Indian Real Estate Outlook and Regulatory Policies

Indian Real Estate: An Outlook on Industry Trends and Regulatory Policies

� On Point • Indian Real Estate: An Outlook on Industry Trends and Regularity Policies On Point • Indian Real Estate: An Outlook on Industry Trends and Regularity Policies �

ForewordGlobal meltdown, which led to changes in global economies, has paved its way. While global economies are yet to find their way to stability, the Indian economy has started its journey for growth. This growth is primarily attributable to proactive steps taken by the Government.

As India gears itself to the growth path, the importance of real estate sector becomes an area of utmost importance. Rapid urbanization and growing business demands are some of the important factors, which are expected to drive real estate demand in the nation.

Confederation of Real Estate Developers Association of India (CREDAI) is a premier real estate organisation of more than 6000 organised private sector developers and works closely with several

Central and State Government bodies. CREDAI also supports the Government in its policies and programs.

Through this whitepaper, we have brought to the fore prevailing real estate scenario with an outlook on �011. We have also brought to the light various tax and regulatory aspects under the changing tax regime.

We at CREDAI acknowledge the contribution of Jones Lang LaSalle (JLL) for the chapters on Indian real estate sector scenario and the future outlook. We acknowledge also the contribution of KPMG for the chapters on tax and regulatory aspects relevant for the sector.

Sincerely,

Kumar Gera Santosh Rungta Chairman, CREDAI President, CREDAI President, CREDAI

Indian Real Estate - On a Comfortable GroundIt is a comfortable feeling to know that you stand on your own ground. Land is about the only thing that can’t fly away. ANTHONY TROLLOPE, The Last Chronicle of Barset

After one and a half years of gradual consolidation, real estate in India has fathomed its own comfortable ground, and is poised at the right threshold to take a giant leap in years to come. While a differential pace of strengthening is evident across sectors, geographies and segments, several property market indicators point to the fact that the industry has indeed bottomed out in the current cycle. The fears of a possible double dip recovery have given way to beliefs in the sustained healthy levels, if not a rapid growth. The experience thus gained in this slowdown is invaluable and will serve real estate strategists for years to come. The various stakeholders in the entire supply chain – the material manufacturers, developers,

property consultants, occupiers, investors and policy makers, have all emerged stronger and primed than yesteryears.

And, if we have taken our lessons right, ‘caution’ and ‘diligence’ would be the keywords for the industry in the medium term. On one hand, the stakeholders can’t afford to sway on the riding waves of healthy demand, and lose the ground advantage that they have so painfully regained by adapting to the rapidly changing business environment. And on the other, the emerging opportunities should be targeted with an unmatched fervor of potential and pragmatism.

The year �011 would usher a new decade of opportunities for Indian real estate, which will be a test of sorts for its stakeholders between these two fringes of the fulcrum. And the winners would be the ones who balance caution with diligence evaluating all the potential opportunities with pragmatism.

It is a good thing to learn caution from the misfortune of others.PUBILIUS SYRUS

� On Point • Indian Real Estate: An Outlook on Industry Trends and Regularity Policies On Point • Indian Real Estate: An Outlook on Industry Trends and Regularity Policies �

Outlook: Office Real EstateThe commercial office sector entered into a phase of gradual recovery in 2010, when firms began charting their expansion plans, strategically assessing the abundant real estate options in the market. The rate of decline of property rates slowed down considerably and was recorded to be stable across most of the micro-markets by end of the year. Despite a rise in absorption levels and stabilization of rents, construction delays have resulted in the deferment of supply of office projects across Indian cities. However, upbeat over the tremendous response in the residential sector, developers are increasingly focusing their energies on execution and delivery of office space, rather than launching new ones. Outright purchases increased during the year, mostly by office occupiers who re-explored their exposure to real assets for

Source: Real Estate Intelligence Service (JLL), �Q10

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Office rents to start appreciating after mid-2011 The effect of strengthening absorption of office space in the past �-� quarters has already resulted in a stabilisation of rental and capital values in most of the markets. The period from �Q10 to �Q11 provides a strategic window of opportunity for both buying and leasing office space, when both rental and capital values are at their cyclical lows (Figure 1). Capital values typically are a leading indicator and signs of strengthening of capital values in selected micro-markets have already been witnessed.

Several markets which were dormant during �010 with respect to property rates will register an appreciation in valuations. The prime markets of Mumbai, Delhi and Bangalore are ahead in the property cycle in terms of transactional volumes and should be the first to register rental growth in 2011. However, the oversupplied suburban markets might still feel the pressure of inadequate demand levels and will be late to recover. Adequate volumes of office supply will keep hitting the markets every quarter, keeping the segment interesting for occupiers as well as investors.

Figure 1: Office Property Clock and the Strategic Window of Opportunity

the accompanying benefits.

Overall, we believe that the year �011 will be a strategic window of opportunity for occupiers and investors, when rents and capital values in most of the micro-markets would be at their cyclical bottom and remain undervalued. Several markets have already shown signs of steady revival in terms of strengthening of demand for office space as well as an increase in capital market transactions.

The year �011 should see more wealth being created across industries in India, which will trickle down as demand for real estate. We forecast the absorption of office space across the top seven cities of India to grow nearly 1.8 times from 19.6 million sq ft recorded in �009 to ��.7 million sq ft in �011.1

1 Unless mentioned, real estate figures in the report are representative of the top seven cities (by population) of India – Mumbai, NCR, Bangalore, Chennai, Kolkata, Pune and Hyderabad.

Note: 1. IT projects include STPI registered units as well as other office projects specially constructed for IT/ITES occupiers.2. IT SEZ projects include projects notified under SEZ Act, 2005.�. Size of bubble represents the total IT supply expected in various cities during �010-�01�.Source: Real Estate Intelligence Service (JLL), �Q10

Sustained traction for IT SEZ spaces The announced sunset over the STPI regulations on IT space has influenced the demand scenario for IT projects across cities. Healthy demand for IT SEZ space was already visible in the second half of 2010, post the clarification in the Union Budget. The revised Direct Tax Code, which also puts a deadline to notification to SEZs in India, will have a significant influence on office real estate in the coming years.

However, the traction for IT SEZ spaces is likely to remain during �011, as the deadline for notifying a SEZ is March �01� and operating out of the premises is March �01�. Developers, who are planning to build SEZs or have got approval for the same, should begin the construction during to satisfy the March �01� deadline for units to occupy spaces.

Among the Indian cities, Pune, Hyderabad, Chennai and Kolkata have a balanced supply of IT and IT SEZ projects. Mumbai, Bangalore and NCR-Delhi have a larger supply of IT projects and relatively fewer IT SEZ projects in pipeline (Figure �).

Figure �: IT and IT SEZ Projects Under Construction (As of �Q10)


Proposed projects to begin constructionAs of October �010, a total of 88.� million sq ft of office space is proposed in the top seven Indian cities, supplemented by 161.1 million sq ft of office space that is under construction, implying that they have broken ground but are yet to become operational (Figure �). In �009 and �010, developers focused their attention and efforts in the execution and delivery of projects that were under construction. Increased confidence in the sector will ensure that some of the proposed projects, which are lying inactive, start witnessing construction activity and get launched in the market during �011.

Despite this, the focus would remain on execution and delivery of ongoing projects.

Figure 3: Stages of Construction of Future Office Supply (As of 3Q10)

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6 On Point • Indian Real Estate: An Outlook on Industry Trends and Regularity Policies On Point • Indian Real Estate: An Outlook on Industry Trends and Regularity Policies 7


More outright purchases by occupiers as well as private equity players As of �Q10, a majority of the commercial markets in India are undervalued relative to rental decline implied by a greater decline in capital values than rental values during �Q08-�Q10. With this fundamental attribute favouring purchase of office properties, a rise in the share of outright purchases has been witnessed in the Indian market.

The share of outright purchases in total transactions has increased from being �-�% in 1H08 to 1�-1�% in �010 (Figure �). This trend is likely to continue in �011 as well, as several private equity funds as well as occupiers evaluate the buy versus lease options and look ahead towards acquisition of office space at reasonable capital values.

Figure �: Share of Sale Transactions in Total Recorded Transactions (1H08-1H10)


Retrofitting of prime locationsWith several prime central locations of the cities reeling under inadequate urban planning and outmoded architectural standards, refurbishment of office projects is expected in Indian cities. We have already witnessed instances of retrofit during the past �-� years and this is likely to continue as owners and occupiers see value in up-gradation of their real estate holdings into the investment grade category (Figure �). This will also imply an increased attention towards sustainability, as the retrofitting process would upgrade the existing high energy consuming facilities with better efficient projects.

Figure 5: Completed and Ongoing Instances of Refurbishment of Office Space at Prime Locations

Property LocationExpected Completion

HT House - Press Building KG Marg, Delhi �009Prestige Delta Richmond Road, Bangalore �010Ashoka Raghupati Chambers Begumpet, Hyderabad �010Meenakshi Technopark Kondapur, Hyderabad �010KMDA Property Sealdah, Kolkata �010Hindustan Uniliver Fort, Mumbai �011Coke Factory Shankar Market, CP, Delhi �011Avani Heights Chowringhee, Kolkata �011

Occupier focus shifting from consolidation to expansion strategiesThe year �009 and �010 witnessed several instances of consolidation� and functional decentralisation� of office spaces, as several corporations restructured their real estate portfolios (Figure 6). However, by end of the year several expansion plans are being put into place, particularly led by the IT/ITES and BFSI sectors. During the slowdown, when these two sectors were either stable or downsizing, the sunshine sectors – telecom, pharmaceuticals, semiconductors, healthcare and education were expanding.

