Recent Trends in Constructions & Real Estate IndustryCA Rajesh Drajeshd@sbsandco.comDate: 19th Feb 2016by

Introduction (1/2)In India, real estate is the second largest employer after agriculture It is slated to grow at 30 per cent over the next decadeThe construction industry ranks third among the 14 major sectors in terms of direct, indirect and induced effects in all sectors of the economyThe Indian real estate market has become one of the most preferred destinations in the Asia Pacific as overseas funds accounted for more than 50 per cent of all investment activity in India in 2014, compared with just 26 per cent in 20132www.sbsandco.com

Introduction (2/2)Fast urbanisation , it is expected that 600 Million Indians will be living in cities by 2030 as compared to 230 million as reported in 2011Size of real estate sector is estimated to grow five folds and to reach 676 Billion by 2025 , providing lot of opportunities in to global real estate stake holder in India as significant technical and financial supports lacks in IndiaThe real estate sector clearly emerging into four sub sectors - housing, retail, hospitality, office and commercial3www.sbsandco.com

Market Size (1/2)The Indian real estate market is expected to touch US$ 180 billion by 2020. The housing sector alone contributes 5-6 per cent to the country's Gross Domestic Product (GDP)CAGR of 11.2 per cent of is expected during the period FY 08-20Retail, hospitality and commercial real estate are also growing significantly, providing the much-needed infrastructure for India's growing needsDuring the first nine months of 2015, PE funds invested about US$ 2.4 billion in the real estate sector, across 53 transactions compared US$ 1.3 billion across 57 transactions in the same period last year4www.sbsandco.com

Market Size (2/2)Private Equity (PE) funds and Non-Banking Financial Companies (NBFCs) in India are seen increasingly investing jointly in real estate projects, in order to hedge risk and undertake bigger transactionsMumbai is the best city in India for commercial real estate investment, with returns of 12-19 per cent likely in the next five years, followed by Bengaluru and Delhi-National Capital Region (NCR)India's office space absorption stood at 35 million sq ft during 2015, which is the second highest figure in the India's history after 2011, and was driven by corporates implementing their growth plansAccording to data released by DIPP, the construction development sector in India has received FDI equity inflows to the tune of US$ 24.156 billion in the period April 2000-September 20155www.sbsandco.com

Central Government InitiativesThe Smart City Project, where there is a plan to build 100 smart cities, is a prime opportunity for the real estate companiesThe Housing for All by 2022 was approved by Narendra Modi. Under the Sardar Patel Urban Housing Mission, 30 million houses will be built in India by 2022, mostly for the economically weaker sectionsThe Government of India has allowed 100% FDI under the automatic route in the construction development sector. This move should boost affordable housing projects and smart cities across the countryThe Securities and Exchange Board of India (SEBI) has notified final regulations that will govern real estate investment trusts (REITs) and infrastructure investment trusts (InvITs)This move will enable easier access to funds for cash-strapped developers and create a new investment avenue for institutions and high net worth individuals, and eventually ordinary investors

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State Government InitiativesThe Government of Rajasthan became the first state to initiate private investments in affordable housing by signing four Memoranda of Understanding (MoUs) with private players for an investment of Rs 5,400 crore (US$ 810 million).The State Government of Kerala has decided to make the process of securing permits from local bodies for construction of houses smoother, as it plans to make the process online with the launch of a software called 'Sanketham'. This will ensure a more standardised procedure, more transparency, and less corruption and bribery7www.sbsandco.com

The Real Estate (Regulation and Development) Bill, 2015The Real Estate (Regulation and Development) Bill, 2013 was first introduced in 2013 was recently approved in April 2015 with by the union Cabinet pending in the Rajya Sabha The bill provides for a Uniform regulatory environment, Protect consumer interests, help speedy adjudication of disputes and ensure orderly growth of the real estate sectorThe Bill aims at restoring confidence of the general public in the real estate sector; by instituting transparency and accountability in real estate and housing transactionsThis in turn will enable the sector to access capital and financial markets essential for its long term growth8www.sbsandco.com

The Real Estate (Regulation and Development) Bill, 2015The Bill contains provisions of registration of real estate projects and registration of real estate agents with the Real Estate Regulatory Authority; functions and duties of promoters and allottees; Establishment of Real Estate Regulatory Authority; Establishment of fast track dispute resolution mechanism through adjudication; establishment of a Real Estate Appellate Tribunal; offences and penalties etc.The Bill ensures mandatory disclosure by promoters to customers through registration of real estate projects as well as real estate agents with the Real Estate Regulatory Authority9www.sbsandco.com

The Salient Features(a) Applicability of the Bill: The proposed initial Bill was applicable for residential real estate. It is now proposed to cover both residential and commercial real estate;

