Indian Real Estate Sector - Handbook 20112012
Contents03 | Foreword05 | Key highlights - 201106 | Regulatory developments: the big picture14 | Investment scenario: the ...
Pg 3ForewordWe are delighted to release the inaugural edition of "Indian Real Estate Sector - Handbook 2011", a publicatio...
Pg 4ForewordI am delighted to know that Grant Thornton has come up with a comprehensive handbook on the Indian real estate...
Pg 5Key highlights - 2011                                                                                       May       ...
Revenue recognition                                                   Reforms            Environment                      ...
Pg 7Regulatory developments: the big pictureThe constant evolution of the organised segment of the Indian real        In a...
Pg 8Regulatory developments: the big picture• The Bill also empowers the village council to conduct social             In ...
Pg 9Regulatory developments: the big picture• In case of any default, the developers will be required to refund      In a ...
Pg 10Regulatory developments: the big pictureThe current definition of project is very broad and identifies parameters   (...
Pg 11Regulatory developments: the big pictureThe recognition of project revenue by reference to the stage of        In a n...
Pg 12Regulatory developments: the big pictureFDI in retail sector                                                      Upd...
Pg 13Regulatory developments: the big pictureMaharashtra Housing Bill 2011                                           • The...
Crisis in Europe                                                     Volatility         Special purpose vehicles          ...
Pg 15Investment scenario: the ins and outsReal estate is the fourth largest sector in terms FDI inflows in the            ...
Pg 16Investment scenario: the ins and outsSince equity inflows are largely sentiment driven, the pessimism in the   Furthe...
Pg 17Investment scenario: the ins and outs                                            2011: Prominent deals in Indian real...
Pg 18Investment scenario: the ins and outsAs per an industry report, during 2011, PE firms invested US$ 2.68         Since...
Pg 19Investment scenario: the ins and outs                                       2011: Prominent PE exits in Indian real e...
Pg 20Investment scenario: the ins and outsIn a nutshell• Investment in the Indian real estate sector between April and  Se...
Growth strategies                                                                                       Vacancy rates     ...
Pg 22Key issues and challenges: caution and diligenceAlong with the rest of the global economy, the commercial property   ...
Pg 23Key issues and challenges: caution and diligencePricing trends                                                       ...
Pg 24Key issues and challenges: caution and diligence                                                                     ...
Pg 25Key issues and challenges: caution and diligenceIncreased vacancy ratesDuring 2011, real estate sector witnessed a sl...
Pg 26Key issues and challenges: caution and diligenceIn a nutshell• The frequent interest rate hikes led to liquidity sque...
Urban infrastructure                                              Benami transactions                  Revenues  Public of...
Pg 28News round-up: regulatorySupreme Court mandated the sale deed                                    Circle rates hiked i...
Pg 29News round-up: regulatoryBudget 2011-12 highlights                                                   Developments in ...
Pg 30News round-up: financialPublic offers deferred by a significant proportion                  Top 11 listed real estate...
Pg 31News round-up: miscellaneousMajor land acquisition dispute in Greater Noida                         Indias largest hi...
Pg 32The way forward Tata Housing forays in       By 2014, Vijay Shanthi        Lodha Group will invest        With an inv...
Pg 33About Grant ThorntonGrant Thornton InternationalGrant Thornton International is one of the worlds leading organisatio...
Pg 34About CIIThe Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the growt...
Pg 35Our real estate solutionsOur real estate practice                                                               Finan...
Contact usTo know more about Grant Thornton, please visit www.grantthornton.in or contact any of our offices as mentioned ...
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Indian real estate sector Handbook 2011

  1. 1. Indian Real Estate Sector - Handbook 20112012
  2. 2. Contents03 | Foreword05 | Key highlights - 201106 | Regulatory developments: the big picture14 | Investment scenario: the ins and outs21 | Major issues and challenges: caution and diligence27 | News round-up32 | The way forward
  3. 3. Pg 3ForewordWe are delighted to release the inaugural edition of "Indian Real Estate Sector - Handbook 2011", a publication focussed onproviding a yearly round-up of the significant developments in the real estate sector in India.As expected, the year proved to be a mixed bag for the sector. Real estate companies continued to face a series of evolvingchallenges: protecting profits while continuing to invest; seizing international opportunities; differentiating their brand; retaining andattracting talent; and cultivating stronger relationships with lenders and fund managers. The volatility in markets reinforced the needto focus on core competence.In order to curb soaring inflation, the RBI raised interest rates 13 times in the past 19 months, seriously impacting demand for realestate which is primarily driven by bank finance. Vishesh C. ChandiokPessimism in the Western economies continued influencing market sentiments and foreign capital inflow in the sector. Mounting National Managing Partnerdebts, rising interest costs and correction in real estate prices further exacerbated the condition. Companies with stronger Grant Thornton India LLPfundamentals and ability to make quick strategic decisions, however, continued with growth despite multi-pronged market pressures.In such a dynamic scenario, it has become critical for real estate companies to keep track of the key developments taking place in thesector.With this view, we have designed this handbook to provide you a quick summary of the key developments around the regulatoryenvironment along with a snapshot of the investment scenario, and major challenges and issues, which made news in 2011. I hopeyou find it useful and welcome your feedback.