The year �011 should witness a greater number of expansion plans getting executed by corporations riding on good business sentiments.

� Consolidated centralisation is the process of consolidating multiple offices to a single location. It is motivated by the synergy of economies of scale achieved by operating out of a single office. It helps in reducing real estate costs by merging functions and reducing shadow capacities lying idle at multiple existing locations.� Functional decentralisation is the process consolidating multiple offices or splitting a single office to multiple locations. It helps in reducing real estate costs by distributing the non-essential functions of a business to less expensive real estate locations while retaining or moving essential functions to a prime location


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City Buyer / Lessee YearLeasable / Saleable Area (sq ft)

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Hyderabad Tata Consultancy Services �010 180,�� Lease ExpansionChennai Cybernet Slash Support �010 1�8,000 Lease Consolidated CentralisationChennai Marg Constructions �010 116,800 Lease Consolidated CentralisationBangalore Citrix �010 1�7,000 Lease ExpansionBangalore Sony �010 1�0,000 Lease Consolidated CentralisationHyderabad Accenture �010 10�,000 Lease ExpansionNoida ACS �010 10�,000 Lease RelocationHyderabad Synopsis �010 61,990 Lease Consolidated CentralisationHyderabad DST �010 ��,000 Lease Consolidated CentralisationChennai Tata Teleservices �010 7�,000 Buy RelocationMumbai Ernst & Young �009 160,000 Lease Functional DecentralisationKolkata McNally Bharat �009 1��,000 Lease Consolidated CentralisationHyderabad Colruyt �009 100,000 Buy Consolidated CentralisationNoida Samsung �009 66,000 Lease Functional DecentralisationKolkata M Junction �009 6�,000 Buy Consolidated CentralisationMumbai Deutsche Bank �009 187,000 Lease Consolidated CentralisationGurgaon Capital IQ �009 �0,000 Lease RelocationMumbai ICICI Prudential �009 �1,000 Lease Functional DecentralisationMumbai Standard Chartered Bank �008 ��0,000 Buy Consolidated CentralisationBangalore Delphi �008 90,000 Lease Consolidated CentralisationBangalore LSI Logic �008 �77,000 Lease Consolidated CentralisationHyderabad Brigade �008 60,000 Buy Consolidated Centralisation


IT/ITES and BFSI would continue to account for 60-70% of office demand Nearly 60-70% of the demand for office space during the past years has been contributed by the IT/ITES and BFSI sectors (Figure 7).

IT and IT-enabled services (ITES) have been the key drivers of the demand for office space in India during the last decade. Primary reasons for India’s leadership in this sector has been the presence of a huge English speaking population, a large part of which is well educated & qualified to handle technical and professional jobs as well. India’s IT-ITES export recorded 8.�% growth during FY �009–�010. According to the Department of Information Technology, the IT-ITES export revenue is expected to reach USD 60 billion and USD 7� billion by the end of FY �010–�011 and FY �011–�01�, respectively.

The Banking, Financial Services and Insurance (BFSI) sector has also been a key contributor to the demand for office space in India. At the end of FY 2000-2001, total number of offices of scheduled commercial banks in India was 6�,919, which had increased to 80,��7 by the end of FY �009-�010. Meanwhile, the per capita credit of the scheduled commercial banks has increased from INR �,��1 in �001 to INR ��,��0 in �009 (Figure 9).

Several foreign banks (both commercial and retail) have set up shops in India over the last decade. Other financial institutions such as insurance companies and securities firms have also forayed into the Indian market and have registered rapid expansion ever since. In �009 and �010 so far, 16-��% demand for office space came from the BFSI sector (Figure 7).

More inter-city competition to build up among the IT/ITES destinationsAt the peak during mid-2008, only 38% of the operational office stock was available for leasing at less than USD 1 per sq ft per month. Post the market crash, nearly 62% of the operational office stock in India is available for leasing at less than USD 1 per sq ft per month. While the slowdown has ensured a greater affordability of office space to the occupier, it has grouped several cities into a narrow band of rents.

Since most of these markets are the IT destinations of Bangalore, Chennai, Pune, Hyderabad and Kolkata, the inter-city competition to garner demand from the sector would be paramount in coming years. The key to success would be diversifying the occupier base into other sectors such as BFSI, manufacturing, logistics, consulting services among others.

Activity Radar for 2011Mumbai would leave Bangalore behind as the city with the highest office stock by end of 2011.Gurgaon is projected to be leader in terms of demand for office space with 4 million sq ft of net absorption projected in 2011. Of this, NH-8 alone would contribute 60% of the demand.Hyderabad and Pune are the only cities with a good mix of IT and IT SEZ projects in supply.Around 10 million sq ft of office space will become operational in Gurgaon and Mumbai suburbs each during 2011, the highest among all the micro-markets.

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Outlook: Residential Real EstateThe residential sector continued its strong growth trajectory in �010, which it has been treading from the second half of �009. Residential property rates have attained the previous peaks of �008 across several markets. The year also saw an increased number of launches in the premium segment, mostly in the Mumbai market. However, sale velocities of houses have dropped by end of the year and further hardening of interest rates along with high inflationary pressure can be a dampener for residential sales in the coming quarters.


Figure 7: Major Sectors Contributing to Office Demand

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Residential property rates are likely to continue their upward trajectory, albeit at a slower pace than �010. We believe that certain locations that have witnessed rapid increments in price, will not only witness resistance to any further price rise, but also some downward pressure. We will continue to see rapid sale velocities in the affordable segment for projects which are priced at or below market averages. Likely hardening of interest rates, coupled with high inflationary pressures and rising property rates, will impact the purchasing power of home buyers in 2011, which will influence the absorption dynamics of the residential sector.


Launch of premium products to continue, albeit at a slower paceThe activity in the high-end residential segment dropped sharply during the slowdown and had hit bottom by beginning of �009, when very few premium projects were being launched. Banking on the tremendous response over residential sales in the lower capital value segment, several developers began launching premium residential projects by end of �010 (Figure 10). This was accompanied by a rise in property rates across cities. Due to the impact of rising prices, absorption rates have eventually wilted and the effect is also being reflected on the number of units being launched in the premium segment, which dropped for the first time since 4Q09.

In �011, although select developers would still launch premium projects, the rate of new supply in the segment is expected to remain range-bound in the near term. However, the premium projects are slated

Figure 10: Launch of Premium Residential Units in India (Priced at more than INR 7,�00 per sq ft)

Note: Premium projects include all residential projects priced at more than INR 7,�00 per sq ft at the time of launch. The analysis doesn’t consider the amenities offered as criteria to distinguish between a premium and mid-segment project. Source: Real Estate Intelligence Service (JLL), �Q10

Large number of launches would continue to be in the range of INR 2,000-3,000 per sq ft at the leapfrogged suburban locationsSince 1Q09, more than �0% of the units that were launched every quarter have been priced less than INR �,000 per sq ft at the time of launch (Figure 11). Apart from Mumbai and NCR-Delhi, a majority of upcoming nodes of residential growth in other cities are priced within this range. The current scenario has opened up new locations for residential development, which were otherwise unattractive to the Indian home buyer. The far flung suburban locations, where land is relatively inexpensive, have witnessed the launch of these aggressively priced projects.

This phenomenon known as ‘leapfrogging’ is not new to real estate but can have far reaching implications. Initial nodes created by leapfrogging lack in terms of social infrastructure, public services and entertainment options due to the absence of a threshold population to support these amenities. However, planned growth of infrastructure can provide tremendous impetus to residential and commercial

Figure 11: Share of Units Launched in Particular Ranges of Capital Value (INR per sq ft)


to outperform each other with displays of irrational exuberance in terms of world class architecture and unmatched amenities.

growth in these tertiary nuclei. If these projects are implemented with design capacities for a long term vision, these far flung areas could serve as alternate nodes to the city and help in decongesting the urban sprawls.

Several infrastructure initiatives are underway to connect these leapfrogged locations with city centres and already developed office locations. In 2011, residential projects priced in the range of INR �,000 – �,000 per sq ft would continue to get launched at these locations and should see increasing acceptance from the price sensitive home buyers.

Launch of Ultra Low Cost (ULC) Housing by private developers – ‘Housing for all’The ultra low cost housing (having a ticket size of less than INR 10 Lakhs), so far, has not been fully embraced at a large scale by the private real estate development players in India. However, due to the large shortfall of housing units in this particular segment, the demand for housing units by the economically weaker sections remains high and the segment is critical for increasing homeownership in India. With the Government trying to gather momentum for the category further with the theme – ‘Housing for all’, the real estate industry is expected to soon harness the massive opportunities of scale and scope at the base of the pyramid.

Several developers have already launched and built projects successfully in the segment, which should be the one to watch for during �011 (Figure 1�).

