Overview of Indian Real Estate Sector

8/8/2019 Overview of Indian Real Estate Sector

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Source: Ministry of Housing and Urban Poverty Alleviation, India

8.3. Green Housing:

Green Building , also known as and green construction or sustainable building , is the practice

of creating structures and using processes that are environmentally responsible and resource-efficient throughout a building's life-cycle: from siting to design, construction, operation,

maintenance, renovation, and deconstruction. This practice expands and complements the

classical building design concerns of economy, utility, durability, and comfort.

Main objectives are:

1. Efficiently using energy, water, and other resources

2. Protecting occupant health and improving employee productivity

3. Reducing waste, pollution and environmental degradation

Green building practices aim to reduce the environmental impact of buildings.

Sustainable development in the built environment includes optimizing site potential, minimizing

energy consumption, protection and conservation of water, using environmentally preferable

products, enhancing Indoor Environmental Quality (IEQ) and optimize operational and

maintenance procedures.

India has two competing systems to rate how green a building really is. There is the energycompliance certificate issued by the Indian Green Building Council (IGBC or Leed India) and

the Green Rating for Integrated Habitat Assessment (Griha). The former is benchmarked with

global standards while the latter is home-grown.

Leed India rating is primarily based on per capita energy consumption.

The ministry has made it mandatory for government buildings to obtain a Griha rating as a

precondition for departments to get subsidies and other financial assistance for green

development.


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The objective of both the organizations is to encourage environment-friendly buildings; IGBC

has higher exposure to the West. This makes it much more acceptable to multinationals. IGBC is

also simple and easy to understand and follow.

8.4. Impact of IFRS on Indian Real EstateApril 1, 2011 will see the entry of IFRS in India, with companies covered in the first phase, as

announced by the Ministry of Corporate Affairs, reporting their performance results as per the

IFRS converged Indian Accounting Standards. There has been much talk about the impact of this

convergence on companies in the real estate sector, and rightly so, as this sector is expected to be

significantly impacted by this change. It will impact the basis for recognizing revenues, take

cognizance of multiple-element contracts and barter transactions, and allow the use of fair value

for measurement of assets.

Sale of properties under construction

The foremost point is that IFRS principles treat sale of apartment and properties as a sale of a

product that is arguably also the underlying substance of such transactions, as against contracts

for provision of construction services. This conclusion is based on the fact that:

1. Customers do not have any right to make fundamental changes to the structure or design

of the apartment during the construction period;

2. Customers do not have right to take over incomplete property under construction, in the

case of default by the developer or otherwise.

Under this approach, Agreement to sell entered into by developers for an under-construction

property is akin to a transferable forward contract to sell the property in the future at an agreed

price; and this by itself does not transfer the risks and rewards of ownership to the customer until

transfer of possession of the property.

This implies that revenue recognition would coincide with delivery of the product; quite the

opposite of the current practice of considering these as construction services and recognising

revenue using the percentage completion method.


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This effectively means that ongoing construction will be inventory for these companies and

revenue will be recognised only once the project construction is complete. This is envisaged to

be the biggest impact for real-estate companies on transition to IFRS.

Structured financing arrangements

Structured financing arrangements for special purpose vehicles (SPV) floated by real-estate

companies for projects, would need to be closely evaluated to identify the substance of the

transaction; and accounting will have to reflect this underlying substance.

For example, instruments issued by the SPV, for which the SPV has an obligation to pay cash,

would need to be classified as debt and the underlying committed returns or fluctuations in the

value of such instruments would have to be recorded in the income statement. This would also

increase the volatility of the reported earnings and reduce reported profits.

Investment property

Under Indian generally accepted accounting principles (GAAP), there is no specific definition of

investment property; hence, there are varying practices of classifying such properties held for

rentals or capital appreciation. They are either shown under investments or as part of fixed assets

at cost of acquisition or construction. If the property is classified as part of fixed assets, it is possible to undertake revaluation, but such gain is taken directly to reserves and the property

needs to be depreciated over its economic useful life.

IFRS will allow real estate companies to adopt fair value for measuring and reporting their

investment properties.