  4. 4. Pg 4ForewordI am delighted to know that Grant Thornton has come up with a comprehensive handbook on the Indian real estate sector withan aim to provide a quick summary of the regulatory and investment issues during the year 2011. The importance of this sectorlies not only in the fact that it is the fourth largest in terms of the FDI inflows in the country, but also the manner in which it hasemerged as an integral part of every common man‟s dream.The burgeoning middle class in the country with high aspirations, access to loan capital and increasing disposable incomes, drivesthe demand for integrated township developments, across the country‟s urban landscape. With a shortage of approximately 25million dwelling units at the beginning of the 11th five-year plan, the private sector is going to play a major role in fulfilling thisdemand. On the infrastructure front alone, the country needs around US$ 1.2 trillion investments over the next 20 years.The very fact that by the year 2030, nearly 70% of the country‟s GDP will be contributed by the cities, signifies the critical need of Firdose Vandrevalaequipping our cities with quality real estate. Against this backdrop, such a contemporary handbook spreading awareness about the Chairman, CII National Committeerecent regulatory developments like Land Acquisition, Rehabilitation and Resettlement Bill, 2011 and the Draft Real Estate on Real Estate & Housing(Regulation and Development) Bill 2011, would serve as a guiding document for the stakeholders. Chairman and Managing Director Hirco Developments PrivateOn behalf of CII, I once again compliment Grant Thornton and hope that the information provided in this handbook would Limitedhelp in shaping an inclusive and sustainable growth path for the real estate sector in India.
  5. 5. Pg 5Key highlights - 2011 May July March January September November DIPP & the Villagers in Noida Finance Ministry and Greater Noida released called off theirCoastal consolidated FDI Ministry of Housing agitation over the New draft of theRegulation Zone policy to tighten prepared draft issue of land Real Estate Bill, Land Acquisition 2011 released forand Island FDI norms for the legislation of Model acquisition Bill, 2011 cleared public consultationProtection Zone sector Residential by the UnionNotifications 2011 Tenancy Act, 2011 Cabinetannounced Maharashtra Government Delhi government planned to Benami hiked the circle Gujarat reintroduce an Transactions rates across government additional 0.33 (Prohibition) To promote affordable categories hiked minimum Floor Space Bill, 2011 housing, Union Budget introduced in base rate for land December Index (FSI) in February provided for 1% interest the Lok Sabha by 400 to 1,000% the Mumbai October Maharashtra became August rebate on housing loans up to Rs 15 lakh suburban the first state of India April June district to get Real Estate Regulatory Authority
  6. 6. Revenue recognition Reforms Environment Approvals Project costs Land acquisition Affordable housing GrowthDevelopment Regulatory environment Governance Rehabilitation Resettlement Law Enforcement Regulatory Authority FDI in retail Appellate Tribunal Land records Transfer Policies Land acquisition Barter transactions Titles
  7. 7. Pg 7Regulatory developments: the big pictureThe constant evolution of the organised segment of the Indian real In a nutshellestate sector, both in terms of size and growth, in the last two • Post acquisition, land cannot be transferred for any other purpose,decades has drawn attention towards the need of introducing and except for a public use, such as government infrastructure projectsimproving the regulatory environment. While self-regulation will be • Government cannot acquire land for private companies, or forthe key for better governance and sustainability, 2011 witnessed private purposesintroduction of a number of reform-oriented moves by the • Except as a demonstrably last measure, acquisition of multi-cropgovernment. Here below is a snapshot of the significant regulatory irrigated land should be avoideddevelopments that would affect the sector in the future. • For rehabilitation and resettlement, owners of the acquired land will be offered subsistence allowance at Rs 3,000 a month for 12Land Acquisition, Rehabilitation and months. In addition to this, land owners will also be provided RsResettlement Bill 2011 2,000 a month a family as annuity for 20 years, Rs 50,000 forIn order to address the issue of land acquisition along with transportation, and mandatory employment for one member of arehabilitation and resettlement of the affected families, the new Land displaced family. The same provisions are proposed for those whoAcquisition and Rehabilitation and Resettlement Bill, 2011 was lose their means of livelihood due to land acquisitionintroduced to overhaul the Land Acquisition Bill of 1894. The • If a private company succeeds in acquiring 80% of the landsignificance of land acquisition issues in the country is evident from required for a project, the government may step-in to facilitate thethe disputes that impact a number of large projects amidst protests by acquisition of the remaining 20% of the land for the privatethe affected families. Currently, most land acquisition deals result in projectlegal issues that get further exacerbated due to ill-documentation oftitle and ownership, especially in the case of agricultural land.