Figure 1�: Ultra Low Cost Housing by Private Developers


Developer Developments

Tata HousingShubh Griha, Boisar, Mumbai

Shubh Griha, Vasind, Mumbai

Matheran Realty Tanaji Malusare City, Karjat, Mumbai

Value and Budget Housing Corporation VBHC Vaibhava, Bangalore

Marg Constructions Maha Utsav, Seeknankuppam, Chennai

Vijay Shanti Builders Lotus Pond, Kelambakkam, Chennai

Shapoorji Pallonji SP Sukhobrishti, Rajarhat, Kolkata

HDIL Paradise City, Palghar, Mumbai

Impact on affordability will influence the price and absorption dynamicsRapidly rising real estate rates is a cause of concern for the money market regulators in India, who have increased the Cash Reserve Ratio (CRR) and repo rates in tranches during �010 to tame liquidity and inflation. As a result, major banks increased the offered housing interest rates recently. The hardening of interest rates coupled with rise in residential rates would impact the decision of the home buyer, who is now dependent on rise of income levels to offset the diminished affordability.

If residential rates increase by 10% during �Q10-1Q11 and interest rates rise by 100 bps, the affordability will reduce from 1�% to �% of the peak levels in �Q08 (Figure 1�). Eg. Residential markets were ��% more affordable in �Q09 when compared to the peak in �Q08. In �Q10, due to the rise in residential rates, they are now only 1�% more affordable when compared to the peak rates of �Q08.

Figure 1�: The Path of Residential Affordability

Note: Numbers denote change in affordability with respect to 1�% mortgage rate and 0% price correction from peak (Conditions in �Q08)Eg. Residential markets were ��% more affordable in �Q09 when compared to the peak in �Q08Mortgage rates are average home loan rates prevalent during the period.Change in income levels during the relevant time period has not been considered while studying affordability.Source: Real Estate Intelligence Service (JLL), �Q10

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1� On Point • Indian Real Estate: An Outlook on Industry Trends and Regularity Policies On Point • Indian Real Estate: An Outlook on Industry Trends and Regularity Policies 1�

The two-direction theory of price movementAverage residential capital values have increased between �0-��% across a majority of Indian cities since hitting trough during mid-�009 (Figure 1�). This rapid reversion to peak levels has been driven by a healthy absorption rate across cities during �H09 and �010. However, developers should be cautious against further aggressive increments in residential rates which would push the sector to become overvalued. Stabilisation and wilting of absorption rates have already been witnessed in certain markets. Also, significant absorption volumes in the initial wave during �009 were taken up by investors, who would be hawking an exit during �011, which will further increase the available stock in the secondary market.

The two-direction theory of price movement is likely to be seen in the sector during �011, wherein select geographies would witness a rapid increase in

Figure 1�: Quarterly Movement of Residential Capital Values

Source: Real Estate Intelligence Service (JLL), �Q10Note: The quarterly movement is the percentage change in average residential property rates, which does not denote the movement of prices in respective markets.

Sustainability to gain focus as the industry looks forward towards IGBC Green Homes standardsSustainability, which is already prominent in the commercial sector, will gain focus in the residential space as well in the coming years. Indian Green Building Council (IGBC) recently rolled out Green Homes, which is its first rating programme, exclusively for the residential sector (Figure 1�). Also, the IGBC Green Townships Rating System, a pilot version of which has been launched, should be beneficial at a larger scale of certifying residential townships.

Interestingly, the sector has witnessed sustainable construction across segments, be it value housing or premium residential towers. We expect the trend to continue in future, as buyers become aware of the benefits of green buildings and in turn developers look forward to market their products with a green certification.

Project Name Developer Location Built-up Area (sq ft)(sq ft) Rating AchievedCamelot Tata Housing Kansal-Mohali �,��9,000 Pre - Certified, GoldPalais Royale Shri Ram Infrastructure Mumbai �,�00,000 Pre - Certified, PlatinumAqua Lily Mahindra Lifespaces Chengulpet 1,�00,000 Pre - Certified, PlatinumAliens Space Station I Aliens Group Hyderabad 8��,776 Pre - Certified, PlatinumAquila Heigths Tata Housing Development Bangalore 6�0,9�0 Pre - Certified, GoldNitesh Columbus Nitesh Estates Bangalore �67,�6� Pre - Certified, GoldAugust Park Mr.Biju P.John Bangalore �08,�79 Pre - Certified, GoldNOEL Greenature NOEL Villas & Apartments Kochi ��,7�� Pre - Certified, GoldSprings Appaswamy Real Estate Limited Chennai 19�,0�8 Pre - Certified, GoldBCIL T ZED Homes BCIL Bangalore 17�,��0 PlatinumMegapolis Pegasus Properties Pune 1�9,�6� Pre - Certified, PlatinumRaisina Residency Tata Housing Gurgaon 1�0,77� Pre - Certified, GoldGreen Grace S&S Construction Limited Hyderabad 9�,90� Pre - Certified, PlatinumShem Park Yuga Homes Chennai 90,610 GoldMahindra Splendour Mahindra Lifespaces Mumbai 80,000 Pre - Certified, PlatinumKalpataru Riverside Kalpataru Developers Mumbai 68,�96 Pre - Certified, PlatinumSrishti Kalpataru Developers Mumbai 68,�96 Pre - Certified, PlatinumMahindra Chloris Mahindra Lifespaces Faridabad ��,7�� Pre - Certified, PlatinumKalpataru Hills Kalpataru Developers Thane �7,966 Pre - Certified, PlatinumMahindra Royale Mahindra Lifespaces Pune ��,990 Pre - Certified, PlatinumKalpataru Pinnacle Kalpataru Ltd Mumbai 1�,�71 Pre - Certified, PlatinumLa Residency ACC Limited Mumbai 1�,000 Pre - Certified, GoldPark Infinia Kumar Properties Pune �,6�� Pre - Certified, Platinum

Source: Indian Green Building Council (IGBC) Website, December �010

Activity Radar for 2011In Navi Mumbai, the approval of the new airport has brought forth a marked reaction on the residential space front, with several existing residential projects in Panvel witnessing appreciation in less than a week after the announcement. Several land deals are on the anvil for development of hospitality, as the sector will gather a lot of activity when the airport becomes operational. The much awaited euphoria is expected to continue as the area has tremendous potential for real estate growth.Lower Parel has become the centre for luxury residential projects in Mumbai with over USD 10 billion (INR ��,000 Crore) worth of residential projects under construction. With the location providing further opportunities for growth due to available land parcels from auctioning of sick mills, the location should be the one to watch for during �011.Noida (including Noida city, Noida-Greater Noida Expressway, Noida Extension and Greater Noida) has been the dominant leader in terms of residential launches during �010 and is expected to be the leader in �011 as well. Apart from the large scale availability of land due to opening of new sectors, the metro rail connectivity to Noida has increased the size of its residential market multifolds. However, investors should be wary of the oversupply conditions being built up in Noida due to a massive

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influx of residential supply.Although the prime areas of Gurgaon are saturated in terms of residential developments, the future growth corridors are the Golf Course Extension Road and Dwarka – Gurgaon Expressway. The National Highway-8 and Sohna Road are also witnessing considerable residential activity.In Bangalore, Hosur Road and Bellary Road have witnessed high residential activity during the past two years and are expected to remain active in the coming years. While Hosur Road connects the city to Electronic City, the Bellary Road connects to the new international airport.The southern suburbs of Chennai, including development along the Old Mahabalipuram Road and Great Southern Trunk Road should witness considerable residential activity.The north-west (Wakad, Pimple, Aundh Annexe) and south-east (NIBM Road, Hadapsar, Kondhwa) zones of Pune have seen considerable activity during the last � years and should remain active in the next year as well.Hitec City and Gachibowli in Hyderabad have yet to register any significant growth of activity and prices since 2008 due to the geo-political instability in the region. However, taking cues from other markets of India, if stability exists in other spheres, the locations should record growth in �011.

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residential rates due to improving infrastructure, while others would languish due to an already overvalued market.

Figure 1�: Existing and Upcoming Residential Projects with IGBC Green Homes Rating in India

1� On Point • Indian Real Estate: An Outlook on Industry Trends and Regularity Policies On Point • Indian Real Estate: An Outlook on Industry Trends and Regularity Policies 1�

Outlook: Retail Real EstateDespite being the worst hit during the recent slowdown, the retail property market has resurged with a marked increase in retail sentiments. In �010, retailers, both domestic and foreign, re-drafted their plans for expansion into various Indian cities. The immediate effect was felt by the increase in high street transactions as suitable space was not available in prime shopping centres. Also, this led to several shopping centre developers focusing on execution of their ongoing projects. Rents have found support at the current levels and there is low expected risk of further downslide. Hence, the corrected rents provide a suitable opportunity for retailers to execute their expansion plans. Revenue sharing models have gained more traction with developers ensuring a better mall management. The polarization of demand for certain locations was evident with select

shopping centres getting operational at high occupancies while others languish.

The year �011 will witness the completion of shopping centres across tiers of geography and segments including value, lifestyle, speciality and luxury. However, the focal point will still be value and necessity retailing in the Tier III locations which limits the expansion of lifestyle and luxury retail to Tier I and Tier II cities. While select developers would demand a higher rent for their upcoming projects, average valuations will not appreciate in a hurry. The possibilities of 100% FDI being permitted for multi-brand retailing are immense for retail real estate in India. However, due to the associated beliefs of negative effects to unorganized retail, the proposition will be tough to get accepted unanimously.