The fair-value gains as well as losses arising from adoption of this method will be routed through

the profit and loss account. If the fair-value model is adopted, investment property is not

depreciated; hence there will be no amortization cost. IFRS recognizes the fact that usually

landed properties only appreciate in market values over the long term; therefore, they need not


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be depreciated (have a certain value written off every year, which is how most assets are

currently treated).

Service concession arrangements

For infrastructure companies the IFRS provision on service concession arrangements will have

far-reaching consequences, since concession arrangements would need to be accounted for

differently. Under Indian GAAP, expenditure incurred by the infrastructure provider is

capitalized as fixed or intangible asset, depreciated usually over the term of the service

concession agreement. Under IFRS, this will have two elements. First, it will be treated as

rendering of construction services where revenues will get recorded at the fair value of such

services, that is, with appropriate mark-up over cost. Second, the provider will recognize an

intangible asset in extinguishment of the receivables on completion of construction. The results

of the service provider will be thus significantly different, since it will recognize revenues during

the construction period under IFRS.

Another important aspect will be discounting of long-term payables and receivables, including

retention money, in line with market interest rates to reflect the current fair value.

Road ahead

Given that convergence with IFRS is inevitable, the key now lies in getting this transition right;

and the most important factors for real estate companies would be educating their stakeholders,

including investors, bankers and align internal budgets and performance measurement matrices.

Correspondingly, market participants also need to align their valuation matrices based on the

different set of accounting policies that will be used by these companies to report their

performance results.

Equally important is for the company to align its internal performance-linked compensation

policies to avoid a sudden unintentional impact on its employee compensation plans.

Further, in case of payments to directors, which in India are limited to a specified percentage of

profits, companies will need to address the impact on managerial remuneration due to


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insufficient profits in the period when construction activity is on, though companies would have

positive cash flows. The above would also impact ability of real estate companies to remunerate

shareholders due to restriction on dividends due to insufficient book profits.

One has to also assess how these IFRS impacts interact with tax regulations. It will be importantto understand whether tax authorities will recognise profits under IFRS as taxable profits and

thereby postpone the tax incidence till the possession of the property is transferred or whether for

tax purpose, companies will need to recomputed revenue using percentage of completion

method.

8.5. Reverse Mortgage India

Reverse Mortgage in India still at an infancy stage. The reverse mortgage came into existence

in the UK during the crash of 1929. Having evolved genetically from the developed countries

and mainly the USA, reverse mortgage is a scheme formulated to benefit the senior citizens the

most. Although applicable for the younger people also, 'reverse mortgage loan products for

senior citizens' is the basic that every bank of financial institution follows.

Reverse Mortgage Information

Reverse mortgage information that will help in understanding the concept of reverse mortgage

loan:

Definition Of Reverse Mortgage: Reverse mortgage is a Home Loan product designed for the

senior citizens by converting their fixed asset - their home or in banking terms their equity in any

house property into an income channel without having to liquidity your equity in case of any

requirement.

The Dealing Parties: Reverse mortgage loan involves two parties, the borrower - the senior

citizen and the lender - any bank or housing finance institution.

Security for the Lender: The borrower pledge their home property to a lender


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Payment of the Loan to the Borrower: In return of the house property pledged, the borrower gets

a lump sum amount or periodic payments spread over the borrower's lifetime that can be utilized

by the borrower (senior citizen) as per needs and not for speculative purposes.

Repayment of Reverse Mortgage Loan: The homeowner and now the borrower will not berequired to repay the loan during his lifetime. On his death or leaving the house permanently, the

loan along with the accumulated interest is repaid through the sale of the property pledged.

Home Value Falling Short: In case the accumulated interest and loan amount is larger than the

value of the mortgaged property, the mortgage loan is capped at the value of the home equity

only and the lender is the party at loss.

Home Value in Excess: Any excess amount by the sale of the property is duly remitted to the

borrower incase of permanent leaving of the house or his heirs in case of the death of the

borrower.

Freeing the property from reverse mortgage: In case you get an additional income and

accumulate an amount to repay your loan, you can free your property in midterm and can also

apply for re-reverse mortgage if required on the same property.

In the usual mortgage loan, the borrower begins with a large loan and lower equity in his house.

In reverse mortgage however, the borrower has a very high equity in his house and a non-

recourse loan secured by the home property. In the usual mortgage system, as the regular

mortgage payments are made the outstanding loan decreases and the house equity increases.