  8. 8. Pg 8Regulatory developments: the big picture• The Bill also empowers the village council to conduct social In a nutshell impact assessment of any land acquisition and define the timelines • The Bill mandates the establishment of the "Real Estate for providing compensation Regulatory Authority" in every state to oversee and regulate the• In case the land is acquired in an urban area, an amount not less real estate sector than twice the market rate needs to be paid to the landowner • Apart from adjudicating disputes between real estate developers• In case the land is acquired in a rural area, an amount not less than and consumers, the proposed Regulatory Authority will also be four times the original market value needs to be paid to the responsible for issuing registration certificates for projects that landowner have a size of 43,052 square feet or more • Before beginning the construction work on plots measuring 4,000 Draft Real Estate (Regulation & Development) square metres or more, it is mandatory for real estate developers to Bill 2011 register with the "Real Estate Regulatory Authority" The Bill aims at promoting transparency and accountability in the • The draft Bill makes it mandatory for promoters to stick to the real estate sector, and proposes to create a "Real Estate Regulatory approved plans and project specifications Authority" in each of the states. The draft guidance of the Bill also • The Bill also proposes to make it mandatory for developers to possesses provisions that reduce the risk of a title dispute. In order deposit 70% of the amount realised for the real estate project from to provide respite to end users, the Bill also proposes to make it buyers in a separate account maintained in a scheduled bank, mandatory for developers to register themselves before launching within 15 days of the realisation of the project any projects, comply with the approved plans and refund money • It further specifies that developers would use this deposited to homebuyers in case of any default. amount only for the purpose of developing the property
  9. 9. Pg 9Regulatory developments: the big picture• In case of any default, the developers will be required to refund In a nutshell money to buyers. Further, if the project gets delayed, the developer This Guidance Note should be applied to all transactions in real estate, is bound to pay interest, at an appropriate rate, to the buyers which are commenced or entered into on or after 01 April 2012.• In case the developers fail to adhere to the provisions, they are liable to imprisonment of up to three years or a penalty of 10% of This primarily provides guidance on application of percentage of completion the estimated real estate price of the project method as per Accounting Standard (AS) 7, Construction Contracts, in respect• If developers are unable to comply with the directions of the "Real of transactions and activities of real estate which have the same economic Estate Regulatory Authority", they would be liable to pay a substance as construction-type contracts. In respect of transactions of real minimum penalty of Rs 1 lakh daily for each day during which the estate which are in substance similar to delivery of goods, Accounting default occurs Standard (AS) 9, Revenue Recognition, is applicable.Draft Guidance Note on revenue recognitionThe Accounting Standards Board of the Institute of Chartered ScopeAccountants (ICAI) came out with a draft of the Guidance Note on • The exposure draft encompasses various types of models/ structuresRevenue Recognition by real estate developers. The proposed which are in practice and the related accounting in respect of:Guidance Note is comprehensive and considers various dynamics of - Sale of land/ plots with or without any developmentthe sector. It aims at removing the subjectivity and judgments in - Development of residential/ commercial unitscertain key accounting principles and attempts to bring consistency in - Acquisition, utilisation and transfer of development rightsthe accounting for real estate transactions. - Re-development of existing buildings/ structures - Joint development arrangements
  10. 10. Pg 10Regulatory developments: the big pictureThe current definition of project is very broad and identifies parameters (d) At least 10% of the total revenue as per the agreements of sale orfor defining the project, in terms of common set of amenities available any other legally enforceable documents are realised at the reportingto the different unit holders in a township and accordingly, even a date in respect of each of the contracts and it is reasonable to expectsingle tower can be treated as a project or a cluster of towers can be that the parties to such contracts will comply with the payment termscombined and designated as a project. It will be useful if the common in the contractsset of amenities within a project can be clearly defined and then link itto the project definition. In a nutshellRevenue recognition under the percentage completion method is Definition of Projectapplied only when all the following conditions are fulfilled: Project is defined in terms of a group of units/ plots/ saleable spaces(a) All critical approvals necessary for commencement of the project and its linkage with the common set of amenities in a manner thathave been obtained. These include the following as applicable: both are clearly dependent on each other for the intended effective• Environmental and other clearances, approval of plans, designs, etc. use.• Title to land or other rights to development/construction(b) When the stage of completion of each project reaches a reasonable Revenue recognition conditions prescribedlevel of development. There is a rebuttable presumption that a • Key approvals to be obtainedreasonable level of development is not achieved if the expenditure • Percentage threshold (rebuttable presumption of 25%)incurred on project costs is less than 25% of the construction and • Sale of project to the extent of 25% of the project sizedevelopment costs • Collection to the extent of 10% of the total revenues as at the(c) At least 25% of the estimated project revenues are secured by reporting datecontracts or agreements with buyers
  11. 11. Pg 11Regulatory developments: the big pictureThe recognition of project revenue by reference to the stage of In a nutshellcompletion of the project activity should not at any point exceed Revenue recognition linked to collectionsthe estimated total revenues from eligible contracts/other legally Eligible contracts‟ means contracts/agreements where at leastenforceable agreements for sale. 10% of the contracted amounts have been realised and there are no outstanding defaults of the payment terms in such contracts.This is definitely a good thought in terms of linking the collection Where the recognition of revenue due to this condition is lowerto the point of revenue recognition. than the revenue determined by reference to the stage of completion, the project costs to be matched with such revenueThe transaction of barter has been rightly picked up in the scope are also proportionately adjusted.of this Guidance Note, wherein the developer is giving a share inthe built up property to the land owner in consideration of land / Barter transactionsdevelopment rights in the project. Where development rights are acquired by way of giving up of rights over existing structures or open land, the developmentFor this purpose, fair market value may be determined by rights should be recorded either at fair value or at the net bookreference either to the asset or portion thereof given up or to the value of the portion of the asset given up.fair value of the rights acquired whichever is more clearly evident.