More collaborative models such as revenue sharing to emerge in the sectorIn a rigorous business environment today, collaborative competition or collabetition is the way forward for the stakeholders in the retail industry - retailers, developers, consumers and the authorities. Some of the trends that have already emerged such as revenue sharing models are a form of collabetition between the retailers and developers, where they are sharing the successes together, while minimizing the downside risk.

In the slowdown, the retailers, concerned with the real estate costs, increased their demand for renegotiating rents. Developers were initially reluctant, which led many retailers to downsize their portfolios across shopping centres in India. However, markets turned rapidly to favour tenants, and retailers renegotiated on the rents as well as demanded revenue sharing models (Figure 16). Such flexible revenue models are highly acceptable to the retailers as the risk is shared between the real estate owner and the retailer. Also, it makes the developer more accountable for generating footfalls and conversion rates in the shopping centre. For the developer, it reduces the risk of high vacancy in the shopping centre while counting on the probability of better revenues in future.

With their shopping centres under advanced stages of construction, developers eventually saw value in the proposition, and provided

Source: Industry Sources

options for sharing revenue with retailers. Several malls that became operational during the slowdown opted for a combination of minimum guarantee and revenue sharing, which ensured floor earnings for the developer. The transparency in revenue recognition is expected to enhance with better mall management practices employed in the industry. This will ensure greater confidence among developers towards innovative rental sharing arrangements with the retailers.

Figure 16: Prevalent Revenue Share Percentages across Major Retail Categories in India

CategoryRevenue share as rent (in(in percentage)

Anchor StoresHyper Market �-�Departmental Stores 7-8Vanilla StoresApparel 1�-18Footwear 1�-18Jewellery �-�.�Health and Beauty Products 10-1�Food 1�-�0Entertainment 8-10

Rents to remain stable except select prime locationsRental values expanded rapidly during �00�-�Q07, followed by a year of gradual growth. However, the effect of the global slowdown had an impact on retail sentiments in the region, which led to a rental correction of ��.�% since the peak recorded in �Q08 (Figure 17). Through �009, several retailers demanded renegotiation on rentals and preferred revenue sharing models. While the terms of revenue sharing have made the landlord accountable for generating footfalls in the mall, it rewards them by reducing the risk of near term vacancy and retaining probabilities of better revenues in the future.

Rents have found support at the current levels and there is low expected risk of further downslide. Hence, the corrected rents provide a suitable opportunity for retailers to execute their expansion plans in the region. However, rents are not expected to appreciate in a hurry, except in select prime locations, where vacancy is low and the demand for retail space is high.

Figure 17: Movement of Indian Retail Markets on the Property Clock


RENTS DECLINING

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Large number of malls slated to become operationalAt end-�Q10, NCR-Delhi and Mumbai together constitute 70% of the total retail space (contributed by shopping centres) in India, housing 1�7 of the 19� shopping centres currently operational in the country. Bangalore and Kolkata have a retail stock of �.8-�.9 million sq ft each, followed by Hyderabad, Pune and Chennai. Apart from shopping centres, high streets with standalone outlets of established brands are prevalent in all these cities.

Sixty-five shopping centres encompassing a total retail space of �� million sq ft are expected to become operational during the next five quarters between �Q10-�011 across the top seven metropolitan cities of India (Figure 18). The matured retail markets of Mumbai and NCR-Delhi, which constitute 70% of the operational stock of retail space, account for only �1%

Figure 18: Supply and Demand of Retail Space


of this new supply. This is due to increased construction activity in the Tier II markets which are relatively underserved, despite having a large potential.

New Completions Net Absorption Vacancy

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A significant portion of the medium term supply is under advanced stages of construction, and has not become operational due to controlled demand from retailers. However, as demand for quality space strengthens, this supply is expected to become operational in medium term. Over 60% of the supply expected to become operational during �Q10-�Q1� has more than half of its structure ready, which minimizes the construction risk for retailers planning to begin operations in near term (Figure 19). Those shopping centres which are being developed along with already functioning townships are expected to become operational first they have a ready residential catchment to tap into.

Figure 19: Status of Construction of Future Supply (�Q10-�Q1�)


More international retailers to venture into IndiaIn �006, Government of India allowed upto �1% Foreign Direct Investment (FDI) into single brand retailing, as a measure to liberalise the retail sector. The conditions included that the products sold should only be of a single brand, which is sold under the same brand internationally, and ‘single brand’ product-retailing would cover only products which are branded during manufacturing. In �008, the sector was further liberalized when the government permitted 100% FDI under the automatic route for wholesale or cash-and-carry trading.

Indian economy faces serious supply-side constraints, particularly in the food-related retail chains. The argument against opening of the retail sector has been that once foreign retailers open up their stores in India, it would amount to unfair competition to small domestic players. This would in turn lead to large scale exit of domestic retailers causing displacement of people employed in the

retail sector. Another argument is that given the nascent stage of the Indian organized retail, the sector should be allowed to grow and consolidate before opening it to foreign investors.

However, in July �010, the Department of Industrial Policy and Promotion (DIPP) released a discussion paper on FDI in multi-brand retailing in India. Indian government is likely to allow FDI in multi-brand retailing in the near term, albeit in a phased manner to safeguard the interests of local kirana stores and ensuring a positive impact on employment generation. The initiative for discussion by the government is a positive step towards bringing the much needed capital to the industry. Retail space in India can see significant growth of demand in the future, if the policies are indeed relaxed.

Even in the current setup, several international retailers have already ventured into partnerships with domestic retailers in the B�B cash-and-carry format or as strategic license and franchise agreements.

Retailers would continue to expand beyond Tier I into Tier II and III citiesThe retailing landscape varies significantly across Indian markets, as cities differ greatly in size, maturity and purchasing power. Retail real estate in the Tier III cities is currently dominated by traditional high streets and is located at central business precincts, transport nodes and along the major transport corridors. The retail stores are generally located on the ground and first floors of prime properties along major roads and high streets. This type of retail space does not have standardised facilities such as parking or central air conditioning.

However consumer preferences are changing the retail real estate landscape of the non-metro cities which are witnessing the development of malls and modern shopping centres. Lack of entertainment options and inconvenient retail environments in these cities have assisted the success of the first malls and shopping centres. Cities like Ahmedabad, Jaipur, Nagpur, Ludhiana, Surat, Vadodara, Aurangabad and Kochi have witnessed growth in mall development in recent years. Although large sized malls like Treasure Island (700,000 sq ft) in Indore have been successful, smaller sized malls ranging between �00,000 sq ft and �00,000 sq ft and strategically distributed across the city are more suitable for these cities.

Store sizes vary across retail categories and Tier III markets. While revenue share models are preferred by retailers, they are less prominent in non-metro cities as these markets are relatively immature and developers/property owners do not yet have substantial understanding of these models.

The Tier III cities in India are the next destinations for retailers after the Tier I and Tier II cities due to increased consumer spending and changing consumer preferences in these cities. Many retailers are exploring this opportunity and they are cautiously expanding into the non-metro cities. Retailers are remodeling their strategies to suit the non-metro cities. As real estate markets in the small cities are still largely unorganised and immature, getting suitable properties is a challenge for retailers. The properties mostly lack in quality, aesthetics and parking facilities. In such a scenario developers and operators of smaller Indian markets need to be more cognisant of the viability of their retail projects while planning, building and operating their properties to tap this demand. With the retail industry poised to grow at the rate of 9% y-o-y, the retail sector in India is again geared towards growth. However, this time the retail landscape in India is growing beyond the metro cities.

Opportunities in retail real estateSeveral urban agglomerations are being planned and developed across the Indian landscape to cater to the rapidly urbanizing population. With the growth of office and residential space in these areas, the opportunities to develop retail along with these developments are immense.

Integrated TownshipsIntegrated townships, with an appropriate mix of office, retail and residential components, are being constructed and planned across the country. These townships are either being developed at the suburban locations of existing cities or second home destinations at far-flung locations such as hill stations.

Special Investment RegionsThe state of Gujarat recently enacted the Special Investment Region (SIR) Act in �009, under which large manufacturing and trading hubs

(more than 100 square km) are being planned in the state. Complete with residential townships and industrial parks, these regions provide immense potential for retail development.

Campus TownsSeveral large educational campuses are being built which will bring together a mass of people including students, educators and support staffs.

Brownfield Redevelopment in Prime CityWith continual expansion of city limits over the years, the erstwhile mills and industrial units which were located outside the city have been engulfed in office and residential developments. As land is scarce in the city, these sick mills have become prime targets for real estate development in several urban locations of India. Brownfield redevelopment at these locations provides an opportunity for development of prime or luxury retail.

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Opportunities in Retail Segments Destination RetailingDestination retailing in India is in its nascent stage of development, primarily due to unavailability of physical infrastructure to support it. As transport infrastructure improves at urban locations, there are tremendous opportunities for destination retailing in the suburban and exurban locations. Clubbed with appropriate entertainment options such as multiplex, restaurants, gaming and even theme parks, these destinations across the globe have struck success as a tourist hotspot. Indian shopping centres are already experimenting with the concepts of experiential retailing (or experience retailing), where they want to provide lifestyle shopping experiences to the consumers.

