A prospective property buyer was given an option by a builder - Rs 15,000 a sqft if 20 per cent was paid upfront and 80 per cent on possession or Rs 14,000 a sqft if 20 per cent was paid upfront and the other 80 per cent was linked to pace of construction.

The builder promised to deliver the project in three years. The question: Which is better for the buyer?

Kartik Jhaveri, director, Transcend India, a financial advisory company, has a simple answer. "For someone investing in this property, the first one is better. For the end-user, the second." Why? An investor who does not want to stay in the property is mostly interested in capital gains. So, he might not want to lock too much money at the start of the project. And, even if the project is delayed, an investor can afford to wait because he is not really looking to stay in it. However, if this property is being bought by an end-user, the second offer is better, as the bank will disburse payments based on meeting the construction goals. In addition, the financial institution will ensure the due-diligence and documentation is in place.

Real estate consultants say another important question to ask is whether you would be able to sell the property without any charges. "It is important to know this because depending on the builder, the cost of transfer can be one to five per cent. In properties which are expensive, this can be a significant sum," says one. For investors who want to make a quick buck, this can be an important question because the returns will be adversely impacted.

If the buyer expires before the possession, what would be the status of the property? "Despite the Maharashtra Ownership Flat Act specifying that if a buyer pays 20 per cent, the builder needs to get into an agreement, many builders do not want to get into an agreement if the initial payment is only 20 per cent. These issues can cause problems in the future," says Jhaveri.

The spate of such schemes comes on the back of a lackadaisical festival season. According to a recent report by UBS Securities, pre-sales of top developers have gone down 50 per cent year-on-year in 2014, pushing residential inventory to a seven-year high. No wonder, innovative schemes such as 20:80 and 25:75 are making a comeback.

In the past, developers had introduced this aggressively but the Reserve Bank of India stepped in. Earlier, the scheme was heavily loaded in favour of the builder. The developer, bank and home buyer went into a tripartite agreement. The buyer paid 20 per cent of the full value of the house upfront. The remaining 80 per cent was given to the developer by the bank. The developer would pay interest to the bank on this amount till it handed over possession to the buyer. The home owner would start paying the equated monthly instalment (EMI) once the property was delivered.

This scheme had dual implications. One, the builder received cheaper funding at interest rates meant for home buyers, a clear four to six per cent lower than what the builder would normally get from banks. Said a senior official at a housing finance company: "With home loan rates at 10.15 to 11 per cent, loans to builders come at 16-17 per cent or even more, if the builder is new. So, this was a perfect way for builders to get money at extremely cheap rates."

This scheme was very popular, especially in Mumbai and Delhi. So much so that Deepak Parekh, chairman of Housing Development Finance Corporation said in its 2012-13 annual general report: "Borrowers must not be blinkered into believing that there are no risks when developers offer to pay interest on a borrower's loan for a specified period. Borrowers have to be cautious because in the event of a developer delaying payment, the credit bureau reports will reflect this in the borrower's records, thereby impacting his or her creditworthiness."

In September 2013, former RBI governor D Subbarao red-flagged 20:80 schemes, a few days before his retirement. "Such housing loan products are likely to expose the banks, as well as their home loan borrowers, to additional risks in case of disputes between individual borrowers and developers/builders, default/delayed payment of interest/EMI by the developer/builder during the agreed period on behalf of the borrower, non-completion of the project on time, etc," said the RBI note.

It also warned banks that any delayed payments by developers or builders on behalf of individual borrowers to banks might lead to lower credit ratings or scores of such borrowers at credit information companies (CICs), as information about servicing of loans gets regularly passed on to CICs. "In cases where bank loans are also disbursed upfront on behalf of their individual borrowers in a lump-sum to builders/developers without any linkage to stages of construction, banks run disproportionately higher exposures, with concomitant risks of diversion of funds," added the note.

In its new avatar, the dice is not so heavily loaded in favour of the builder. The new schemes give an option as mentioned at the outset. Now, there is no tripartite agreement. Instead, only developer and buyer are involved and decide on the method of payment. It is important that buyers or investors take note of all these points before taking a plunge.

- by Joydeep Ghosh for Business Standard

The recently-concluded festival season proved a damp squib for real estate developers. In spite of hefty advertising and promotion, sales didn't pick up. Many developers were hoping to offload some parts of the huge inventory they are stuck with, but their efforts came to naught. The only cheer came towards the end of the month when the government liberalised norms for foreign direct investment in the sector. Among other things, the minimum built-up area required to get a foreign investor into a project was slashed from 50,000 square metres to 20,000 square metres, and the project size was halved to $5 million. Under the rules, 100 per cent foreign investment is allowed in real estate projects.