  12. 12. Pg 12Regulatory developments: the big pictureFDI in retail sector UpdatesThe Union Cabinet, in December 2011, permitted 51% of ForeignDirect Investment (FDI) in multi-brand retail and 100% FDI in In January 2012, the Department of Industrial Policy and Promotionsingle-brand retail. However, the decision was suspended due to (DIPP) permitted 100% FDI in Single Brand Retail Trade (SBRT)widespread opposition from the unorganised retail market and under Government approval as against the current limit of 51% FDIabsence of political consensus. in SBRT. All the key features of the policy liberalisation have been retained in this Press Note along with the following additionalIn a nutshell clarifications/ modifications:• Indias retail sector is estimated at US$ 450 billion, growing at the • With respect to proposals involving FDI beyond 51%, mandatory rate of 15% a year sourcing of at least 30% of the value of products sold would have• Currently, India permits 51% FDI in single-brand retail and 100% to be done from Indian small industries/ village and cottage FDI in cash-and-carry industries, artisans and craftsmen• The Bill was meant to allow foreign investment in multi-brand • Small industries would be defined as industries which have a total retail, which is not permitted in India at present investment in plant & machinery not exceeding US$ 1 million • The earlier press release dated 25 November 2011 had indicated that such small industries could be located anywhere in the world
  13. 13. Pg 13Regulatory developments: the big pictureMaharashtra Housing Bill 2011 • The developer would be required to maintain a separate account ofMaharashtra Housing Bill, 2011 aims at replacing the Maharashtra the money received from the buyers and, if required, provide usageOwnership Flats (Regulations of promotion of construction, sale, details of the same to the "Real Estate Regulatory Authority".management, and transfer) Act, 1963. Also known as the Regulation • In case developers contravene the provisions of the Bill, the Billand Promotion of Construction, Sale, Management and Transfer Bill, proposes to make them liable to a penalty ranging from ait contains provisions meant to safeguard the interest of homebuyers. minimum of Rs 1,000 per day to a maximum amount of Rs 1 crore, along with an imprisonment for a term extending to threeIn a nutshell years• The Bill mandates the establishment of a "Real Estate Regulatory Updates Authority" and an "Appellate Tribunal", while also offering provisions for preventing the diversion of money received from The State Cabinet has recently approved establishment of "Housing home buyers Regulatory Authority" and the "Housing Appellate Tribunal" in• It makes it compulsory for developers to use the money received Maharashtra. The Bill is expected to be presented before the State from homebuyers to timely execute the residential project, instead Legislature in March 2012. After being passed by the State of using it for the acquisition of new land Legislature, all property transaction disputes will be handled by the• To appeal against the orders of the "Appellate Tribunal", the three-member "Housing Regulatory Authority" followed by the applicant can approach the State High Court "Housing Appellate Tribunal".
  14. 14. Crisis in Europe Volatility Special purpose vehicles IPOs Challenges Joint ventures Capital markets OpportunitiesMarket sentiment Investment scenario FDI inflows Private equity Returns Sustainability Depreciation in rupee Market consolidation Global slowdown Exits Transactions Growth M&A Deals Project viability
  15. 15. Pg 15Investment scenario: the ins and outsReal estate is the fourth largest sector in terms FDI inflows in the Year-wise FDI Inflows ( in US$ in million)country. As per DIPP, the sector attracted investment to the tune ofUS$ 453 million between April and September 2011. 3,500 2,935Further, the period from January to May 2011 also witnessed various 3,000prominent Private Equity (PE) and Mergers & Acquisitions (M&A)deals. Some of the prominent deals that formed the chunk of the 20 2,500deals worth US$ 1.3 billion occurring during this period includeinvestments made by Oceanus Real Estate and Ascendas India (US$ 2,000190 million), Tata Realty (US$ 86 million), etc. 1,500 1,227However, the global economic scenario remained volatile due to 1,000unfavourable economic environment in the US and Euro zone.Owing to this, foreign investors were seen becoming relatively 453 500cautious. 0 2009-10 (April - March) 2010-11 (April - March) 2011-12 (April - September) FDI Inflows ( in US$ in million) Source: Department of Industrial Policy and Promotion, Government of India
  16. 16. Pg 16Investment scenario: the ins and outsSince equity inflows are largely sentiment driven, the pessimism in the Further, a recent report published by Jones Lang LaSalle India statesUS and the UK, which form the major sources of equity inflows to that within the past four years, PE investors reaped average returnsthe sector, was largely responsible in reducing the FDI inflows to the from the sector that were 1.21 times, or 20% higher than the globalsector. Apart from the US and the UK, the sector also attracts equity average of 0.8 times. The report, which also states that Mumbai andfrom economies, including the Netherlands, Japan, Germany, Kolkata accounted for returns of 1.4 and 1.3 times, respectively,Mauritius, Singapore, and the UAE. within the past four years, has lifted the aura of gloom hanging over the sector for quite some time now.However, the Indian real estate sector still occupies the topmostposition among all the major sectors for PE investment in 2011. As The report points out that even amid the bleak scenario of propertyper our research, real estate and infrastructure management along markets between 2008 and 2011, when investors failed to profit fromwith automotive, power and energy, banking and financial services their investment in the sector in other economies, India has providedand information technology accounted for 67% of the total PE deal far better returns than the global average.value for the year. Moreover, although commercial real estate is a riskier option asA survey conducted by a leading advisory firm also shows that while compared to residential, the former has given returns of 1.2 times,planning to invest in various avenues in India, 55% of the investors while residential has given returns of 1.1 times. The report has alsoexpect to achieve their target returns, while 45% investors are analysed the profits from PE exits in the sector, and states that out ofoptimistic to reap a return which is higher than their existing the overall PE exits worth US$ 3 billion in the past four years, 65%portfolio. have been profitable.