Collabetition takes a leap of faith and enters a new paradigm with

destination retailing, where retailers and even developers come together to partner in creating recreational shopping precincts.

Luxury RetailingLuxury retailing in India is limited to few luxury shopping centres, select high street locations and five star hotels. Considering the consumer class of the country, the penetration is evidently shallow. According to the �010 World Wealth Report by Capgemini, the HNWI’s population in India was over 1�6,700 in �009, recording a �0.9% annual growth during the year. Several wealthy consumers travel abroad for their luxury purchases, which exposes the lack of suitable luxury destinations in the country. As of �010, there are only three shopping centres, which can be termed as luxury – DLF Emporio in Delhi, UB City in Bangalore and Palladium (High Street Phoenix) in Mumbai.

An Outlook on Real Estate Regulatory Policies in IndiaForeign Direct Investment and Other Regulatory Policies1. Foreign Direct InvestmentHistorically, Foreign Direct Investments and Foreign Exchange flows have been regulated by Governments world over to achieve their objectives and priorities, India being no different in this regard. The Foreign Direct Investment (FDI) in Real Estate Development being a sensitive sector was restricted until �00�.

As part of the liberalization process which began in 1991 to improve the growth and foreign exchange reserves position, the Government opened up the sector to FDI in March 2005 by issuing the first Press Note � of �00�.

There are four different routes for foreign investors for making investment in the Real Estate Sector.

Investment by all category of investors under FDI Route;Investment by Foreign Institutional Investors (FIIs);Investment by Non-Resident Indians (NRIs); andInvestment by Foreign Venture Capital Company/Fund

Presently, FDI upto 100% for the first category is permitted under the automatic route in townships, housing, built-up infrastructure and construction development projects (which would include, but not restricted to housing, commercial premises, hotel, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure). No prior approval is required for FDI subject to fulfillment of the following conditions:

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Nature of Project Minimum Development AreaServiced housing plots 10 hectares (�� acres)Construction development projects Built up area of �0,000 sq. mts.Combination of the above two Any one of the above two conditions

Condition Requirements

Minimum capital infusionWholly Owned Subsidiary -USD 10 mn / Joint Venture - USD � mn

Minimum Initial Investment Brought in within 6 months of commencement of business

Repatriation of Investments After 3 years of complete capitalization (clarification to Press Note � / �00�)Early remittance permitted with FIPB approval

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Minimum Area Development Norms

Minimum Capitalization Norms

Other ConditionsDevelopment project to conform with local development rules and regulationsMinimum �0% of project must be developed within � yearsSale of undeveloped plots would not be permitted

In case where the investment does not meet the aforesaid criteria, then the investor can approach the Government for their specific proposal.

The intent of the Government is loud and clear that investment for trading in Real Estate is strictly prohibited and only investment for development purposes is permitted. Further, the investment is permitted only in Green field projects (i.e. new projects) and not in Brown field projects (i.e. existing projects).

As the investment started flowing in the country and innovative investment structures emerged, various interpretation and practical issues arose which created controversies and unintended results. In order to clarify some of the interpretation issues, the Government issued the following clarifications vide Press Release dated 30 September �010:

Share premium should be included while calculating Minimum Capitalization.The entire amount brought in as FDI is regarded as original investment. The lock-in period of three years will be applied from the date of receipt of each installment / trenche of FDI or from the date of completion of minimum capitalization, whichever is later.

However, the ambiguity with respect to, inter-alia, the following aspects still exists:

Whether investment is permissible in existing company proposing to engage in Real Estate development? What is meant by “commencement of business”?Whether built-up area includes parking space / other amenities for computing minimum threshold?Whether FII investment is permissible in the Real Estate Sector without compliance with the FDI policy?

Since the opening up of window for investment, the sector has attracted total investment of USD� 8.90 billion and it is expected to reach a size of USD� 180 billion by �0�0, now the Real Estate Sector is witnessing a next round of BUZZ and the Government should proactively clarify most of the issues and develop an investor friendly environment to attract significant investments and to avoid controversy / aggressive interpretations.

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Investment under this route is permitted via equity shares, preference shares and fully and compulsorily convertible preference shares/debentures. Investment through any other instruments, say bonds, debentures, etc is regulated by the External Commercial Borrowings Policy of the RBI.

Apart from the FDI route discussed above, NRI route for making investment in challenging projects has been explored in the past. Similarly, Foreign Venture Capital Investors route is also in vogue with respect to planned investments by overseas Realty Funds and Pension Funds into the Indian opportunities.

In order to provide more liquidity to the sector and also permit retail investors to reap the benefits of Real Estate boom, the Government released drafts of Real Estate Mutual Fund (REMF) Regulations and Real Estate Investment Trust (REIT) Regulations. REIT is a collective alternate investment scheme introduced by the Government and is similar to mutual funds. REIT is a trust created by the trustee company and managed by the Asset Management Company (REIMC). REIT and REIMC are required to be registered with SEBI. Detailed regulations have been prescribed by the SEBI for the registration of REIT and REIMC, functioning of these entities, scheme criteria, listing of scheme, valuation criteria, investment and dividend policy, etc. The present FDI policy does not enable foreign investments into REIT and the Government is evaluating allowing of investments into REIT. Further, there is no clarity on tax implications of REIT as well as the investors which is one of the major bottlenecks which Government needs to work around. SEBI introduced REMF regime in mid �008 by amending the existing Mutual Fund Regulations. REMF is effectively a Real Estate dedicated close ended mutual fund. The draft REMF regulation issued by SEBI prescribes various aspects such as eligibility, registration, investment and dividend policy, valuation guidelines, etc. The present FDI guidelines could permit foreign investments and the tax regime for the mutual fund could equally apply to REMF. These could provide REMF an edge over REIT. Due to certain practical difficulties, these regulations are under consideration of the Government for further refinement.

Construction of Special Economic Zone (SEZ) The Government has also allowed 100% FDI under automatic route in development of SEZ, without applicability of Press Note � of �00� conditions. However, this relaxation is subject to the provisions of SEZ Act �00� and the SEZ Policy of the Department of Commerce.

� Source: Fact sheet on Foreign Direct Investment from August 1991 to September �010, Department of Industrial Policy and Promotion� Source: www.ibef.org

�0 On Point • Indian Real Estate: An Outlook on Industry Trends and Regularity Policies On Point • Indian Real Estate: An Outlook on Industry Trends and Regularity Policies �1

External Commercial Borrowings (ECB) Policy The ECB is restricted for the Real Estate Sector. However, ECB under the approval route is permissible to SEZ Developers for providing the specified infrastructure facilities. Similar relaxations upto �1 December �010 have been provided for integrated township projects, as defined and subject to fulfillment of specified conditions.

2. Other Exchange Control RegulationsIn order to promote free flow of foreign exchange and trade, the Reserve Bank of India (RBI) issues and monitors exchange control regulations. Some of the following positive steps taken by the RBI have benefited Real Estate Sector as well.

Royalty and technical collaboration fees could be remitted without any restrictions. Dividend and interest income is freely repatriable under the Current Account transaction regulations.

3. Model Real Estate (Regulation of Development) Act The necessity for a regulatory body to regulate the Real Estate Sector, being dominated by unorganized and non-corporate players has been echoed for the long time. Accordingly, in order to bring the transparency and promote planned and healthy Real Estate development of colonies and apartments, the Ministry of Housing & Urban Poverty Alleviation has released a draft Model Real Estate (Regulation of Development) Act. The respective State Governments are expected to enact local laws on the same lines, to regulate the sector.The salient features of the Model Act (which is yet to be enacted) are as follows:

Establishment of a Real Estate Regulatory Authority (RERA) and Real Estate Appellate Tribunal (REAT);Compulsory registration of specified Real Estate projects;

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Build to Sell Build to Lease The income would be regarded as Income from Business Income would be taxed on a net income basis at �0 per cent (excluding surcharge and cess).All business expenses generally allowable as a tax deduction if….

- incurred after ‘set up’ of business;- revenue in nature;- incurred wholly and exclusively for business purposes;- after withholding appropriate tax (if any) and paid to the exchequer;- reasonable and at an arm’s length price if payable to related party

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Income from leasing of properties could be taxed as a ‘Business Income’ or ‘Income from House Property’.Generally, lease rentals earned from exploitation of commercially complex property is taxed as income from business. Whereas, pure lease rentals earned could be taxed as income from house property. Income earned from provision of services undertaken in a systematic and regular basis should ideally be taxed as income from business. The tax treatment of income from business is already discussed. The tax treatment of income from house property would be subject to following deductions:

- Municipal / local taxes and cess levied on property;- �0 per cent of lease rentals (net of municipal taxes); and - Interest on funds borrowed.

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Furnishing of bank guarantee (�% of the estimated costs of development works) to the local authority;Make available all information and documents relating to the property;Upload on the website all project details and the names of property dealers or brokers dealing in the project;Enter into a registered agreement for sale with the allottee before accepting any deposit or advance.