This will provide relief to the sector which is plagued with massive unsold stock, sluggish sales, resource crunch, debt, buyer activism and insufficient regulation. Here's how the sector got caught in a vicious cycle of debt. Thanks to under-regulation, many developers have used money raised for one project to buy land for another. These overenthusiastic serial developers have caused a glut in the market (see Property for sale). With new sales coming to a standstill - a result of the economic slowdown coupled with high interest rates -, most of them face a severe shortage of resources. Banks have turned off the tap because of the perceived risk of default. Many developers are known to be raising money from private sources at exorbitant rates to keep the show going. This is where the liberalisation of the norms could help.

Naturally, developers have welcomed the government's move. "The permission to sell completed projects to foreign investors will help Indian real estate developers get the much needed liquidity into the system," says Unitech Managing Director Sanjay Chandra. "The lack of project financing has been holding back the real estate sector for a very long time. Besides revitalising the existing housing market in and around urban agglomerations, this decision is likely to encourage investments in new geographies," adds Tata Housing Managing Director & CEO Brotin Banerjee. Navin Raheja, the chairman of Naredco, a real estate association, says the relaxation of norms has the potential to more than double foreign inflows into housing, commercial real estate, hotels and townships over the next one year.
From boom to bust

The decision has come at a time when foreign investment in real estate has turned into a trickle. The sector had received about $22 billion in 2000-2013, almost 11 per cent of the total foreign direct investment into the country during the period. Those were the years of an unprecedented boom in real estate. But once it transited from a sellers' market to a buyers' market, the foreign investors began to lose their appetite. As a result, foreign investment in the sector has slowed drastically since 2012. It fell from $3.1 billion in 2011-12 to $1.3 billion in 2012-13 and $1.2 billion in 2013-14. During April-August of the current financial year, $446 million has flowed into the sector.

Will the recent changes make the sector attractive to foreign investors? The evidence is mixed. Some analysts feel that unless the inventory gets cleared, they might not be interested. The fundamentals of the market have not improved in any way. Foreign investors could also be looking for some clarity on a regulator for the sector. The talk of such a regulator has been doing the rounds for quite some time. After much deliberation, the United Progressive Alliance government had introduced the Real Estate (Regulation and Development) Bill in the Rajya Sabha last year. The view of the current National Democratic Alliance government on it is not very clear. But it is unlikely that it will see the light of the day anytime soon. Meanwhile, Maharashtra is all set to become the first state in the country to have a regulator for the housing sector: the Housing Regulatory Authority. A search committee headed by the chief secretary of the state will suggest names for the chairman and members of the authority. The increased buyer activism, as was seen in the case of Supertech and DLF, too bothers foreign investors.

On the positive side, the distress in the sector will fetch deals at bargain basement prices. "Many (foreign players and funds) will start evaluating India as a potential investment destination. But foreign investment won't start flowing in immediately. We will see many large deals happening in this space within the next three or four quarters," a senior executive of a private equity fund says.

One aspect everybody agrees on is that it will help the government's ambitious programme to set up smart cities and give a boost to affordable housing. "It will go a long way in making the affordable segment more viable for developers," says Banerjee of Tata Housing. Many small and mid-sized builders will now find foreign capital accessible.

Under the relaxed norms for FDI, projects which commit at least 30 per cent of the total cost for low-cost affordable housing would be exempted from minimum built up area and capitalisation requirements with a three-year lock in. According to the revised norms, projects with at least 60 per cent of the FAR/FSI (floor area ratio/floor space index) for units of carpet area not over 60 square metre will be considered as affordable housing projects. Also, 35 per cent of the total number of units should be constructed with carpet area of 21-27 square metre for the economically weaker sections. Such projects can have a mix of dwelling and commercial units. However, a servant's quarter that comes along with a high-end unit cannot be separately counted as a low-cost dwelling unit in an affordable housing project.

Some developers point out that what comes in the way of low-cost housing is the sky-high price of land. And the new norms do little to address that. "In a city like Gurgaon, nobody can buy land to build inexpensive houses. For such projects, you have to go far away. But the transport infrastructure is such that people can't live there and come for work to Gurgaon effortlessly," says a developer with substantial interests in the Delhi suburb.

At the moment, the industry is happy with the new concession. Real estate consultancy CBRE's South Asia Chairman & Managing Director Anshuman Magazine says: "The real estate and infrastructure industry is starved of funds. This announcement will widen the base of investors, especially mid-sized financial institutions. It will also encourage new development projects in prime areas of large cities and in Tier II towns.


- by Mansi Taneja for Business Standard

Piramal Fund Management said it has surpassed its initial fund size of Rs. 350 crore for the ‘Indiareit Apartment Fund’ by raising Rs. 500 crore of commitments under three months since launch.

The platform has exercised its greenshoe option to increase the size of the offering to Rs. 700 crore.

The fund is uniquely positioned as a first-to-market platform for underwriting units only -- physical sqft rather than financial participation, whilst adhering to the basic tenets of a defined use of funds, appropriate security and monitoring as well as ensuring developer alignment and project completion.

The Fund has already disbursed its first transaction of Rs. 50 crore to Omkar Alta Monte project in Mumbai.

