (10%) 10. While the number of estimated slums has fallen from 56,311 recorded during 1993 to 48,994 recorded during , living conditions in these slums have only marginally improved. These urban slums pose a great risk to the city s growth as they often occupy large tracts of prime land (both public and private) and are a health hazard to the dwellers, due to poor and unorganised water, sanitation and shelter conditions. In the next decade, planners should address this issue by providing the poor with legal access to land through establishment of appropriate tenure frameworks, readjustment of Figure 20: Pro-Poor Tenure Options in Slum Upgradation Illegal or informal Rights Legal or Formal Rights Perceived or De- Facto Tenure Anti-Eviction Laws Adverse Possession Group Tenure Leases (Rentals, Leaseholds and Leases) Provisional, Conditional and/or Qualified Titles or Deeds This tenure exists when people residing on land illegally are able to remain on the land for an extended period, for example, due to non-committal of courts to provide eviction notices. The tenure is weak as evidence is circumstantial and people remain subject to evictions. These laws serve to regulate relations between the landlord and the tenant by providing rules that the parties must follow. This procedure allows occupiers to acquire property they have lived on and used without opposition over a prescribed period of time. Group tenure options allow groups of poor people to own or lease property as a group. This option is known as block or group tenure. It gives cities flexibility on how to record the rights of poor individuals and households affordably in the short term. They refer to a person or group living on and/or using land that belongs to someone else for a specified period of time under agreed conditions, like rental. The key characteristic of leases is they can transfer all rights except actual ownership. A very strong legal tenure is conditional or qualified title or deed. This is almost the same as ownership but the title/deed is subject to some conditions and restrictions. Once these are met, legal ownership can be transferred. Source: Pro Poor Land Management Integrating Slums into City Planning Approaches, United Nations Human Settlements Programme, UN-HABITAT; Jones Lang LaSalle Research 10 Some Characteristics of Urban Slums , NSSO 65th Round Estimates (includes notified and non-notified slums)

22 22 Advance - Upscaling Indian Real Estate land utilizing effective land information systems along with detailed planning and implementation of affordable shelters at the local level. There are several pro-poor tenure options which can allow an effective upgradation of slums, while protecting the rights of the slum dwellers (Figure 20). Per the Government of India Report of the Committee on Slum Statistics / Census released in 2010, an estimated 93.1 million people live in slums in India, which is over one-fourth the entire urban population. If Indian cities have to upgrade themselves for the next decade, a focused attention is required towards upgradation and rehabilitation of existing slum settlements and prevention of further proliferation. Slum creation is a local issue and a clinical approach towards poverty eradication, land use management and rehabilitation is required, which should be localized to specific cities. Initiatives by Government in Increasing Transparency Model Real Estate (Regulation of Development) Bill The regulation of activities of property developers and builders in India is a state subject and comes under the purview of the respective state governments, urban local bodies (ULBs) and development authorities, under the provisions of State Town and Country Planning or City Development Authority Acts. This has led to inconsistency, vis-a-vis rules and regulations being followed in governing, constructing, purchasing, transferring and leasing of properties across the country. The Model Real Estate Regulation Bill proposes to establish a regulatory authority and appellate tribunal to regulate, control and promote real estate construction, keeping in view the interest of the buyer and enable smooth and speedy construction. All properties being developed on land greater than 1,000 sq m or have proposed number of residential units greater than four shall come under the purview of the act and shall be registered with the regulatory authority. All details Figure 21: Status of Key Reforms under JNNURM As of June 2010 State Level Reforms % of States / Cities Achieved Overall Status of Reform 74th Constitutional Amendment Act (Transfer of 12 35% Medium scheduled functions) 74th Constitutional Amendment Act (Constitution of 65% Medium District Planning Committee) 74th Constitutional Amendment Act (Constitution of 19% Low Metropolitan Planning Committee) Transfer of City Planning Functions 42% Medium Transfer of Water Supply & Sanitation 55% Medium Reform in Rent Control 29% Low Stamp duty rationalization to 5% 35% Medium Repeal of ULCRA 94% High Enactment of Community Participation Law 39% Medium Enactment of Public Disclosure Law 61% Medium Urban Local Bodies (ULB) Level Reforms (At a City Level) E- Governance Set-Up 34% Medium Shift to Accrual Based Double Entry Accounting 57% Medium Property Tax (85% Coverage) 32% Low Property Tax (90% Collection Efficiency) 23% Low 100% Cost Recovery (Water Supply) 11% Low 100% Cost Recovery (Solid waste) 9% Low Internal Earmarking of Funds for Services to Urban Poor 77% High Optional Reforms (At a City Level) Introduction of Property Title Certification System 0% Low Revision of Building Bye Laws - Streamlining the 48% Medium Approval Process Revision of Building Bye laws - Mandatory Rainwater 77% High Harvesting in all Buildings Earmarking 25% Developed Land in all Housing 40% Medium Projects for EWS/LIG Simplification of Legal and Procedural Framework for 60% Medium Conversion of Agricultural Land for Non-Agricultural Purposes Introduction of computerized process of Registration 58% Medium of land and property Byelaws on Reuse of Recycled Water 45% Medium Administrative Reforms 26% Low Structural Reforms 34% Medium Encouraging Public Private Partnership 71% High Source: Jawaharlal Nehru National Urban Renewal Mission, June 2010; Jones Lang LaSalle Research Note: The figures denote the percentage of states / cities that have already achieved the stipulated reforms. States leading the reforms under JNNURM are Andhra Pradesh, Gujarat, Kerala, Karnataka, Madhya Pradesh, Tamil Nadu, Uttar Pradesh and West Bengal.

