Be Cautious Real Estate

Mar 9, 2010

Recessions have affected mostly the real estate business.
Slowing demand and sudden evaporation
of liquidity position made the situation become
so tough for the real estate sector that companies

who were engaged in massive long term projects have
to abandon the projects. In many cases they have
to forgo SEZ projects too due to financial crisis.

The worst suffers were the ones who have dreamt
of having their own roof over their heads.
As liquidity crisis fragmented the real estate sector
delay in construction became the night mare of the
advance booked consumers. The consumers who
made advance payments have too only wait for the
revival of time and on the other hand they counted the
expenses of the installment payments. Even the banks
were compelled to go for loan rescheduling.

But after one year the situation have changed for the real
estate sector. Not only constructions have begun but
completions of old projects have been completed on a
war basis. Price benefits and other amenities were added
up to complete the sales process of unsold projects.
Demand started picking up slowly but not to the
levels of pre recession.

The budget 2010-11 added more smile for the reeling sector.

• The pending housing projects have been granted a
one year extension for completion. Earlier its was
existing for 4 years and now its is for 5 years.
This have been made for claiming a 100% deduction
on their profits under section 80-IB of the Income Tax Act, 1961 (“Act”).

• The government also relaxed under section 80-IB of the
Act to 3% of the aggregate built-up area of the housing project
or 5000 square feet, whichever is less.
Earlier it was the existing 5% of the aggregate
built-up area or 2000 square feet, whichever was less.

• Investment linked incentives have been proposed for
the business of building and operating new hotels of two-star
or above category, anywhere in India, which start
functioning after April 1, 2010.

• 1% interest subvention on housing loans up
to Rs.10 lakh (where the cost of the house does not
exceed Rs.20 lakh) has been extended till March 31, 2011.

• More over some commercial projects have been
included among the category of deduction under income tax act.

• A 4 month extension has been provided for setting up
and commencing operations of hotels and convention
centers in National Capital Territory of Delhi and specified
surrounding regions. Such hotels and convention centers
would now be eligible to claim specified deductions,
where such facilities are set up and commence business by July 31, 2010.

All these incentives and packages make the sector prospects
for new financial year very much progressive.
The sector needs to make judicious mix of the incentives
to derive growth as compared to the tough phase of recession.

On the other hand the sector also faces some inbuilt
economic factors which decided the direction of
the growth paddle of the sector. In many areas
of India where unemployment is still a factor of
concernprojects built in those areas finds hard to
sell their projects. Since good employment opportunities

makes the process of long term payments easier.
Job security plays a big role for the real estate sector.

• Road infrastructure followed with water and sanitation
infrastructures also decided the fate of the sector.
Improper infrastructure makes it difficult for sale ofprojects.

• Even if the project is below the market rate or at
reasonable rate it becomes difficult to find prospective
buyer for these projects due to infrastructure issues.

• Speculative prices of real estate came to an end
during recession.

• Cost of input also reduced the end price of the projects.

• But with Indian economy getting back on the wheel
of 8% GDP growth the cost of materials and others are increasing.

• As a result the price of projects is increasing and
speculations of prices are also back on the street

• The allocation of funds by the banks to the real
estate sector is very much impressive.

• The total outstanding of banks to the real estate sector
stood at Rs 88581 crore as on November 21, 2009.

• The banks exposure has gone down by a little over
Rs 8,000 crore between June and November 2009.

• The flow of funds in to sector also spooks off the factor
of speculation and return of over pricing of projects.

The sector should make a cautious move from
now as global financial position is yet to develop.
Massive project undertakings should be avoided
followed with controlled speculative prices ofprojects.
Intermediaries should be reduced so that speculation
and over pricing of projects should not erupt.
Since these might make the growth of the sector
slow and difficult. The builders should try to capitalize
optimum utilization of resources and timely completion
ofprojects.
The sector should avoid too much leverage on its working capital.

In many cases over supply of projects have eliminated
the demand appetite for the sector.
The builders should keep this factor in mind
when new projects are being undertaken by them.
Proper survey of the demand and supply position of the area should be made.

But despite of all these the sector enjoys the threat
of job security and unstable demand.

The governments of India have been very helpful
to the sector but many of my readers might disagree
and will demand for more sops.
The only reply I have for them is that demands have no ending.

Author: Indranil Sen Gupta
Financial, Economic Writer and Research Analyst

Book under construction flat before July 2010 to avoid 3.30% Service tax on Agreement Value

Mar 6, 2010

Those looking to buy a house would do well to book one before
July, when the new service tax levy on construction service
will come into effect. The cost of flats will go up 3.3% of
the total purchase consideration once service tax begins
to be levied on construction.