It has also approved two more transactions, in Mumbai (Bandra Kurla Complex) and Chennai (Adyar), which are in final stages of pre-disbursement diligence.

Khushru Jijina, Managing Director, Piramal Fund Management said, “With the Apartment Fund, we have consciously added another product to our suite of offerings. This strategy enables them to advance construction and delivery of units without the pressure of sales and increases visibility of site progress.”


Source :- The Hindu Business Line

Aadhaar may be used to curb Black Money in Real Estate
If Aadhaar is made compulsory in real estate purchases, it could also potentially solve the problem of property buyers using fake and multiple PAN to register their transactions to avoid detection by the income tax department. 
In a move aimed at curbing the use of black money in property deals, the government is considering linking real estate transactions with Aadhaar, the unique identity number. 

If implemented, the move could provide a trail of all real estate transactions by an individual. It could also potentially solve the problem of property buyers using fake and multiple permanent account numbers to register their transactions to avoid detection by the income tax department. 

Real estate, mining, bullion and jewellery are some of the sectors believed to have large amounts of black money—unaccounted-for and untaxed wealth—in circulation. 

In an interview, finance minister Arun Jaitley said the government is considering making the use of Aadhaar mandatory for real estate transactions. 

“Aadhaar is a good idea,” he said, while emphasizing that the current centralized monitoring systems that the government has in place also provide a strong trail of such transactions.

Implicitly, the proposal is yet another endorsement of the idea of Aadhaar, which was put in place by the previous government. Once implemented, it will extend the use of the unique identity programme to a new platform. Experts welcomed the move, saying it would stimulate the clean-up of a sector notorious for opaque practices skirting the law. 

Experts welcomed the move, saying it would stimulate the clean-up of a sector notorious for opaque practices skirting the law.

If the use of the Aadhaar card is made mandatory in property transactions, it will have huge implications for the sector, said Amber Maheshwari, managing director, corporate finance, Jones Lang LaSalle, a property advisory. “Not only will it boost transparency, but it will also provide a critical data base on the supply-demand, sales and pricing trends in real estate,” said Maheshwari.

Chasing black money in circulation domestically was a key message delivered by Jaitley in his meeting with top officials of the income tax department last week. 

“We should not lose track of domestic black money. Every taxman should know where it is operating—in mining, in land, jewellery, in luxury items, in real estate. If you have to increase the tax base, you have to reach more areas. If the black money component can be brought back into the national mainstream, probably our GDP (gross domestic product) growth rates will be much higher,” Jaitley said.

Bringing black money stashed away in overseas accounts was a key electoral promise by the Bharatiya Janata Party (BJP).

Since taking charge in May, the BJP-led National Democratic Alliance government has constituted a special investigation team on the orders of the apex court to track black money. The government was also forced to disclose names of 627 foreign bank account holders received from the French government to the apex court.

Investment in property is considered to be one of the most common ways to park black money, as a large number of transactions in real estate are not reported or are under-reported to avoid taxes.

The tax department, over the last few years, has taken many steps to curb black money in the real estate sector. Last year, the Central Board of Direct Taxes made it mandatory for a buyer of immovable property to compulsorily withhold tax at the rate of 1% of the property transaction where the value exceeds Rs.50 lakh. In case the seller does not have a permanent account number, tax at 20% has to be deducted.

“The procedures involved in a real estate transaction are time-consuming and now if the Aadhaar clause is introduced, it will be an additional procedure which will also be time-consuming,” said a Mumbai-based real estate developer, who didn’t wish to be named.

Not just property transaction, the massive number of so-called benaami land transactions that are widely prevalent in the sector will also be mapped, if the use of the Aadhaar number is extended to land deals as well.

A benaami transaction is one in which property is transferred to a person who acquires it for someone else, who pays for it using black money.

“Apart from the obviously positive effects, it will make a big difference in tax matters,” said Pankaj Kapoor, managing director, Liases Foras Real Estate Rating and Research Pvt. Ltd.

Often, individuals exploit tax provisions during property transactions, and with Aadhaar, that will be in check, said Kapoor.

The use of black money in real estate is rampant, especially in high-value, investor-led transactions and in the form of land deals as well. 

Sunil Rohokale, chief executive and managing director of financial services firm ASK Group, said the main problem concerns stamp duty tax evasion, where buyers pay tax based on the lower ready reckoner values of the government rather than the much-higher market values at which transactions take place. Rohokale said he wasn’t quite sure how Aadhaar would curtail that. However, Rohokale added, if the bandwidth of the Aadhaar card is expanded and it functions as a social security card at some point of time, it could boost transparency.

Aadhaar is already being used by the government for cash transfers of subsidies directly into the bank accounts of beneficiaries to plug leakages. The government is using it to identify beneficiaries for transferring funds under scholarship schemes, pension money, cooking gas subsidy as well as seeding of bank accounts to weed out multiple beneficiaries under the government’s financial inclusion programme Jan Dhan.


by Remya Nair / Asit Ranjan Mishra /  Madhurima Nandy for Livemint.