(b) Establishment of Real Estate Regulatory Authority: Establishment of one or more Real Estate Regulatory Authority in each State/ Union Territory (UT), by the Appropriate Government for oversight of real estate transactions, To appoint one or more adjudicating officers to settle disputes and impose compensation and interest;

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The Salient Features(c) Registration of Real Estate Projects and Registration of Real Estate Agents:Mandatory registration of real estate projects and real estate agents who intend to sell any plot, apartment or building, with the Real Estate Regulatory Authority;

(d) Mandatory Public Disclosure of all project details:Mandatory public disclosure norms for all registered projects such as details of promoters, project, layout plan, plan of development works, land status, status of statutory approvals and disclosure of proforma agreements, names and addresses of real estate agents, contractors, architect, structural engineer etc.;11www.sbsandco.com

The Salient Featurese) Functions and Duties of Promoter: Disclosure of all relevant information of project; Adherence to approved plans and project specifications; Obligations regarding veracity of the advertisement for sale or prospectus; Rectify structural defects; Refund money in cases of default;

(f) Compulsory deposit of 50 percent:To compulsorily deposit 50 percent (or such lesser percent as notified by the Appropriate Government) of the amounts realized for the real estate project from the allottees in a separate account in a scheduled bank within a period of fifteen days to cover the cost of construction to be used for that purpose;(Earlier it was 70%)On going projects which have not got completion certificate also got into purview.

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The Salient Features(g) Adherence to declared plans: To bar the promoter from altering plans, structural designs and specifications of the plot, apartment or building without the consent of two-third allottees after disclosure; However, minor additions or alterations permissible due to architectural and structural reasons;

(h) Functions of Real Estate Agents: Real estate agents to sell properties registered with the Authority; Maintain books of accounts, records and documents; Not to involve in any unfair trade practices;13www.sbsandco.com

The Salient Featuresi) Rights and Duties of Allottees: Right to obtain stage-wise time schedule of project; Claim possession as per promoter declaration; Refund with interest and compensation for default by the promoter; Allottees to make payments and fulfill responsibilities as per agreement;

(j) Functions of Real Estate Regulatory Authority: The Authority to act as the nodal agency to co-ordinate efforts regarding development of the real estate sector and render necessary advice to the appropriate Government to ensure the growth and promotion of a transparent, efficient and competitive real estate sector;

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The Salient Features(k) Fast Track Dispute Settlement Mechanism: Fast track dispute resolution through adjudicating officers (District Judge); Appellate Tribunal to hear appeals and adjudicate the cased in 60 days as against 90 days.

(l) Establishment of Central Advisory Council:To advise the Central Government on implementation of the Act, recommend policy, protection of consumer interest and to foster growth and development of the real estate sector

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The Salient Features(m) Establishment of Real Estate Appellate Tribunal:Real Estate Appellate Tribunal to hear appeals from orders of the Authority and the adjudicating officer. The Appellate Tribunal is to be headed by a sitting or retired Judge of the High Court, with one judicial and one administrative/technical member;

(n) Punitive Provisions:Penalties include 10 % of project cost for non registration and payment of additional 10% of project cost or three year imprisonment or both 5% of the project cost in case of wrong disclosure of information,Provisions including de-registration of the project in case of contravention of provisions of the Bill or the orders of the Authority or Tribunal;16www.sbsandco.com

The Salient Features(o) Bar of Jurisdiction Courts:Provision for barring jurisdiction of court and any authority from entertaining complaints in respect of matters covered under the Bill;

(p) Power to make Rules and Regulations:Appropriate Government to have powers to make rules over subjects specified in the Bill;Regulatory Authority to have powers to make regulations;17www.sbsandco.com

Other PointsRegistration of Real Estate Projects and Real Estate AgentsMakes provision for seller buyer agreement and the developer agreement should be in line with the model agreement set out in the BillCarpet Area is now clearly defined to include usable space like kitchen and toilets to make it clear18www.sbsandco.com

Expectation not met from IndustrySingle window clearance is not provided. The bill does nothing to stream line the 50 plus approvals required for housing projectUrban and Local bodies have not bought under the purview of the regulatory authority since the process of issue of certificate is under their control19www.sbsandco.com

Major short Comings/ChallengesOngoing Projects included in the definition of certain provision will bring lot of confusion and also industry request the bill should be implemented prospectively and not retrospectivelyInclusion of commercial real estate in the definition. The residential and commercial real estate segments are two different nature of industries , in commercial segment the cash flow will only come after the completion and leasing of the property and in such case depositing 70% in escrow account is not possible. Analysts feel that once the bill becomes law, supply shortage is imminent as the developers cannot launch without obtaining all project permissions. They need to arrange funds for getting approvals and registering the projects with the authorities will require lot of upfront cash flows which will create lot of hardship on developers20www.sbsandco.com

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