The government is considering exempting from tax flats
booked before the notification of the expanded
construction service, a finance ministry official told 
“There is a case for giving relief to buyers who booked their
houses before the service is notified… We are examining it,” he said.

So, a buyer who has booked a flat but will get possession only
after the notification of the new service need not worry.
A clarification to this effect may be issued when the tax is
notified after the passage of the finance bill, he said.

The Union Budget proposes to expand the definition of construction
service and levy tax on houses under construction as well.
The new rule, which will come into effect when Parliament
approves the budget, says service tax would be imposed
if payments were made before the completion of construction.

Realty companies typically sell property before they begin
construction and fear that the move will hit the sector hard as
it would lead to a rise in home prices and depress demand.
“The government must reconsider its decision to impose service
tax on under-construction housing as the real estate industry is
already paying 14-16% as indirect taxes.
The current move will make affordable housing unaffordable
in the future,” said the DLF spokesperson.

The government plans to include charges such as development fee,
parking fee and premium location charges usually paid at the time of
completion of construction in the base price. Only 33% of the base
price of the flat will be chargeable to service tax levied at the rate
of 10%, taking the effective tax to 3.3%.

“Since an amendment has been made in an existing service already
under tax net, there are diverse views whether this will be operative
from a specific date after notification or treated as a clarificatory
amendment roping in construction-linked payment plans of houses under
construction,” said Anil Kumar, CEO and deputy managing director,
Ansal API. If it is to be operative from a prospective date,
booking a house in the next 3-4 months may result in savings
of up to 4% for a customer, he added.

However, the government remains firm on levying the tax. Revenue
secretary Sunil Mitra said the proposal would not hike prices by
more than 3.5%, an increase that could be afforded by the customers.

“Construction is a service. As a service, there is no reason why
it should not be taxed,” he said. “It is only 3% or 3.5% that gets
added up (for the buyer),” Mr Mitra added.

Realty developers not pleased at many Budget details

Raghavendra Kamath & Kalpana Pathak / Mumbai March 6, 2010, 0:47 IST

The devil is in the detail for the real estate sector.

Though the Budget gave sops to home buyers in the form

of tax savings and interest rate subvention, it quietly 

brought back service tax on lease rentals in the Finance Bill.


Builders said they’d pass on the service tax burden to
customers. The silver lining was that the continuation
of interest rate subvention and higher disposable income
in the hands of individuals through income tax reliefs
would more than make up for it.

The Budget announced a maximum tax savings of Rs 20,000
for those earning an annual income up to Rs 5 lakh and up
to Rs 50,000 for those earning up to Rs 8 lakh.
This additional income is likely to find its way towards buying homes.

Says Aashiesh Agarwaal, research analyst at Edelweiss
Capital: “For people getting an annual income of Rs 8 lakh, there will be a saving of 10 per cent, which will increase disposable income and their affordability. This will mean they can pay a higher EMI and be eligible for loans of higher value.’’

This Budget also extended the interest rate subvention
on a housing loan up to Rs 10 lakh where the house price
is up to Rs 20 lakh, announced in the earlier Budget, to
March 31, 2011. But, many developers are unimpressed.
“Overall, home sales may go up, but there is no incentive fo
developers to launch more affordable housing projects.
Why should we?’’ said Niranjan Hiranandani, managing director
of Hiranandani Constructions.

SERVICE TAX WORRY
The biggest worry of developers is re-introduction of service
taxes. In April 2009, the Delhi High Court stayed the tax on
lease rents when some retailers approached it, opposing the
government move to impose it. According to the Finance Bill,
service tax would be levied for renting immovable property or
any other service to such renting with retrospective effect from
June 1, 2007. The service tax rate is 10 per cent now.

Buildings under construction and the leasing of vacant land
would also attract service tax, the Bill says.

“The levy of service tax will increase the price of properties.
This has come as a dampener, as even renting under-construction
property will attract service tax now,’’ says Jai Mavani, executive
director and head of the real estate practice at KPMG.

Some developers are unmoved.
“We will transfer the service tax to home
buyers and to that effect there will not be
any additional liability,’’ said Sarang Wadhawan,
managing director of HDIL, a Mumbai-based developer.

OTHER SPURS
Though the Budget allowed projects started
before March 31, 2008, to be completed within
five years instead of four for claiming deduction
of their profits as “one-time relief to the sector’’,
developers and consultants said the measure does not help much.