  17. 17. Pg 17Investment scenario: the ins and outs 2011: Prominent deals in Indian real estate sector Investor Investee Investment Purpose Warburg Pincus Lemon Tree Hotels Rs 1,400 An affordable housing venture was financed by the JV crore called Oceanus Real Estate Sun Apollo Parsvnath Rs 100 crore A residential project SPV Developers Blackstone DLF Rs 810 crore Acquisition of a DLF firm owning a SEZ in India Red Fort Capital Ansal Properties & Rs 200 crore The deal financed a residential project in Gurgaon by Infrastructure developing a 108-acre township Red Fort Capital Delhi Heights Undisclosed A mixed use development having more than 2,000 residential units is planned to be developed ICICI Prudential Logix Group Rs 80 crore The investment financed the development of Blossom Asset Management Greens - a 2,500-unit residential project Source: Grant Thornton research
  18. 18. Pg 18Investment scenario: the ins and outsAs per an industry report, during 2011, PE firms invested US$ 2.68 Since 2009, Kotak Realty has exited from about US$ 175 millionbillion in the real estate sector. Further, the year also witnessed an worth of investments. However, even amid the enhanced momentumincrease in deal activities of domestic fund houses such as Kotak, of exits, PE‟s found it difficult to exit with good returns, largely dueIndiareit, and ASK Investment Holdings. During the year, PE firms to volatile stock markets in 2011. As per a report by Bain and Co,made 69 investments, of which 53 transactions were announced, about 120 PE funds, with a potential to raise approximately US$ 34making the cumulative worth US$ 2.68 billion. The report also states billion were impacted by the bleak economic scenario in 2011.that of the total investment, 57% were made in residential projects,while commercial projects accounted for 19% of the chunk. Further, according to a report, 2010 and 2011 in combination witnessed real estate PE exits worth US$ 3 billion. The low PE exitsReal estate sector had witnessed a flood of PE investments between in the year can also be attributed to high inflation, steep interest rates2006 and 2008, which headed to a natural end in 2011-12 due to the and slow economic growth. As per another survey report, secondarytypical three-five year investment horizons. During Q1 of the year, a and strategic sales were the preferred exit choices, while IPO‟s andtotal of 11 real estate focused PE funds exited the market. A report multiple exits, once the most popular routes for exits, lost theirreleased by a leading advisory firm states that during 2011, real estate charm to investors in 2011.and the infrastructure sector witnessed nearly 22% of the total PEinvestments. As per the research firm VCCEdge, Q1 witnessed sixexits worth a combined US$ 124 million, largely through equitybuybacks and secondary sales. During this period, returns from realestate investments ranged between 1.4 and 4 times.
  19. 19. Pg 19Investment scenario: the ins and outs 2011: Prominent PE exits in Indian real estate sector PE funds Value Background Indiareit Fund Advisors US$ 100 million Exit of an office project in Kurla, in suburban Mumbai. In 2006, Indiareit Fund Advisors made an investment of Rs 145 crore Kotak India Real Estate Rs 385 crore The PE firm sold its stake in Peepal Tree Properties, which it had Fund-I purchased in 2007 for Rs 95 crore. The deal was made with Tata Realty Initiatives Fund-I HDFC India Real Estate Undisclosed The entire paid-up share capital of Udhay GK-Realty was purchased Fund by Godrej Properties Ltd Milestone Capital 2.04 times of the initial Milestone Capital Advisors exited from Stone Arc, a residential Advisors investment project located at Thiruvanmiyur, Chennai, where it owned 26,800 square feet of saleable area IL&FS Milestone Fund I 1.51 times of the initial The PE exit involved the sale of 29,490 square feet of area in investment commercial property Raheja Titanium in Mumbai by IL&FS Milestone Fund I HDFC Property Fund Rs 540 crore The fund, sponsored by HDFC, sold its 21% stake in Manyata Business Park, a 7.7 million square feet infotech SEZ in Bangalore, to the Embassy Group Source: Grant Thornton research
  20. 20. Pg 20Investment scenario: the ins and outsIn a nutshell• Investment in the Indian real estate sector between April and September 2011 stood at US$ 453 million• PE funds invested US$ 2.68 billion in the Indian real estate sector during 2011• Major PE and M&A deals that were witnessed in the sector from January to May 2011 include investment of Oceanus Real Estate and Ascendas India (US$ 190 million), Tata Realty (US$ 86 million), etc• The 53 transactions announced in 2011 had a cumulative worth of US$ 2.68 billion. The materialisation of deals at a time when the sector found it tough to receive bank funding stood testimony to the optimism in investors• NRIs, whose share of real estate buying in India accounts for about 4% every year, rose to 8% in 2011, largely due to depreciation in the value of rupee
  21. 21. Growth strategies Vacancy rates Revenues Sales Demand NRI transactions Declining margins OpportunitiesMarket sentiment Issues and challenges New avenues Interest costs Correction Sustainability Market expectations Buyer interest Profitability Prices Projections Future prospects Loans Finance Oversupply
  22. 22. Pg 22Key issues and challenges: caution and diligenceAlong with the rest of the global economy, the commercial property Hike in repo rate 8.5 9sector is in a period of rapid change, with both owners and builders 8 8.25questioning current strategies and future expectations. In the current 8 7.5 7.25business environment, real estate developers face many obstacles to 6.75 6.5their pursuit for growth. Yet, industry leaders are largely optimistic 7 6.25 6about their business prospects, as they strategically plan for higher 5.75 6 5.25revenues and profits in 2012. 4.75 5Interest rate hike 4In order to address the issue of rising inflation, the RBI hiked therepo rate a number of times in the year. The increase in prime lending 3rates at commercial banks and other housing finance institutionsbecame a major deterrent for homebuyers to take loans for buying 2residential real estate, as a result of which, residential sales slumped 1markedly. In addition to its impact on property buyers, the hike ininterest rate resulted in liquidity crunch for real estate developers. 0Apart from decreased profitability from projects due to reduceddemand, developers also faced difficulty in raising finance frombanks. Further, the debt-to-equity ratio of developers also increasedduring the year due to increase in the cost of construction, building Repo rate (%)material and labour. Source: RBI