Income-tax Provisions and the Impact of Direct Tax Code1. Income-tax ProvisionsMultiple Taxation LevyReal Estate Sector is subject to multiple taxes such as corporate tax (under the Income-tax Act, 1961 (the Act)), service tax, VAT, stamp duty, etc. Corporate tax for an Indian company is �0% (plus applicable surcharge and cess); whereas the rate for the foreign company is �0% (plus applicable surcharge and cess). In certain situations Minimum Alternate Tax (MAT) of 18% (plus applicable surcharge and cess) is leviable where corporate tax liability is lower than the MAT liability. Dividend Distribution Tax (DDT) of 16.99�% is payable on payment of dividend. The reintroduction of wealth tax on some of the assets also increases tax cost though marginally.Characterization of Income Broadly, income of the Real Estate Sector can be broken into two baskets depending upon the business model i.e. ‘Build to Sell’ or ‘Build to Lease’. The most important tax aspect which needs to be considered is the characterization of income, which would depend upon the precise business model followed and facts of each case. Given below is the general tax treatment:

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Another important aspect for Build to Sell model (mainly followed for residential and commercial projects) is the accrual and taxability of income as the project progresses. A question often arises whether the income should be accounted and offered to tax on completion of the project or it should be done as the project progresses on percentage completion method. The recent accounting guidance notes issued by the Institute of Chartered Accountants of India and the judicial precedents of various Indian Courts, indicates that, by far, income from such projects should ideally be accounted and offered to tax following percentage of completion method.

Income-tax Incentives for the Developers Indian Government has provided various Income-tax incentives to the Developers depending upon the nature of project developed by the Developer. The various Income-tax incentives are as under:

1) Development of Affordable Housing Project (including Slum Redevelopment and Rehabilitation Projects) approved before 31 March 2008: Profit linked incentive is available to the Developer of a qualifying housing project under section 80-IB(10) of the Act. The incentive is 100% tax deduction of the profit earned from the business of developing and building a housing project subject to satisfaction of following conditions:

Project should be approved by a local authority and the same should be completed within the prescribed time period from the date of such approval (five years where the Project is approved between 1 April �00� to �1 March �008) (relaxation from this condition to Slum Redevelopment or Rehabilitation Projects is provided).Size of the project plot – minimum area of one acre (relaxation from this condition to Slum Redevelopment or Rehabilitation Projects is provided)Maximum built-up area of constructed residential unit - 1000 sq ft if situated in or within �� kms of Mumbai/Delhi, otherwise 1�00 sq ft.Built-up area of the shop or commercial establishments should not exceed �,000 sq. ft. or �% of the aggregate built-up area of the housing project.Maximum one residential unit in the housing project can be allotted to a person other than individual.Not more than one residential unit should be allotted to an individual or to his spouse or minor children or the HUF in which the individual is a Karta or any other person representing such individual, his spouse or the HUF.

While, the incentive is available, a Developer is confronted with

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various issues. Some of the frequently faced tax issues are: Eligibility to deduction, in case the construction gets delayed for reasons beyond control of Developer?Adjustment for actual losses in the year of completion of project where percentage of completion method is applied by the Tax Authorities?Eligibility to deduction in case where project is executed on adjacent pieces of land below 1 acre?Whether ownership of land on which the housing project is a pre-requisite for claiming deduction?Whether income from sale of FSI from the eligible housing project is eligible for claiming deduction?Meaning of “Built-up Area” - whether area of common amenities, stair cases, lobby, parking space/garages (not being shops or commercial establishments) to be included?

2) Slum Redevelopment or Rehabilitation projects notified by the Central Board of Direct TaxesIn order to promote Slum Redevelopment or Rehabilitation Scheme in India, the Finance Act, 2010 amended definition of ‘specified business’ for the purpose of section ��AD to include the developing and building a housing project commenced on or after 1 April �010 for Slum Redevelopment / Rehabilitation. Under the amended provisions, Developers are eligible for claiming deduction of 100% of the capital expenditure in the previous year in which the same is incurred. Further, expenses incurred before commencement of operations are allowable as a deduction in the first year of operation. It is pertinent to note that no deduction is allowable towards expenses incurred for acquisition of land or goodwill or financial instruments.

The section, in effect provides accelerated depreciation. Therefore, a question arises as to whether the section really provides an incentive. Further, the question becomes larger when it surmises that a Developer paying taxes under the provision of the MAT, may have to pay taxes on book profit calculated after claiming normal book depreciation though accelerated depreciation is allowed under section ��AD.

3) Development of Special Economic Zones (SEZs) An SEZ Developer (including a Co-developer) is also eligible to profit linked incentives under the provisions of the Act. Tax incentive in the form of 100% deduction of the profits for the period of ten consecutive assessment years out of fifteen years is available to a Developer of SEZ. The deduction is available from the assessment year in which the SEZ is notified by the Central Government. Further, the SEZ Developer also enjoys following exemption:

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�� On Point • Indian Real Estate: An Outlook on Industry Trends and Regularity Policies On Point • Indian Real Estate: An Outlook on Industry Trends and Regularity Policies ��

i. Exemption from the levy of MAT; and ii. Exemption from levy of DDT.

However, one is confronted with, inter-alia, the following issues which are worth considering:

The nature of income which is regarded as “derived from” and hence eligible for the tax deduction?Whether the income arising from operating and maintaining is eligible for claiming tax deduction?Whether the tax deduction period commences from the date of SEZ notification even for a Co-developer which has been approved after the date of SEZ notification? The quantum of DDT exemption when the SEZ Developer is engaged in multiple business activities?

Tax issues faced by the sector The face of Real Estate Sector has been changing as the sector is getting more organised and corporatized. With these changes, the tax challenges will also undergo change. Some of the tax issues that still haunt the sector are highlighted below, which needs to be addressed to maximise the tax savings and minimise litigations.

Point of taxation and the method of calculation of taxable consideration arising on transfer of Development Rights?Whether consideration on transfer of Development Rights in land is to be considered as per stamp valuation authorities or actual consideration?Whether payment of protection money is allowable as business expenditure?Whether payment made to existing tenant or occupier of land to induce him to vacate and hand over vacant possession is capital expenditure or revenue expenditure?Whether interest and expenses incurred on issue of fully / partly convertible debentures are capital in nature or revenue in nature?

2. Direct Taxes Code Bill, 2010Direct Taxes Code Bill, �010 (DTC) has attracted / continues to attract the attention of the Government and various industries considering its superseding effect over the �0 year old Income-tax law in India. It is primarily released with the objective of consolidating and interpreting all the provisions of Income-tax law in the more simplified manner and overcoming the litigation on various issues which has significantly delayed the legislative implementation in the country.

While the introduction of General Anti Avoidance Rules (GAAR),

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Controlled Foreign Company (CFC), new Residency Test, etc. has general impact on all sectors of the economy, the key provisions which would directly impact the Real Estate Sector are as under:

Lease Rental Income would be taxed as Income from House Property other than lease rentals earned by SEZ Developers (which would be taxed as Business Income);SEZ Developers would be eligible for claiming the tax incentives as under:For SEZ notified on or before 31st March 2012

Profit based deduction available under section 80-IAB of the Act would be grandfathered for the balance unexpired period out of the prescribed 10 years. The methodology prescribed under Schedule 1� of the DTC should be applied while computing profits eligible for deduction. However, the capital expenditure as well as expenditure incurred prior to commencement of business shall not be allowed

For the SEZ notified on or after 1 April 2012Paradigm shift from profit based deduction to investment based deduction Capital expenditure and expenditure incurred prior to commencement of business would be allowed as a business expenditure, except expenditure incurred on acquisition of any land including long term lease, goodwill or financial instrumentIn effect an accelerated depreciation prescribed as against a profit based incentive and hence a question arises, is it really an incentive.

Minimum Alternate Tax and Dividend Distribution Tax exemptions shall not be availableCurrent incentives available for an approved housing project under a scheme for slum re-development or rehabilitation under section ��AD continued in the same form in the DTCProfit based deduction available under section 80-IB(10) of the Act grandfathered.

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Indirect Tax Provisions and Impact of GST1. Plethora of Indirect-taxes India has a combination of a federal as well as a decentralized system of levying indirect taxes. The Central Government of India, the Governments of each individual State and the local authorities are empowered to impose various indirect taxes. The key indirect taxes include:A. The Central taxes, which are levied by the Central Government, such as:

Customs DutyCENVAT (or excise duty)Service TaxCentral Sales Tax

Research and Development Cess.

B. The State taxes, which are levied by the respective State Governments, such as:

Value Added Tax (VAT)Entry TaxOctroi (levied and collected by Municipal Authorities - presently imposed only in Maharashtra)Stamp Duty

Other Local Taxes

C. The Government of India is planning to introduce a single uniform Goods and Services Tax (GST) in the financial year 2011-12 which would subsume many of the above taxes.