Reverse is the case in reverse mortgage, the loan amount increases with time and the home

equity decreases with time.

Reverse Mortgage Pros and Cons

The reverse mortgage pros and cons should be measured carefully before subscribing to it. Since,

the bulk of the savings for the average Indian are typically locked away in a house or other property at the time of retirement, and in case of requirement it cannot be encashed except by

selling the home or moving out. This is where reverse mortgage comes as an answer.


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Taking the usual mortgage loans in lieu of your home as a security will not be feasible in the age

above 50 as the repayment of the loan is not feasible. The Banks And Financial Institutions also

won't be of any help in case of no income source. This is where the house property proves as an

asset and brings in reverse mortgage that allows you to be the home owner as long as you live.

Home ownership is an area most Indians are sensitive about and reverse mortgage entitles you

your house throughout your remaining life.

According to demographic projections, reverse mortgage loan products could be a hit among the

metros and also in areas like Kerala, Tamil Nadu, Goa and Chandigarh in India. With hardly any

old age social security schemes and financial helplines, reverse mortgages have a potential

market. Loans are available in the form of reverse mortgage without any income criteria at an

age where normal loans are not available. Reverse mortgage for senior citizens is a social

assurance post-retirement.

Features of reverse mortgage:

1. Any house owner over 60 years of age is eligible for a reverse mortgage.

2. The maximum loan is up to 60 per cent of the value of the residential property.

3. The maximum period of property mortgage is 15 years with a bank or HFC (housing

finance company).

4. The borrower can opt for a monthly, quarterly, annual or lump sum payments at any

point, as per his discretion.

5. The revaluation of the property has to be undertaken by the bank or HFC once every 5

years.

6. The amount received through reverse mortgage is considered as loan and not income;

hence the same will not attract any tax liability.

Reasons for failure

Recent reports seem to indicate that a very small percentage of senior citizens only seem to havetaken advantage of the facility since its inception. This could be perhaps because better

awareness had not been created about the product.


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Secondly, the Indian banking industry caps the available loan amount at Rs 50 lakh (Rs 5

million), instead of providing for an equitable percentage of the property's value, and limits the

loan period to a tenure of 15 years.

The product is still evolving and may take on new dimensions depending on how the banks wishto present its consumer appeal.

Chapter 9 - Unexplored areas

1. Logistics and warehousing

Rationale for investment

Logistics framework needs to be developed as per international norms. Extensive but not so well-maintained transport network, ICDs, CFSs and warehouses. Physical infrastructure needs to be upgraded to catalyze countrys trade growth and

ensure optimal utilization resources (logistics costs are 13 per cent of GDP). Government initiatives to boost trade is showing results and hence the need for logistics

solutions. Logistics market is currently estimated at US$ 105 billion and is expected to reach US$

125 billion by 2010, indicating a growth of 16 to 17 per cent.

Outlook

Relatively small manufacturing base, but growing Greater acceptability towards outsourcing logistics activities to capable third-party

operators, providing immense potential for growth in logistics solutions


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Opportunities

Booming trade domestic and international As more MNCs establish their operations in India, the need for good quality

warehousing, distribution and sourcing centers is expected to rise. VAT, if uniformly implemented, is expected to change warehousing and distribution

fundamentals and is expected to consolidate warehousing needs. Agriculture logistics proper cold chain management. Logistics for large infrastructure and engineering projects.

1. Healthcare infrastructure


Healthcare delivery market expected to grow at a CAGR of 12 per cent over the next five

years.

The total investment needed to reach the optimum target of 1.85 beds per thousand populations is US$ 77.9 billion, out of which US$ 69.7 billion is expected to come from

the private sector. An estimated one million beds would be added by 2012 taking the total beds available in

the country to over two million. Revenues currently generated by private hospitals (all-inclusive) are US$ 15.51 billion. Medical tourism is estimated to emerge as a US$ 2,000 million market by 2012.

Outlook


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Rapidly changing market with growing demand for quality healthcare infrastructure. The sector is expected to witness foreign equity participation, joint ventures, alliances

and tie-ups among healthcare institutions resulting in transfer of technology, skills and

practices.