  23. 23. Pg 23Key issues and challenges: caution and diligencePricing trends On the other hand, during the first half of the year, rents of malls andAccording to National Housing Bank (NHB), during Q4, property high-streets increased by 15-20%. No price/ rent correction was seenprices of residential units in Kolkata and Mumbai registered a decline in completed projects in both the residential and commercialof about 0.5%, as compared to Q3. At 15.5%, Kochi registered the segments in the year, despite the slump in demand. Depreciation ofmaximum decline, followed by Hyderabad (6%), Jaipur (1.5%), and rupee evoked the interest of NRIs in purchasing property in India.Patna (0.7%). Among all the cities covered under the NHB Residex, City-wise housing price index - Tier I citiessix cities witnessed a decline in prices, while nine cities observed an 350increasing trend during Q4, as compared to Q3. 300 250During the fourth quarter of the year, prices in Delhi rose by 8.4%, ascompared to Q3. In addition to Delhi, other cities that witnessed a 200positive movement in property prices include: 150• Surat: 9.4% 100• Chennai: 9.2%• Pune: 8.9% 50• Bangalore: 7.5% 0• Lucknow: 7.1% Jan - June July - Dec Jan - June July - Dec Jan - March April - June July - Sept Oct - Dec Jan - March April - June July - Sept Oct - Dec• Faridabad: 5.8% 2008 2008 2009 2009 2010 2010 2010 2010 2011 2011 2011 2011• Ahmedabad: 2.5%• Bhopal: 1.4% Hyderabad Mumbai Chennai Bangalore Kolkata Delhi Source: NHB Residex
  24. 24. Pg 24Key issues and challenges: caution and diligence City-wise housing price index Tier II cities Tier III cities 250 250 200 200 150 150 100 100 50 50 0 0 Jan - July - Jan - July - Jan - April - July - Oct - Jan - April - July - Oct - Jan - July - Jan - July - Jan - April - July - Oct - Jan - April - July - Oct - June Dec June Dec March June Sept Dec March June Sept Dec June Dec June Dec March June Sept Dec March June Sept Dec 2008 2008 2009 2009 2010 2010 2010 2010 2011 2011 2011 2011 2008 2008 2009 2009 2010 2010 2010 2010 2011 2011 2011 2011 Ahmedabad Jaipur Lucknow Pune Faridabad Patna Kochi Bhopal Source: NHB Residex
  25. 25. Pg 25Key issues and challenges: caution and diligenceIncreased vacancy ratesDuring 2011, real estate sector witnessed a slowdown in transactionactivity, reduced launches of new projects and stagnant propertyprices. As per a report released by Knight Frank India, residentialproperty prices depreciated by up to 10% across Mumbai, NCR,Bangalore and Chennai. With a substantial number of prospectivehomebuyers deferring their plans of buying property, almost 3,06,859units of residential property are currently lying unsold.Further, the NCR market had the highest proportion of vacancy ratefor residential property in 2011. The lack of buyer interest is alsoevident from the fact that in 2011, 40,660 housing units remainedunsold in Mumbai. In 2011, the unsold inventory levels of residentialreal estate stood at 46,596 units for Bangalore and 40,734 units forPune.In the July-September quarter, demand for office space across the topsix cities in India was 8.5 million square feet. With a number ofcorporates deferring their hiring plans, demand for office space in2011 across the top seven cities also remained muted.
  26. 26. Pg 26Key issues and challenges: caution and diligenceIn a nutshell• The frequent interest rate hikes led to liquidity squeeze, thereby making cost of credit expensive for the real estate developers• The hike in home loan rates compelled buyers to postpone their buying decision, leading to a drastic reduction in sale of residential units across segments• Due to the reduced availability of capital to real estate developers, the year also witnessed widespread delays in construction projects• The slowdown in the demand of residential units was also evident from the NHB Residex, with Tier I cities such as Kolkata and Mumbai witnessing a downward trend in the prices of residential properties• As a result of the tough market conditions, numerous cities such as Kochi and Hyderabad witnessed a decline in prices of residential units during Q4• Demand for office space also slumped during the year, resulting in an increase in vacancy levels• The NCR market registered the highest vacancy rate for residential property during the year
  27. 27. Urban infrastructure Benami transactions Revenues Public offers Land acquisition Black money Growth projections EnvironmentMarket sentiment 2011 News round-up Overseas projects Sale deed mandate Circle rates Green building Priority sector landing Customer grievance Stamp duty Affordable housing New rating system Evasion Finance Interest rate subsidy
  28. 28. Pg 28News round-up: regulatorySupreme Court mandated the sale deed Circle rates hiked in Delhi by up to 250%In a landmark judgment, the Supreme Court held that General Power The Delhi government hiked the circle rates by up to 250% inof Attorney (GPA) is not a valid instrument for transferring property October 2011. This was the second hike in circle rates in 2011.rights. The decision is expected to curb evasion of duties, use of Earlier in February, the rates were increased by up to 100%. Whileblack money and unscrupulous transactions that often result in the move aims at curbing the use of black money in propertydisputes. transactions, it would also help garner an additional revenue of Rs 800 crore a year, mainly through stamp duty and registration fees.Benami Transactions (Prohibition) Bill, 2011introducedThe Finance Ministry introduced the Benami Transactions(Prohibition) Bill, in August 2011. The Bill prohibits benamitransactions done in someone elses name, except in the case oftransactions in the name of a spouse, brother or sister or any linealascendant or descendant.The Bill intends to replace the existing Benami Transactions(Prohibition) Act, 1988, and proposes provisions for confiscation ofsuch property and imprisonment.