A typical Real Estate development involves three key elements – land, material and labour. The indirect taxes authorities in India have sought to levy indirect taxes on each such element, resulting in not only multiplicity of taxes, but also in double taxation. The key indirect taxes relevant therefore are:

Stamp Duty – Stamp duty is payable on instruments such as an affidavit, an agreement, an indemnity bond, etc., and not on transactions. The stamp duty rate varies from State to State and is paid on the basis of value of property at the time of execution of the underlying instrument.VAT – this is a form of transaction tax applicable on sale transaction of goods within the same State. The rate of VAT is generally �% or 1�.�%, depending upon the nature of goods. It is to be noted that VAT is applicable on ‘moveable property’, and not on ‘immovable property’. It is also to be noted that the State VAT legislations also empowers the State Government to levy VAT on the goods/ materials, property in which is transferred during the course of execution of a ‘works contract’, even though the activity

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of such ‘works contract’ may result into an ‘immoveable property’. A question therefore arises is whether a Developer who sells a flat to a potential customer is engaged in the transaction of a ‘sale of an immovable property’ or in a transaction involving ‘works contract’. This issue has been a subject matter of intense litigation in the past. A landmark judgment was delivered by the Supreme Court in the case of K Raheja Constructions, in which the Apex Court held that if the agreement is entered into after the unit is already constructed, then there would be no works contract, however, if agreement is entered into before construction is complete, then it would be works contract. The key principle that seems to emerge out of the said decision (based on the fact pattern involved in the Raheja judgment) is that in a model where there are two different agreements between the Real Estate Developer and the customer (one for sale of undivided interest in land and the other for undertaking in future, the construction of the structure on such parcel of land), the second agreement can be regarded as a works contract, and VAT would be payable on the materials sold by the Developer during the execution of such works contract. However, while the Raheja judgment was delivered in the context of the contracting parties entering into two different agreements, the State Governments are currently pursuing the levy of VAT even in cases where there is only one agreement for sale of flat. It may be noted that this decision has subsequently been referred to the larger bench of the Supreme Court and therefore, the issue of applicability of VAT on such transaction does not seem to have settled. Service tax – this is a form of transaction tax that is applicable @ 10.�% on a service transaction. While the State Government

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levies VAT on the material element involved in the Real Estate transaction, the Central Government levies service tax on the labour element involved. In the past, there has been much of a debate on whether Builders and Developers are liable to service tax. While various circulars and clarifications were issued by the service tax department, in a circular dated �9 January �009, held that the construction service provided by the Builder till the execution of the sale deed is in the nature of ‘self-service’ and would not attract service tax. However, in the Union Budget �010 certain amendment in the taxable service categories of ‘Construction of Complex Services’ and ‘Commercial or Industrial Construction Service’ was made. The effect of such amendment is that unless the entire consideration for the property is paid after the completion of construction, the activity of construction would be deemed to be a taxable service, and hence, liable to service tax (subject to some abatement). Real Estate associations have vehemently opposed the service tax imposition on Real Estate and writs have also been filed in various high courts against the levy. In fact, apart from the levy of service tax on Real Estate transactions, the service tax law also prescribes for levy of service tax on rentals arising out of commercial leasing of immovable property, which again is a subject matter of intense litigation.

It is therefore apparent that the taxability of Real Estate transactions has been a subject matter of intense dispute and litigation. To add to the confusion, the regulations governing Real Estate developments differs from State to State (e.g. provision of completion certificates does not exist in many places, which leads to the question as to how would the linking of service tax with completion certificates happen in such places). Given the fact that these transaction taxes add to the overall cost of a Real Estate property in the hands of potential buyers, the industry would be waiting with a bated breath for these controversies to be resolved.

Irrespective of the aforesaid legal controversies, given the current tax regime, a Real Estate Developer needs to evaluate various factors to minimize the indirect tax outflow.

2. Introduction of GST Regime and its Impact on the Real Estate Sector The implementation of GST is expected to have a significant impact on most industry verticals, and Real Estate is no exception.

The first discussion paper on GST released by the Empowered

Committee was silent on the aspect of applicability or otherwise of GST on Real Estate transactions. However, in the thirteenth finance commission’s report, it was suggested that Real Estate Sector should be integrated into the GST framework by subsuming the stamp duty to facilitate input credit and eliminate cascading effect. It was therefore suggested in the report that

GST should apply for all newly constructed property (both residential and commercial) and credit should be allowed in respect of input tax paid on raw materials used in construction.

All secondary market transactions in immovable properties (whether constructed before or after the introduction of GST) should be liable to GST. If the property is constructed after the introduction of GST, the GST should be levied on the resale value and input tax credit should be allowed in respect of the GST paid upon purchase of the property after making adjustment for inflation. If the property has been acquired by the seller before the introduction of GST, the GST should be levied on the difference between the sale price and the cost of acquisition and improvements thereto and no input tax credit should be allowed.

Rental charges received (excluding imputed rental values) in respect of leasing of immovable property should be charged to GST. No input tax credit should be allowed in respect of tax paid on construction or acquisition of the property or tax paid on improvements thereto. However, input tax credit should be allowed in respect of input tax paid on goods and services used for maintenance.

The final decision with respect to this sector is yet to be taken. While one school of thought is that the Real Estate transactions involving sale / transfer of Real Estate should be kept outside the GST ambit (in which case, such transactions may continue to attract Stamp Duty), the other school of thought is that Real Estate transactions should be brought within the purview of GST, to ensure that the GST chain is not broken, and the Developers / Builders get a set-off / credit of taxes paid on construction material and services.

Internationally, in many countries, Real Estate transactions have been given a preferential treatment under the GST / VAT regimes. For instance, in Australia, supply of Real Estate property is subject to “going concern” (which is equivalent to zero rating) concession, on fulfillment of prescribed conditions. In United Kingdom supplies of private residences are zero rated. In France, supply of immovable property is generally exempt from VAT.

Therefore, given the peculiar transaction dynamics in the Real Estate Sector, one would believe that this sector should merit a special treatment under the GST regime.

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Transition from Indian GAAP to IFRS1. Background and ObjectiveIndian Inc. has been on an expansion mode with Indian companies wanting to increase their global footprint and looking to tap the overseas market for raising funds / listings overseas. This has lead to increased challenges for complying with the regulatory framework of overseas countries and overseas stock exchanges and hence the need for a solo set of financial information reporting standards.

Globally, the ‘International Financial Reporting Standards (IFRS)’ [developed by the International Accounting Standard Board (IASB)] are recognized / in the process of being recognized by most of the countries / stock exchanges. Adoption of IFRS would reduce the hassles of Indian entities arising from the necessity of preparing financial statements / reports under multiple reporting standards or making adjustments, etc. Further, it would also enable the Indian entities and intellects to compare Indian financial statements with the overseas companies and move ahead.

Accordingly, the Indian Government has proposed to comply with the IFRS provisions by �011. Further, the Institute of Chartered Accountants of India (ICAI) has announced convergence by issuing IFRS equivalent Indian Accounting Standards with only limited changes as per the following implementation schedule:

Timeline for achieveing convergencePhase I: Transition date 1 April, �011

NIFTY �0SENSEX �0Companies whose shares or other secutities listed on stock exchanges outside IndiaCompanies (listed or unlisted) with net worth in excess of INR 1,000 crores

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Phase II: Transition date 1 April, �01�Companies (listed or unlisted) with net worth in excess of INR �00 crores but less than INR 1,000 crores

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Phase III: Transition date 1 April, �01�Listed companies with net worth less than INR �00 crores•

2. Impact on Taxability of Real Estate Sector The convergence with IFRS would have far-reaching implications for Real Estate, construction and infrastructure companies. It will impact the basis for recognizing revenues, valuation and accounting for assets, classification between equity and liability, etc.

Although it is a settled principle of tax law that accounting treatment is not determinative of taxable income as per the Act, it is still desirable that the differences between book profits and tax profits are minimized to ensure harmony and reduce tax litigation. The objective is to highlight certain key challenges to the Real Estate Sector that are likely to emerge from Indian tax perspective as a result of the transition to IFRS, owing to broad areas of differences between Indian Generally Accepted Accounting Principles (GAAP) and IFRS:

1. At the time of transition from Indian GAAP to IFRS, there would be a need to recast the balance sheet which is likely to result in a gain/ loss as on the transition date. As per IFRS, such gain/ loss should be adjusted through retained earnings or to a more appropriate component of equity. Certain tax issues that may arise include:a) Any increase in book value of a fixed asset would lead to higher book depreciation resulting in reduced MAT liability and vice versa.b) Impact on determination of ‘net worth’ for the purpose of computing capital gains arising on slump sale of such business in future.c) Any adjustment to the retained earnings would impact deemed dividend applicability.

�6 On Point • Indian Real Estate: An Outlook on Industry Trends and Regularity Policies On Point • Indian Real Estate: An Outlook on Industry Trends and Regularity Policies �7

Amit Mookim, Director, Strategic and Commercial Intelligence (SCI) [email protected] +91 �� 090�1�1

Amit has more than 10 years of management consulting experience across diverse industry and consulting disciplines in India and the USA. Based out of Mumbai, his focus industries include real estate, hospitality, etc. He has been instrumental helping set up the Commercial Due Diligence and Market Entry practice at KPMG India. Amit has advised several Indian and multinational clients and Private Equity funds in their strategy towards setting up new businesses such as hospitality assets, resorts, special economic zones, retail, townships and IT parks. Amit holds a Masters in Business Administration (MBA) from Faculty of Management Studies (FMS) and Bachelors in Economics from University of Kolkata.