“It is unfortunate that the commencement date of March 31, 2008,
has not been extended but the period for implementation
has been extended by one year. Hence, the impact of the
amendment would be marginal,’’

said Pranay Vakil, chairman of Knight Frank India,
an international property consultant.

However, the hotel industry gave a thumbs-up to the finance
minister’s move to give investment-linked deduction to new
hotels in two-star or above categories.

The benefit was hitherto available to certain states such as
Uttarakhand and Himachal Pradesh; it has been extended to all.

It allows 100 per cent deduction in respect of the whole of any
expenditure of a capital nature (other than on land, goodwill and financial instruments).

“It’s a good measure that will boost investment in the tourism
sector, with high employment potential. Also, the fact that the
benefit is made available to hotels across the board will boost
investment in all categories,” said a Delhi-based analyst.

FAQ-reverse mortgage?

 

Q.1.What is reverse mortgage?

When you buy a house through a home loan, every EMI
you pay towards servicing the loan increases your equity in
the house. Once you payoff the loan in full, your equity
in the house is 100 per cent. In reverse mortgage, exactly
the opposite happens. When you pledge your house for
reverse mortgage with a lending institution,
your equity in your own house decreases with every
disbursal that the lending institution makes to you.

Q.2 Which institutions offer reverse
mortgage as a product in India?

Reverse mortgage as a product is fairly new to India.
Dewan Housing Finance was the first institution in the
country to come up with its reverse mortgage product-Saksham.
Since then, most leading lending institutions have come up
with their own reverse mortgage products.

Some of these are State Bank of India, Punjab National Bank,
Bank of Baroda, Central Bank of India, Union Bank of India,
LlC Housing Finance, Indian Bank, Andhra Bank,
Corporation Bank and Canara Bank.

Q.3 What is the eligibility criteria for reverse mortgage?

First, Second you need to have 100 per cent equity in
your should be more than 60 years of age.
If your wife is a co-applicant, she  should be above 58.

Q.4 How do I apply for reverse mortgage?

Once you decide to pledge your house for reverse
gage, you should ideally go to the branch of the bank
with which you have a banking relationship and fill up
the necessary form–provided the bank offersreverse mortgage.
If your bank does not offer reverse mortgage ,
then approach the nearest branch of a bank that
does, and fill up the form.

You will need to furnish your personal and financial
details: details about The property, your legal heirs,
and so on. To authenticate that you own that the property,
you will also need to furnish property papers and a
proof that the house that you are pledging is your residence.

Q.5 How does the lending institution arrive at 
the amount that would be disbursed under the reverse mortgage product?

The qualifying amount of loan will depend on the
realisable value of your property after maintaining a
margin. This margin covers the rate of interest on the
loan and any possible fluctuations in the value of the
property pledged for reverse mortgage.

The value of the property is evaluated every 3-5 years,
depending on the lender, and this will affect the amount of
funds being released to you as per the payment plan you choose.

Q.6  What are the payment options that lending
institutions provide under reverse mortgage?

The money can be credited into your savings bank
account or in a joint account-with the either or survivor
option-in the same bank either on a monthly or quarterly
basis, or as a one-time lump sum payment.

Q.7  What is the rate of interest on the amount 
that the bank sanctions under reverse mortgage?

The rate of interest on the reverse mortgage loan typically
varies between 10 per cent and 12 per cent.

However,
you will not be required to pay this interest.
Once you vacate the premises permanently, or in the
event of your death, the lending institution will give the first
option to the legal heirs of the property to settle the loan.

If they are unable to settle the loan, the lending institution
will sell the property and, from its proceeds take its
share-principal, i.e., the total amount disbursed  as loan
and the interest on it-and give the to the legal heirs.

Q.8 Is there a processing fee?

Yes, There is a processing fee. This typically varies between
0.15 per cent and 1.50 per cent of the loan amount.
In some cases, apart from specifying the percentage
of loan amount as processing fee, they also have an upper
limit as to how much they can charge as processing fee.

Q.9 What is the maximum payment tenure that a
lending institution offers under reverse mortgage?

Most reverse mortgage loan products available have a maximum
tenure of 15 years, with a minimum tenure of 10 years.
However, RML products of central Bank of India andBank
of Baroda can be extended further, to the advance value of the
property. In case of Central Bank of India, the loan can be
further extended by another five years. Punjab National Bank
is the only institution that offers RML for 20 years.

Q.10 Can I prepay the amount that the lending 
institution disburses under reverse mortgage? 
Is there a pre-payment penalty?

Yes, you can prepay the loan along with the interest any
time during the loan tenure. Typically, there is no pre-payment penalty.