23 Advance - Upscaling Indian Real Estate 23 regarding the property shall be maintained on a website and the promoter of the project shall be responsible for recording and entering the project details within a stipulated timeframe. Property Title Certification System (PTCS) and Transaction Records One of the optional reforms required to be undertaken by cities that are receiving funds under JNNURM is the creation of Property Title Certification System (PTCS). PTCS will be a comprehensive database of land transaction records, utilizing Information Technology. It shall have three registers register of titles, register of disputes and register of charges and covenants, which shall together constitute the total record of title of all lands. It will have far reaching implications in making the land market transparent and enabling better policymaking and urban planning. While none of the states have achieved this, most of the cities have committed to a 5-7 year timeline to accomplish the reform, considering the vast amount of effort required in compiling this. India for the securities markets) approved the guidelines for real estate mutual funds (REMFs). As per the guidelines, all the schemes having an objective to invest directly or indirectly in real estate assets or other permissible assets are governed by the provisions and guidelines under Securities and Exchange Board of India (Mutual Funds) Regulations The key features of the guidelines are as follows: REMFs shall be closed end funds and its units shall be listed on a recognised stock exchange. The net asset value (NAV) shall be declared at the close of each business day. Title deeds pertaining to the real estate assets shall be kept in safe custody with the custodian of the REMF. No lending or housing finance activities should be taken up by REMFs. The investments by an REMF are to be made in the prescribed ratios among real estate assets, mortgage backed securities (but not in mortgages), equity shares or debentures Another optional reform under JNNURM is the introduction of computerized process of registration of land and property. Over half of the cities had already achieved this by June 2010 (Figure 21). Government should make available the deeds and titles under the ambit of Right to Information (RTI) in order to foster transparency in the real estate market. The registration departments should integrate these records with Geographical Information Systems (GIS) and make it available for analysis, which will enable faster and effective urban planning. The compuetrised records should also be integrated with the Unique Identification (UID) project that is currently underway, which is providing a unique identification to all Indian citizens. Real Estate Mutual Funds (REMFs) (Source: Jones Lang LaSalle India Property Investment Guide, 2011) In 2008, SEBI (the apex regulatory body in

24 24 Advance - Upscaling Indian Real Estate companies (whether listed or not) engaged in dealing in real estate assets or in undertaking real estate development projects and other securities. They must invest at least 35 percent of net assets in completed properties and at least 75 percent of net assets directly in real estate assets, equity shares, or debentures of real estate companies engaged in real estate development, whether listed or unlisted. Real estate assets may be let out or leased out if the term of such lease or letting does not extend beyond the period of maturity of the REMF. Real Estate Investment Trusts (REITs) Under the draft Real Estate Investment Trust (REIT) regulations, a REIT is defined as a trust registered under the Indian Trusts Act, 1882, and registered with SEBI, whose objective is to organize, operate, and manage real estate collective investments. It is similar to REMFs in structure, except for a few significant differences: REITs can invest in income generating real estate but can acquire real estate under construction as long as the value does not exceed 20 percent of the total NAV. REITs must distribute at least 90 percent of their annual net income after tax to unitholders and leverage cannot exceed 20 percent of gross assets. REITs and REMFs would demand a greater transparency from the real estate developers, for appropriate and periodic valuation of assets and investment decisions, in turn assuring a higher transparency to the investor. The major challenges to enactment of REIT and REMF legislations in India is the issue over clarity of taxation and high real estate transaction costs in India. Government should expedite these legislations to bring more investment into real estate, as well as increase transparency in the sector.

25 Advance - Upscaling Indian Real Estate 25 Kandla Vadodara GUJARAT Amritsar RAJASTHAN Jaipur Jodhpur Ahmedabad Surat Nashik Ludhiana JAMMU AND KASHMIR PUNJAB Indore HIMACHAL PRADESH Jalandhar HARYANA NCR Chandigarh UTTRAKHAND Bhopal Nagpur Meerut UTTAR PRADESH Agra Lucknow MADHYA PRADESH Kanpur Allahabad Varanasi CHHATTISGARH The Infrastructural Landscape of India BIHAR Patna JHARKHAND WEST BENGAL Kolkata ORISSA Paradip SIKKIM Guwahati MEGHALAYA TRIPURA ARUNACHAL PRADESH ASSAM NAGALAND MANIPUR MIZORAM MumbaiMAHARASHTRA Bhubaneshwar Pune Hyderabad Visakhapatnam Goa GOA KARNATAKA Mangalore Vijayawada ANDHRA PRADESH Ennore Delhi - Mumbai Industrial Corridor Golden Quadrilateral 99.5% Complete North-South Corridor 76.7% Complete East-West Corridor 76.7% Complete Mysore Bangalore Chennai TAMIL NADU KERALA Coimbatore Kochi Tuticorin Thiruvananthapuram Western DFC Line Eastern DFC Line International Airport Domestic Airport Major Sea Port Metro-Railways Operational / Construction Underway Note: The proposed infrastructure developments including routes for various projects shown on the map are for illustration purposes only. Users of this information should review or consult the primary data and information sources to ascertain the usability of the information. Source: Jones Lang LaSalle Research