Authors

Abhishek Kiran Gupta, Head of Research & [email protected]+91 �� 61�1 6�00 Abhishek Kiran Gupta leads the Jones Lang LaSalle India Research team and is based in Mumbai. He manages research operations on a Pan-India level and is responsible for the team’s outputs, including research reports such as topical white papers, property market digests and bespoke research projects based on specific client requirements. Prior to joining Jones Lang LaSalle, he had seven years of experience in market research, business analysis and market strategy consulting, servicing diversified industries including pharmaceutical, software publishing and insurance.

Himadri Mayank, Manager, Research & [email protected]+91 �� 61�1 6�00

Himadri Mayank joined Jones Lang LaSalle India in July �008 and is responsible for managing the quarterly research offering – Real Estate Intelligence Service (REIS), which tracks, analyses and forecasts trends in office, retail and residential property sectors for Indian cities. Based out of Mumbai, he also contributes towards regional and local research publications covering economy, sector analyses, market forecasts and investment strategies.He holds a bachelor’s degree in Architecture from Indian Institute of Technology Kharagpur and has three years of experience in the field of real estate. He is pursuing the Chartered Financial Analyst (CFA) program offered by CFA Institute, Charlottesville and is a �011 Level III CFA candidate.

Amit Mookim, Director, Strategic and Commercial Intelligence (SCI) [email protected] +91 �� 090�1�1

Amit has more than 10 years of management consulting experience across diverse industry and consulting disciplines in India and the USA. Based out of Mumbai, his focus industries include real estate, hospitality, etc. He has been instrumental helping set up the Commercial Due Diligence and Market Entry practice at KPMG India. Amit has advised several Indian and multinational clients and Private Equity funds in their strategy towards setting up new businesses such as hospitality assets, resorts, special economic zones, retail, townships and IT parks. Amit holds a Masters in Business Administration (MBA) from Faculty of Management Studies (FMS) and Bachelors in Economics from University of Kolkata.

Rajiv Parekh, Assistant Manager, Research, Analytics & Knowledge (RAK) [email protected] +91 �� 090��77

Rajiv Parekh joined KPMG India in April �007 and is responsible for developing real estate related thought leaderships. Based out of Mumbai, he also contributes towards regional and local research publications covering economy and sector analyses. He is a qualified Chartered Financial Analyst (CFA) and holds bachelors degree in management studies from University of Mumbai.

�. Further, there would be numerous instances where under the IFRS, entry need to be routed through the profit and loss account as compared to the Indian GAAP. Thus, there is a need for clarification whether such debit / credit entry to the profit and loss account would be taxable or allowable as revenue income / expenditure or the same needs to be capitalized for claiming depreciation thereon. Similarly, the treatment required to be given in case of notional losses (arising from the suggested accounting treatment under the IFRS) also needs to be clarified. Further, the impact of such credit / debit entries in the profit and loss account on the MAT liability also needs to be clarified. Few such instances are mentioned hereinunder:

Under IFRS, investment properties (land or building, or both) have to be valued at fair value (as against recorded at cost under the Indian GAAP) and resultant gain / loss needs to be routed through the profit and loss account. Further, no depreciation could be claimed under IFRS on such fair valued amount. IFRS mandates component accounting (as against capitalizing assets based on the broad category under the Indian GAAP) which may require significant technical assessment and from a financial reporting standpoint, each component is required to be depreciated separately based on its useful life. Under IFRS, payment on account of business combinations and acquisitions are not capitalized (as required under the Indian GAAP) but recorded through the profit and loss account. Under IFRS, premium on redemption of financial instruments (say preference shares and debentures) and all associated costs are required to be recorded through the profit and loss account over the tenure of the instrument as against adjustment through the share premium account allowed under the Indian GAAP.

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Under IFRS, recording of financial instruments is based on their substance instead of form (as against recording based on form under the Indian GAAP). Therefore, mandatory redeemable preference shares on which fixed dividend is payable can be treated as liability and accordingly dividend would be recorded as an interest charge to the profit and loss account. Under IFRS, an entity is required to classify a non-current asset (or disposal group) as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. Once this is done, the asset is (a) not depreciated; and (b) is measured at the lower of its carrying amount and its fair value less cost to sell with any loss being recognized in the profit and loss account.

Summing up The Government’s vision of providing housing to all is a noble one as it would help overall economic development of the country. This vision could be achieved provided the Government provides the business friendly regulatory framework and also provides desired fiscal as well as tax incentives to various stakeholders who contribute significantly in the development of the sector. Presently, the sector is subject to multiple levies of taxation and the overall tax cost for the Developer ranges between �7% to �0%. The Government should consider simplifying the tax laws and minimizing the overall tax cost for the sector so that housing can become affordable for the common man leaving decent “take home” for the Developers.

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About Jones Lang LaSalleJones Lang LaSalle (NYSE:JLL) is a financial and professional services firm specializing in real estate. The firm offers integrated services delivered by expert teams worldwide to clients seeking increased value by owning, occupying or investing in real estate. With �009 global revenue of USD �.� billion, Jones Lang LaSalle serves clients in 60 countries from 750 locations worldwide, including 180 corporate offices. The firm is an industry leader in property and corporate facility management services, with a portfolio of approximately 1.6 billion square feet worldwide. LaSalle Investment Management, the company’s investment management business, is one of the world’s largest and most diverse in real estate with approximately USD �0 billion of assets under management. For further information, please visit our website, www.joneslanglasalle.com.Jones Lang LaSalle has over 50 years of experience in Asia Pacific, with over 17,800 employees operating in 76 offices in 13 countries across the region. About Jones Lang LaSalle IndiaJones Lang LaSalle is India’s premiere and largest professional services firm specializing in real estate. With an extensive geographic footprint across ten cities (Delhi, Mumbai, Bangalore, Pune, Chennai, Hyderabad, Kolkata, Kochi, Chandigarh and Coimbatore) and a staff strength of over 3500, the firm provides investors, developers, local corporates and multinational companies with a comprehensive range of services including research, consultancy, transactions, project and development services, integrated facility management, property and asset management, capital markets, residential, hotels and retail advisory. For further information, please visit www.joneslanglasalle.co.in About CREDAIThe Confederation of Real Estate Developers’ Associations of India (CREDAI), an apex Real Estate Developers’ body, has congregated over 6,000 Developers all across India under a single umbrella and has linked them with government and customers through relentless initiatives and activities.The major objectives of CREDAI are as enlisted below -

To perpetuate an ethical code of conduct, which is self – imposed & mandatory for all the member developers / builders of CREDAI to maintain integrity & transparency in the profession of Real Estate Development. To represent the developers/builders across India by communicating & representing with the government authorities for the formulation of proactive policies for this profession.To encourage & support the developments/builders to increase their efficiency in the development /construction activities by introducing the latest technologies.To disseminate the data, statistics & other related information in this profession of real estate development.To promote the interest of construction workers & to educate them on the best practices.To encourage research in the profession of construction & real estate developmentTo facilitate easy housing finance availability to the property purchases by working in close coordination with the leading house finance institutions & banks.

CREDAI helps the Developer community to Facilitate, Promote, Build, Serve and Prosper.About KPMG in IndiaKPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 146 countries and have 140,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International, a Swiss cooperative. KPMG International provides no client services. Each KPMG firm is a legally distinct and separate entity and describes itself as such.Each KPMG firm is a legally distinct and separate entity and describes itself as such. KPMG in India, the audit, tax and advisory firm, is the Indian member firm of KPMG International Cooperative (KPMG International) was established in September 1993. The firms in India have access to more than 3500 Indian and expatriate professionals, many of whom are internationally trained. As members of a cohesive business unit they respond to a client service environment by leveraging the resources of a global network of firms, providing detailed knowledge of local laws, regulations, markets and competition. KPMG has offices in India in Mumbai, Delhi, Bangalore, Chennai, Chandigarh, Hyderabad, Kolkata, Pune and Kochi. We strive to provide rapid, performance-based, industry-focused and technology-enabled services, which reflect a shared knowledge of global and local industries and our experience of the Indian business environment.

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Real Estate Intelligence Service (REIS) India is a subscription based research service designed to provide you with cutting edge insights into India’s diverse and challenging real estate markets through collation, analysis and forecasts of property market indicators and trends across all major Indian markets across various real estate asset classes - office, retail, residential. REIS empowers you with consistent and complete market data and analyses for all real estate indicators by specific micro markets. It is supplemented by value added services including client briefings, presentations and rapid market updates. For more details, contact, Abhishek Kiran Gupta - [email protected] or Avinash Mirchandani - [email protected]

KPMG disclaimer: The information contained herein Indian Real Estate: An Outlook on Industry Trends and Regulatory Policies is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

COPYRIGHT © JONES LANG LASALLE All rights reserved. No part of this publication may be published without prior written permission from Jones Lang LaSalle. The information in this publication should be regarded solely as a general guide. Whilst care has been taken in its preparation no representation is made or responsibility accepted for the accuracy of the whole or any part. We stress that forecasting is a problematical exercise which at best should be regarded as an indicative assessment of possibilities rather than absolute certainties. The process of making forward projections involves assumptions regarding numerous variables which are acutely sensitive to changing conditions, variations in any one of which may significantly affect the outcome, and we draw your attention to this factor.

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Indian Real Estate Outlook and Regulatory Policies