New economy

Spurring the boom, the government has slashed cobwebs of legislation by allowing 100 percent foreign direct investment in large projects. Stamp duties have been rationalised and reduced, and a policy to set up special economic zones is boosting industrial growth.
Nascent chains such as Pantaloon Retail (India) Ltd and Reliance Retail Ltd have lined up multi-billion dollar expansion plans in which the largest component has been set aside for leasing or buying organised retail space. In addition, companies such as Nike Inc. and Adidas are deepening their presence through franchised operations beyond India’s metros to soak up demand from millions in the growing middle class.
“The demand for retail space across India will increase,” says Vivek Dahiya, associate director at global property advisor DTZ India. “Certain markets seeing oversupply will see reduction in vacancies.”
In Delhi, Gurgaon and Noida alone, organised retail space is likely to rise to 14 million sq.ft. by the end of 2007 from 2 million now, he said.
But the sharp rise in commercial rentals in the past three years is hurting growth prospects of organised retail chains, which operate on margins as low as 3 to 4 per cent. “Rentals are now dramatically higher — by at least 50 per cent in a lot of cities,” says Kishore Biyani, Managing Director at Pantaloon. “At these prices we can’t sign up new properties.”
Biyani, who started retailing in 1997, says annual sales needed to be at least 50 per cent higher to offset rising rentals.
In central parts of heavily congested Mumbai city, monthly rentals for discount stores have soared in excess of Rs 125 sq.ft from 55 rupees sq.ft about two years ago, says Pranay Vakil, Chairman, Knight Frank India.
“This is madness and has little relevance to actual supply and demand factors,” Vakil says. “Rentals are now crossing the industry norm of 12 per cent of gross sales, making it extremely difficult and unaffordable for retailers.”
But even after this rise, monthly retail rentals in prime commercial space or “high street” in Mumbai are low at $11 per sq.ft compared with $24 in Singapore and $80 in Hong Kong, according to data from Knight Frank India.

Services sector

Research firm SSKI forecasts demand for 160 million sq.ft. of commercial real estate over the next three to four years, driven primarily by the services sector, which contributes nearly 55 per cent of GDP in Asia’s fourth-largest economy. Similarly, the housing sector is likely to see 15.9 billion sq. ft. of construction by 2010, SSKI says in a recent report. However risks abound despite runaway gains and could harm property in central Delhi have soared more than 75 per cent over the past two years thanks to demand from a growing tribe of millionaires and a law that limits the number of floors that can be constructed. All this euphoria has also spilled onto the stock markets where the real estate stocks have been among the top performers.short-term demand for residential property. “The sharp run in property prices over the last two to three years and an upturn in the interest rate cycle are the key risks,” says Shirish Rane, an analyst at SSKI.

“Commercial and retail properties are threatened by the trend of rising rentals which impact profitability.” Prices of prime residential

• Key facts On India's booming property market
  
• India’s real estate market is currently estimated at $16 billion and is forecast to reach $60 billion by 2010. The real estate sector could attract a quarter of an estimated $8 billion in long-term foreign investment bound for India in 2006-2007, according to a study by industry lobby Assocham
  
• In the last two years, the value of commercial office space has increased by 40 per cent. It is expected that the demand for office spaces alone will grow to over 19 million square feet in 2006 to 2007. The outsourcing sector would account for approximately 75 per cent of the demand and by 2010 would need 200 million square feet of office space in major metropolitan cities.
• The number of shopping malls in Kolkata, Mumbai, Bangalore , New Delhi, Hyderabad and Pune is expected to grow to 300 by 2010 from the current 50. The total mall space currently available in these cities is around 12.4 million square feet.
• In 2005-06, the real estate sector tapped 16 per cent of the $5.54 billion of foreign investment attracted to India, compared to 10.6 percent of the $3.75 billion foreign investment in India in 2004-05.
• Morgan Stanley’s real estate investment arm has invested $68 million in Mantri Developers Private Ltd, which is based in Bangalore, while JP Morgan Chase’s Principal Real Estate Investments has invested $60 million in a residential project in Mumbai with Lodha Builders.
• Hilton International Corp. plans to invest $143 million for a 26 per cent stake in the joint venture company with domestic real estate firm DLF Universal Ltd for hotel and real estate activities.
• India’s first property trust is due to be launched early next year when business park developer Embassy group spins off buildings in a Singapore IPO.