26 Authors Himadri Mayank, Manager, Research & REIS Himadri Mayank joined Jones Lang LaSalle India in July 2008 and is responsible for managing the quarterly research offering Real Estate Intelligence Service (REIS), which tracks, analyses and forecasts trends in office, retail and residential property sectors for Indian cities. Based out of Mumbai, he also contributes towards regional and local research publications covering economy, sector analyses, market forecasts and investment strategies. He holds a bachelor s degree in Architecture from Indian Institute of Technology Kharagpur and has three years of experience in the field of real estate. He is pursuing the Chartered Financial Analyst (CFA) program offered by CFA Institute, Charlottesville and is a 2011 Level III CFA candidate. Abhishek Kiran Gupta, Head of Research & REIS abhishekkiran.gupta@ap.jll.com Abhishek Kiran Gupta leads the Jones Lang LaSalle India Research team and is based in Mumbai. He manages research operations on a Pan-India level and is responsible for the team s outputs, including research reports such as topical white papers, property market digests and bespoke research projects based on specific client requirements. Prior to joining Jones Lang LaSalle, he had seven years of experience in market research, business analysis and market strategy consulting, servicing diversified industries including pharmaceutical, software publishing and insurance. Acknowledgements The authors acknowledge the contribution of Hariharan Ganesan and Subash Bhola from Jones Lang LaSalle Research towards the content of this report.

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28 About Jones Lang LaSalle Jones Lang LaSalle (NYSE:JLL) is a financial and professional services firm specializing in real estate. The firm offers integrated services delivered by expert teams worldwide to clients seeking increased value by owning, occupying or investing in real estate. With 2010 global revenue USD2.9 billion, Jones Lang LaSalle serves clients in 60 countries from 750 locations worldwide, including 180 corporate offices. The firm is an industry leader in property and corporate facility management services, with a portfolio of approximately 1.7 billion square feet worldwide. LaSalle Investment Management, the company s investment management business, is one of the world s largest and most diverse in real estate with approximately USD41 billion of assets under management. For further information, please visit our website, www. joneslanglasalle.com Jones Lang LaSalle has over 50 years of experience in Asia Pacific, with over 19,400 employees operating in 77 offices in 13 countries across the region. About Jones Lang LaSalle India Jones Lang LaSalle is India s premiere and largest professional services firm specializing in real estate. With an extensive geographic footprint across eleven cities (Ahmedabad, Delhi, Mumbai, Bangalore, Pune, Chennai, Hyderabad, Kolkata, Kochi, Chandigarh and Coimbatore) and a staff strength of over 3500, the firm provides investors, developers, local corporates and multinational companies with a comprehensive range of services including research, analytics, consultancy, transactions, project and development services, integrated facility management, property and asset management, sustainability, warehousing and logistics, capital markets, residential, hotels, health care, senior living, education and retail advisory. For further information, please visit Real Estate Intelligence Service (REIS) India is a subscription based research service designed to provide you with cutting edge insights into India s diverse and challenging real estate markets through collation, analysis and forecasts of property market indicators and trends across all major Indian markets across various real estate asset classes - office, retail, residential. REIS empowers you with consistent and complete market data and analyses for all real estate indicators by specific micro markets. It is supplemented by value added services including client briefings, presentations and rapid market updates. For more details, contact, Abhishek Kiran Gupta - abhishekkiran.gupta@ap.jll.com Jones Lang LaSalle offices AHMEDABAD tel BANGALORE tel CHANDIGARH tel CHENNAI tel COIMBATORE tel DELHI tel GURGAON tel HYDERABAD tel KOCHI tel KOLKATA tel MUMBAI tel tel PUNE tel COPYRIGHT JONES LANG LASALLE All rights reserved. No part of this publication may be published without prior written permission from Jones Lang LaSalle. The information in this publication should be regarded solely as a general guide. Whilst care has been taken in its preparation no representation is made or responsibility accepted for the accuracy of the whole or any part. We stress that forecasting is a problematical exercise which at best should be regarded as an indicative assessment of possibilities rather than absolute certainties. The process of making forward projections involves assumptions regarding numerous variables which are acutely sensitive to changing conditions, variations in any one of which may significantly affect the outcome, and we draw your attention to this factor.