Q.11 Is the rate of interest on the RML and the value 
of the house fixed for the entire tenure or are they revised at regular intervals?

Considering that real estate, like any other asset class, passes
through cycles and the cost of funds for lending institutions also
keep changing, most lending institutions have a reset clause
in the their respective RMLs. This is to ensure that at no
point during the loan tenure, the loan to
value ratio exceeds the maximum unlock able value of the
mortgaged property.  However, this reset clause varies across
institutions. While mostlending institutions have a reset clause
of five years, Central Bank of India and Dewan Housing
Finance have a reset clause of three years.
 

So, after the scheduled period, both the value of the house
as well as the rate of interest will be re-evalued and necessary
adjustments will be made in your monthly payments.

Q.12 What if I outlive the tenure? Can I still stay in my house?

In case you outlive your loan tenure, you will continue to live in your house. However, the lending institution may stop the monthly payments to you if the unlock able value of the property has already been exhausted.

Q.13 When will the lending institution take my house?

After your death, or if you have permanently moved out
of the property, the bank will first give your legal heirs an
option to settlethe loan. In case of a joint loan,
it will become due for recovery and payable six months
after death of the last surviving spouse,

Q.14 How does the lending institution recover the money that it has given me under reverse mortgage?

If your legal heirs cannot settle the reverse mortgage loan, t
hen the property will be sold off and after realizing its money
(total advances and the accumulated interest), the bank
will pass on any surplus to your legal heirs.

Q.15When does it make sense to opt for reverse mortgage?

Reverse mortgage should ideally be used to augment one’s income in
the golden days in the retirement years. It should ideally be the
last resort to make good of the shortfall in funds in your retirement years.

Mumbai to lead office space take-up

 

 

 

3rd March,2010

Mumbai and Delhi NCR are expected to absorb

 about 20-22 per cent of the projected demand for  

office space during 2010-2012, says a report The year 2009

would be marked in Indian real estate as one of the most 

difficult periods for the industry in recent times.

However, despite the turbulence and uncertainty, there are 

momentous opportunities to learn through the turn.

 

With signs in the global economy that the worst may be

behind us, commercial office space in India has begun to 

consolidate, focusing on affordability, diversification and delivery, 

says a report by realty consultant Jones Lang LaSalle Meghraj.

The year witnessed a considerably lower net absorption of 19.6 million sq ft 

against a robust net absorption of 33.1 million sq ft in 2008.

Quarterly absorption rate was recorded at 17 per cent

in the fourth quarter of 2009, which has been increasing 

steadily after hitting bottom in the first quarter of 2009.

Indian real estate witnessed net absorption of 8 million sq ft 

in quarter 4, 2009, nearly four times the lowest witnessed in quarter 1, 2009.

With lower rents in IT as well as non-IT spaces,

the opportunistic demand is led by domestic occupiers, 

who have expanded their real estate portfolios in various 

Indian cities. The sunshine sectors ­ telecom, pharmaceuticals,

healthcare and manufacturing leased large spaces in various cities. 

A larger share of transactions happened in operational vacant

stock rather than under-construction projects in 2009, contrary

to the trend observed during 2007 and 2008, when options in 

operational office space weren't available to the tenants in

the same measure.

Projected supply and demand of office space Office 

space amounting to 162.6 million sq ft is expected to

become operational in the next three years, which would

increase the pan-India grade-A office stock to 387.4 million sq ft.

By end-2010, Mumbai is expected to lead in terms of

operational office stock in the country, pushing the leader,

Bangalore, to second position.

About 85-90 per cent of the near term supply of 68.3 million sq ft,

which is expected to become operational in 2010, is

in advanced stages of construction with more than 50 per cent

of the structure completed at end-2009.

The pace of supply infusion is expected to outgrow the 

demand in the medium, term thus creating a condition of 

oversupply across the secondary and suburban micro markets.

Net absorption of office space is projected to grow at a compound 

annual growth rate (CAGR) of 29 per cent during 2009-2012,

increasing from 19.6 million sq ft registered in 2009 to 42.2 million sq ft in 2012.

While Mumbai and NCR Delhi are expected to absorb

about 20-22 per cent of the projected demand during 

2010-2012, Bangalore and Chennai are expected to 

absorb about 14-15 per cent of the projected demand

during the same period.

Despite a projected growth of 10 per cent for IT/ITES 

and the BPO sector in India during 2010, demand for

real estate space is only expected by end of 2010.
During 2011-2012, with better growth projections 

of IT/ITES sector, demand for office space in these 

micro markets is likely to increase.