Opportunities

Medicity Hospital Elderly homes Medical office buildings

1. Lowcost housing/ Affordable housing


Rural population of over 70 per cent Huge market potential Housing shortage expected to increase to 26.53 million units by 2012 and requires

investment of US$ 877 million. Shift from rented to owned house Easy access to financing Nuclear families Government initiatives such as 'Housing to all', public-private partnership (PPP) joint

ventures and exemptions in Floor Space Index (FSI). Under this model, the state offers

land and private developers bring in capital as well as efficiency.


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1. Education infrastructure

Huge market with untapped potential and low competition Need for development of more world-class educational institutions Driven by knowledge-based industries, large demand for qualified engineers Research laboratories adding value to global outsourcing Growing interest of leading global educational institutions in setting up institutions in

India.

Chapter 10 - Real Estate Glossary

Absolute Title

The right of ownership of a mortgage deed which gives the right in certain specified

circumstances to demand repayment in full of the outstanding debt than the due date.

Amortization: Payment of a debt in equal installments of principal interest as opposed to

interest only payments.

Annuity: A sum of money paid each year during the life of the recipient. An annuity is usually

paid as a legal obligation under a contract or undertaking as through a pension scheme and may

be paid in installments more frequently than once every twelve months.

Bayana: An Indian term used to denote the token money given to the landlord to informally

freeze negotiations on a particular property after the initial terms and conditions have been

formalized.


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Built-up area: Built-up area denotes to the entire area of the floor including carpet area, walls,

lobbies and corridors, atrium areas and basement.

Breach of Contract: An act or omission contrary to enforce specific performance to rescind the

contract and / or to claim damages the remedy available depending upon the nature of the breach.

Building Contract: A contract between an owner or occupier of land and a building contractor

setting forth the terms under which construction is to be carried out basis of remuneration time

scale and penalties if any for failure to comply with terms of the contract.

Buy-Out Rate : In a funding agreement between a developer and a prospective purchaser the

pre-determined investment yield which will be used to capitalize the annual income receivable at

the time of sale to determine the buyout price.

Completion Certificate/Statement : A certificate issued by the local development authority

certifying that all necessary works have been completed and that the property is fit for

occupation.

Carpet area: The actual usable area within the walls of the floor is Carpet area.

Conveyance : A document transferring title to land from one person to another.

Effective rent : The gross rent payable per month by the occupiers which includes the base rent,

maintenance charges, and imputed costs of loss of interest on security deposit and rental

advance. The effective rent indicates the total cash outflow of an occupier every month on

account of leasing any property.

Equity Linked Mortgage : A mortgage whereby the interest on the principal in part or in whole

is calculated, usually yearly, by reference on the security, e.g. It may reflect annual increase or

possible decreases, in the annual return on, or the value of, the property in which the mortgage issecured.

Escalation Clause : A clause specified in lease agreements wherein renewals of lease period are


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built in. It involves an increment in the base rent at every renewal of a lease agreement in the

base rent at every renewal of a lease agreement and is generally a percentage rate that is either

pre agreed or negotiated before the renewal of the lease agreement.

EMI : EMI is Equated Monthly Installment. The loan can be repaid through EMIs over the tenure

of the loan

Efficiency ratio: Efficiency ratio is expressed as a share of carpet to super areas of the property.

Foreclosure : The legal process by which a mortgagee can sell the mortgagors interest in the

property to satisfy debt.

Floor Space Index (FSI): Floor Space Index is the quotient of the ratio of the combined gross

floor area of all floors excepting areas specifically exempted under these regulations to the total

area of the plot.

Freehold : In general parlance this is used as shorthand for the tenure of an estate in fee simple

absolute in possession. Strictly speaking, however, freehold includes fee simple, entailed

interests and tenancies for life.

Indenture : A deed between two or more parties, each party having his own copy. Originally

copies were all included in a single document from which each was torn or cut along a wavy

(intended) line.

Lease Agreement : An agreement, usually written, between the lesser and the lessee, who allows

for the conveyance of property to the tenant under a contract, and confers usage and control

rights to the tenant for the duration of lease. Apart from financial terms and conditions, several

clauses describing the other binding terms and conditions of the agreement are also documented.