  29. 29. Pg 29News round-up: regulatoryBudget 2011-12 highlights Developments in Tamil Nadu and HaryanaThe Union Budget 2011-12 presented various initiatives for the real In July 2011, the government of Tamil Nadu revised the ceiling onestate sector, especially focusing on affordable housing. Some of these stamp duty from Rs 5,000 to Rs 25,000. Applicable exclusively forinitiatives include: title deeds, the guidelines also revised the cap on registration fee from• Raising the limit on housing loans eligible for a 1% subsidy in Rs 1,000 to Rs 5,000. interest rates• Widening the scope for housing under "priority-sector lending" for On the other hand, the ceiling on non-agricultural land was waivered banks, making interest rates cheaper on them by the state assembly of Haryana, in an attempt to facilitate land• Earmarking a substantial amount to the Urban Development assembly for apartments and townships. Ministry for spending on extension of Metro networks in Delhi, Bangalore and Chennai• Allocating US$ 20.03 million for the urban infrastructure development project. The Urban Development Ministry received US$ 1.5 billion, an increase of US$ 68.53 million from the last fiscal 2010-11• Increasing allocation for Bharat Nirman to US$ 12.89 billion. Bharat Nirman consists of 6 flagship programmes, the Pradhan Mantri Gram Sadak Yojana (PMGSY), Accelerated Irrigation Benefit Program, Rajiv Gandhi Grameen Vidyutikaran Yojana, Indira Awas Yojana, National Rural Drinking Water Program and Rural telephony
  30. 30. Pg 30News round-up: financialPublic offers deferred by a significant proportion Top 11 listed real estate companies accumulatedof real estate companies a debt of over Rs 5,000 croreAs per SMC research, at least 28 companies deferred their IPOs in According to Edelweiss Securities report, the total debt of the top 112011, including a number of real estate companies such as Lodha listed real estate companies of India increased by over Rs 5,000 croreDevelopers, Lavasa Corporation, Ambiance Real Estate, Kumar to Rs 38,500 crore.Urban Developers and Neptune Developers. The IPOs were calledoff due to unfavourable market conditions.15% growth estimates in 2011As per media reports and expert estimates, the Indian real estatesector registered a growth rate of about 15% in 2011. Albeit thetrends were not-so-negative despite the slowdown in the Westerneconomies, the growth rate was lower than 25-30% as projectedduring the beginning of the year.
  31. 31. Pg 31News round-up: miscellaneousMajor land acquisition dispute in Greater Noida Indias largest hill city, Lavasa stalled on chargesThe Supreme Court upheld the High Court decision cancelling of violating green lawsallotment of 156 hectares of land in Greater Noida. The decision was Lavasa Corporation came under the Ministry of Environment scannertaken following the writ petition filed by farmers expressing dissent for allegedly violating environmental norms in its hill city project. Theon the massive difference in buying and selling rates. company was later provided conditional approval by the Ministry.The land was acquired by Greater Noida Industrial Development Affordable housing scheme – ‘Rajiv Awaas Yojana’Authority (GNIDA) and UP government at Shahberi Village at the In order to boost affordable housing schemes, the government proposedrate of Rs 850 per square metre and allotted to private developers at an exemption of service tax for the construction or finishing of newrates ranging from Rs 10,000 to Rs 12,000 per square metre. residential complex under „Jawaharlal Nehru National Urban Renewal Mission‟ and „Rajiv Awaas Yojana‟ in the Union Budget 2011-12.The Court also ordered the seven real estate developers to return allthe payments received from over 6,500 people towards the bookingof flats over disputed pieces of land.New green building rating system introducedTo rate the level of environment friendliness and sustainability ofbuildings, an upgraded Leadership in Energy and EnvironmentalDesign 2011 (LEED 2011 for India) rating system has now beenintroduced in the country. The new rating has come into effect.
  32. 32. Pg 32The way forward Tata Housing forays in By 2014, Vijay Shanthi Lodha Group will invest With an investment of Larsen and Toubro Following the opening the international Builders will develop over Rs 10,000 crore in a Rs 500 crore, Malabar (L&T) plans to up of FDI in retail market, announcing a projects worth Rs new project, titled New Builders will launch its construct the first sector, DLF will invest Rs1,000 crore MoU 2,100 crore, beginning Cuffe Parade, in Mumbai, first township project in residential high-rise a sum of US$ 570.2 with the Government with a residential over the next 5-7 years Mangalore shortly building of the country million for developing of Maldives project on a pre-cast basis malls over the next 5 years Royal Institution of Chartered Surveyors (RICS) CREDAI releases a code-of-conduct for its launches India edition of the Red Book which lays members and also recommends setting up of down mandatory rules for its members and serves consumer grievance redressal cells to address as best practice for industry professionals complaints and disputes To streamline brokerage practices and bring transparency in property transactions, National Association of Realtors-India and the Confederation of Real Estate Developers Associations of India (CREDAI) signs an agreement of cooperation
  33. 33. Pg 33About Grant ThorntonGrant Thornton InternationalGrant Thornton International is one of the worlds leading organisations of independently owned and managed accounting and consulting firms.These firms provide assurance, tax and specialist advisory services to privately held businesses and public interest entities.Clients of member and correspondent firms can access the knowledge and experience of more than 2500 partners in over 100 countries in order toconsistently receive a distinctive, high quality and personalised service wherever they choose to do business. Grant Thornton International strives tospeak out issues that matter to business and which are in the wider public interest. Its aim is to emerge as a bold and positive leader in its chosenmarkets and within the global accounting profession.Grant Thornton India LLPGrant Thornton India LLP is a member firm within Grant Thornton International Ltd. The firm has today grown to be one of the largestaccountancy and advisory firms in India with nearly 1,100 professional staff in New Delhi, Bangalore, Chandigarh, Chennai, Gurgaon, Hyderabad,Kolkata, Mumbai and Pune, and affiliate arrangements in most of the major towns and cities across the country. The firm specialises in providingaudit, tax and advisory services to growth-oriented, entrepreneurial companies.