The boom in real estate sector of India can be broadly categorized into two broad segments i.e. demand for commercial properties and demand for residential properties. The demand for commercial properties in India has been increasing with the opening up of the economy.
The developed cities in India have been the investment destination for big multinational companies. The companies from almost all the sectors lead by software and IT-enabled companies have been expanding their operations in India. Most of the big names in the IT and BPO industry have established themselves here. This development has created a huge demand for commercial properties. Companies look for space to set-up their corporate office and there is heavy demand for properties with good infrastructure, connectivity and a real value for money.
Indian real estate has evolved as a huge industry in past few years and as per industry sources this boom will continue for a good time to come. Indian government is also making huge revenues by selling the land to builders for various projects. On the other hand, government is also contributing by way of providing the infrastructure support and promoting the investment in the real estate sector.

 
Sealing Commercial activities in residential areas pushing the prices up

One reason for this increasing demand for commercial properties in the metro cities is the strict regulations by the government to stop all commercial activities in the residential areas. The commercial or business activities should only be carried in the commercially approved spaces so that the life in the residential areas is not disturbed. Hence, the demand for commercial space India has gone up remarkably.

The prices of the commercial properties are also touching sky due to shortage of quality space. There are huge business towers and commercial spaces created by some of the reputed builders. These properties are as per the international standards and offer all kinds of facilities as required by the big clients. Although India has been successful in meeting the requirements of the clients, still there is a long way to go.

The economy is expanding and big players of the corporate world are going to set up their operations. For example the retail sector is poised for a huge growth in Real Estate India and this has already created a competition amongst the companies to acquire the best possible commercial space to market their products.
There is an all round development happening in India. The increase of business has propelled the development of more and more commercial properties in India. To meet the requirements government is also promoting the development of hotels, airports and other infrastructures. A lot of special economic zones and industrial properties are being approved and developed to promote business in remote regions.

NRIs and Indian Real estate

The government including Reserve Bank of India (RBI) and Foreign Exchange Management Act (FEMA in India) has liberalized the rules and regulations for the NRIs to make investment in real estate in India.

Both the NRIs and the persons of Indian origin are being encouraged to invest in properties in India. The NRIs can invest in both residential as well as the commercial properties in India. There is also no kind or restriction as to the maximum number of properties that can be bought. Although there are some restrictions as far as purchase of an agricultural land or farm house is concerned. NRIs also get full support for the finance required for the purchase of the properties. Even more to diversify their portfolio investment in India, Indian government has introduced more relaxed regulation for non-resident Indians/ people of Indian origin.
Once all the formalities related with RBI are fulfilled to bring in investments, another hurdle faced by NRI is a cap on returns he can repatriate out of the investments made in immovable properties in India.
Foreign direct investors in sectors where foreigners are permitted to invest are allowed to repatriate profits from businesses in India as dividends. NRIs have no dividend option for repatriation. In areas where NRIS are allowed to repatriate profits like deposits, it is estimated that NRIs have made deposits of nearly US$ 10 billion.
NRI interest is high on deposits as the interest accruals on such deposits and the deposit amount itself can be repatriated. Only preference that an NRI enjoys in commercial or capital investments like real estate, banking and civil aviation is that the investments caps for NRIs are higher than for a foreign national.
The Reserve Bank has granted a blanket permission to NRIs to purchase property in India for their residential and commercial purposes. There is also no limit on the number of investments or the quantity of investments that can be made in real estate. The immovable property can be purchased by inward remittances from any place outside India or through funds maintained in NRI accounts in the banks within the country.
FEMA stipulates that before making a purchase a specified form called the IPI 7 needs to be filed with the central office of the RBI along with the title deed or any other certified copy of the document proving that the NRI has executed an agreement to purchase property within the country. The form has to he filed within 90 days of the purchase of property and has to be accompanied with a bank certificate stating the consideration paid for the purchase. Once all the relevant papers are submitted, permissions are generally granted without undue delays.
NRI desiring to sell property within India has a lock in period of 3 years i.e. NRI under the FEMA regulations is allowed to sell property only after three years from the date of acquisition for the property or from the date of payment of the final installment of the consideration for its acquisition, whichever is later.