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Letter of Intent (LOI): The Letter Of Intent is a non-binding offer letter to buy a commercial

place.

Mixed use: It is commercial properties with retail on the first floor and apartments on upper

floors. Mixed use is the use of commercial and residential simultaneously.

Mortgage : It is an agreement by which the borrower gives the lending institution the right to

take possession of the property given as security if the loan is not repaid. Usually all the

documents of the property have to be deposited with the HFC.s

Net Operating Income (NOI): Net Operating Income is the annual income after deduction of

expenses like property tax, insurance, and maintenance but mortgage payments are exceptional.

Registration charges: The fees associated with getting the legal title registered in your name.

This legal process takes place in the sub-registrars office in your local court.

Rentable Area: The area of floor space for which rent is calculated even though other areas,

within or outside the premise, are lawfully used by the tenant. For example, in an office building

it is customary to exclude from the direct calculation of rent the space used for corridors, atrium

and stairways.

Refinance: Refinance means prepaying an existing higher interest loan by taking a lower interest rate in the wake of falling interest rates. One can do this either from the same HFI or

from a different HFI. If one retires a loan using money borrowed from another Finance

Company, he will have to pay a refinance charge of 1-2% of the loan outstanding.

Sale and Leaseback

An arrangement whereby a freeholder or lessee sells his interest in a property for an agreed sum

and takes back a lease on the whole or part of the property from the purchaser, generally either at

a rack rent or at some lesser rent related to the price paid.

Super area:


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This is as a rule regards to the entire area of the building which includes carpet area, lobbies and

corridors, walls, lifts, staircases basements, and other atrium and utility areas.

Sale deed:

Sale deed provides the buyer the absolute and undisputed ownership of the property. With this

law, the seller transfers his right of property to the buyer. Subsequently, it is executed to the

execution of the sale agreement and after compliance of various terms and conditions detailed in

the agreement.

Conclusion:

As per the official reports the Indian Real estate has attained a twofold increase. The market

experts have predicted that the coming years will witness a boon in the Indian Real Estate

Scenario and property business will turn out to be a cash processing machine.

With the on time stimulus measures provided by the government the impact of recession on the

sector was reduced to some extend and it also helped the recovery of the sector.

real estate is now increasingly been seen as an investment option. With the coming of various

real estate products an investor has more options rather than invest in physical property.

With the relaxation of the FDI norms the sector is going to experience exponential boom. This

opens up the sector to the deep pocketed foreign investors .this will help Indian real estate sector

as it will not only bring in the capital but also the foreign technology, expertise and other

financial products.


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The Indian real estate sector is going from luxurious homes to affordable houses, this move will

benefit a huge portion of population as it will help them realize their dream of having their own

homes.

Green housing is the next big thing which will make all developers more aware and inclusive of the environmental needs while going for the construction. With the increasing awareness about

the carbon footprint among home buyers the builders with such move will definitely gain

goodwill and prospective customers.

All in the all scenario for the real estate market in India seem to be rosy. The sector is about to

experience growth and stability in future. However the developers need to take into account the

changing environment i.e. the introduction of IFRS and Reverse Mortgage and take appropriate

measures to tackle them and take advantage of them.

Bibliography

Websites

www.wekipedi.com

www.magicbricks.com

www.ibef.org

www.indiahousing.com

Magazines

Realty Plus
http://www.wekipedi.com/http://www.magicbricks.com/http://www.ibef.org/http://www.indiahousing.com/http://www.wekipedi.com/http://www.magicbricks.com/http://www.ibef.org/http://www.indiahousing.com/


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Real Estate Times

Construction World

Property Plus- Supplement of Times of India

Research Papers

SHRACHI dreamer doer

Knight Frank- affordable housing market in India

Deutsche bank India - Building up India ,Outlook for Indias real estate markets

Prospects & Problems of Real Estate in India : study by Vandana Singh , Head-MBA

Department , Seth Jai Prakash Mukand Lal Institute of Engeenring &Technology (JMIT)

Ernst & Young- Eye on Real Estate

Papers by ICICI Bank, Motilal Oswal, Yes Bank and Nomura financial advisory and securities

(India) pvt. Ltd.

Overview of Indian Real Estate Sector

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