  34. 34. Pg 34About CIIThe Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the growth of industry in India, partneringindustry and government alike through advisory and consultative processes.CII is a non-government, not-for-profit, industry led and industry managed organisation, playing a proactive role in Indias development process.Founded over 116 years ago, it is Indias premier business association, with a direct membership of over 8100 organisations from the private as wellas public sectors, including SMEs and MNCs, and an indirect membership of over 90,000 companies from around 400 national and regional sectoralassociations.CII catalyses change by working closely with government on policy issues, enhancing efficiency, competitiveness and expanding businessopportunities for industry through a range of specialised services and global linkages. It also provides a platform for sectoral consensus building andnetworking. Major emphasis is laid on projecting a positive image of business, assisting industry to identify and execute corporate citizenshipprogrammes. Partnerships with over 120 NGOs across the country carry forward our initiatives in integrated and inclusive development, whichinclude health, education, livelihood, diversity management, skill development and water, to name a few.CII has taken up the agenda of “Business for Livelihood” for the year 2011-12. This converges the fundamental themes of spreading growth todisadvantaged sections of society, building skills for meeting emerging economic compulsions, and fostering a climate of good governance. In linewith this, CII is placing increased focus on Affirmative Action, Skills Development and Governance during the year.With 64 offices and 7 Centres of Excellence in India, and 7 overseas offices in Australia, China, France, Singapore, South Africa, UK, and USA, aswell as institutional partnerships with 223 counterpart organisations in 90 countries, CII serves as a reference point for Indian industry and theinternational business community.
  35. 35. Pg 35Our real estate solutionsOur real estate practice Financing your business Communication and complianceReal estate is a complex business. Owing to its capital intensive nature, any • analysing funding requirements • advising on financial reporting requirementsturbulence in the economic and business environment can affect a real estate • preparing submissions to financiers • clarifying directors‟ responsibilities • benchmarking terms and pricing • mitigating fraud riskbusiness in a number of ways. With its depth of knowledge and global experience, • considering alternative sources • evaluating and designing controlsGrant Thornton India can assist you in mitigating these inherent risks. At thesame time, we can help you identify and leverage potential opportunities as well. Working capital management Human capital managementAssurance, tax and advisory services are just the beginning of our suite of services • managing your cash • optimising pension and benefit schemesfor real estate companies. • forecasting and re-forecasting • retaining the right talent • optimising tax cash flow savings • devising tax efficient packages • improving management information • enhancing reward packagesPlease contact our real estate experts at realestate.solutions@in.gt.com to knowmore about how Grant Thornton can assist you achieve your objectives. Protecting profits Strategic direction • product portfolio analysis • benchmarking against competitors • optimising pricing strategy • entering new markets • enhancing terms of trade • identifying acquisition opportunities • identifying overhead savings • reviewing business plans Operations and cost reduction • establishing cost reduction programmes • improving supply chain • enhancing operational efficiency • outsourcing back office functions
  36. 36. Contact usTo know more about Grant Thornton, please visit www.grantthornton.in or contact any of our offices as mentioned below: Confederation of Indian IndustryNEW DELHI BENGALURU CHANDIGARH The Mantosh Sondhi CentreNational Office “Wings”, First floor SCO 17 23, Institutional Area, Lodi RoadOuter Circle 16/1 Cambridge Road 2nd Floor New Delhi – 110 003 (India)L 41, Connaught Circus Ulsoor Sector 17 E T: 91 11 24629994-7 • F: 91 11 24626149New Delhi 110 001 Bengaluru 560 008 Chandigarh 160 017 E: ciico@cii.in • W: www.cii.inT +91 11 4278 7070 T +91 80 4243 0700 T +91 172 4338 000CHENNAI GURGAON HYDERABAD CII Membership Helpline:Arihant Nitco Park, 6th floor 21st Floor, DLF Square 7th Floor, Block III 00-91-11-435 46244 / 00-91-99104 46244No.90, Dr. Radhakrishnan Salai Jacaranda Marg White House, Kundan BaghMylapore DLF Phase II Begumpet CII Helpline Toll free No:Chennai 600 004 Gurgaon 122 002 Hyderabad 500 016 1800-103-1244T +91 44 4294 0000 T +91 124 462 8000 T +91 40 6630 8200KOLKATA MUMBAI PUNE10C Hungerford Street 16th floor, Indiabulls Finance Centre 401, Century Arcade5th floor Senapati Bapat Marg Narangi Baug RoadKolkata 700 017 Elphinstone (W) Off Boat Club RoadT +91 33 4050 8000 Mumbai 400013 Pune 411 001 T +91 22 2367 1623 T +91 20 4105 7000Disclaimer:The information contained in this document has been compiled from various public sources believed to be reliable, but no representation or warranty is made to its accuracy,completeness or correctness. The information contained in this document is published for the knowledge of the recipient but is not to be relied upon as authoritative or taken insubstitution for the exercise of judgment by any recipient. This document is not intended to be a substitute for professional, technical or legal advice or opinion and the contents in thisdocument are subject to change without notice.Whilst due care has been taken in the preparation of this report and information contained herein, Grant Thornton does not take ownership of or endorse any findings or personalviews expressed herein or accept any liability whatsoever, for any direct or consequential loss howsoever arising from any use of this document or its contents or otherwise arising inconnection herewith.© Grant Thornton India LLP. All rights reserved.www.grantthornton.in

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