Real Estate Lobby Up in Arms Over Service Tax
March 7th, 2007

The Confederation of Real Estate Developers’ Association of India (Credai) plans to protest against the proposals laid for real estate sector in the budget unveiled by finance minister, P. Chidambaram. The major gung-ho is done in context of imposing 12.36% service tax on “renting of immovable property for use in commerce or business.
Refuting the finance minister’s move, Credai’s secretary, Raj Menda, said that the finance minister’s service tax proposal is not constitutional as land tax is a state subject. He further added that, since the building is on the land, any kind of tax on the building can only be imposed by the state government. And central government can’t impose any tax.
Menda, who is also the managing director of RMZ Corp, the Bangalore based real estate company, said added that the association will soon submit its demand to revoke service tax to the finance minister.
And if the finance minister does not agree with them and Parliament passes the Budget with service tax on lease rentals in place, then they will knock Supreme Court’ door.
According to him, as a result of the new service tax, some of his IT customers will have to pay Rs 60 lakh more per month on 2 lakh sq ft of rented place.
Menda is not alone in this crusade. Harshvardhan Neotia, chairman of Ambuja Realty Development, too feels the new service tax is a burden on the IT promoters and will increases their overhead cost, which is a concern.
Menda said Credai has already spoken to some senior advocates on the possibility of moving court on this issue.
However, Narayan Jain, a senior tax consultant, feels that real estate entrepreneurs are misinterpreting the proposed amendment as service tax is not going to be imposed on the amount of rent but only on the brokerage or commission payable in respect of services rendered by the real estate agents or the brokers.

Bank surety must for SEZs to get stamp duty sop

Developers of special economic zones (SEZs) may have to provide bank guarantees to states to avail of stamp duty exemption on land. The board of approvals (BoA), at its meeting last week, decided that developers should be given stamp duty exemption on land after they receive in-principle approval for their proposals.

However, they might be asked to provide bank guarantees equivalent to the exempted amount so states can recover the sum if developers do not use the land to build SEZs or the SEZs don’t get notified.

A source, who attended the BoA meeting, told ET that since developers start acquiring land after getting in-principle approval from the government, members agreed that this was the stage when the stamp duty exemption should be given. “It was felt that giving stamp duty refund after formal approval is given or a SEZ is notified would be unnecessarily delaying things,” the official said.

Some states, however, expressed apprehensions about being unable to recover the stamp duty exemption amount from the developer if a SEZ did not get notified for some reason. “It was felt that asking developers to furnish bank guarantees for the amount would be a sure way of getting around the problem,” the official added.

The decision would be official once it appears in the minutes of the BoA meeting. If developers are asked to furnish mandatory bank guarantees in lieu of stamp duty, it will significantly increase the initial investment.

For instance, in Haryana, a developer will have to give a bank guarantee equivalent to 8% stamp duty charged by the state. So, if a company wants to set up a SEZ on 12,500 acres at the rate of about Rs 20 lakh per acre, the bank guarantee has to be for about Rs 200 crore. The company would be able to encash the bank guarantee only after the project is notified.

Sources say the move is aimed at discouraging developers from getting into real estate plays for land earmarked for SEZ development. “A developer coming up with a mid-sized project in Gurgaon recently approached us, saying he was unable to complete acquisition of the entire land earmarked for the project. He wanted to convert it into an integrated township. We have obviously not allowed it. But there need to be specific laws to deal with such cases,” an official in the Haryana State Industrial and Infrastructure Development Corporation (HSIIDC) told ET.

In Haryana, this is a matter of particular concern because barring Reliance and Orient Craft, all other developers have a real estate background. Meanwhile, the BoA meeting held on Tuesday formally approved 10 proposals, including three IT/ITes SEZs to be set up by Mukesh Ambani-promoted Navi Mumbai SEZ Pvt Ltd and a multi-product SEZ by Mundra Port in Gujarat.

A decision on four proposals from Uttar Pradesh was, however, deferred as the developers did not possess land. BoA chairman and commerce secretary GK Pillai clarified the proposals will be approved once the developers acquired land. The next meeting of the BoA is scheduled for October 19.