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Real Estate Basics

Trainings by Vidya Bhagwat

1.1 Basic Concepts Of Assets And Investments

The real estate sector has to be at the forefront of India‘s development agenda on account of its obvious potential to propel economic growth. The importance of this sector is that, it is the second largest employer next only to agriculture and supports nearly 250 ancillary industries such as cement, steel, brick, which are some of the supporting services. Real estate development market in India is around $12 billion, growing annually at 30 per sent.

The sector has of late witnessed a spurt in the demand of not just residential property but also commercial property. Indian cities have found a place for themselves on the world map as attractive investment destinations for international real estate players.


What Is An Asset?

Asset can be anything of material value or utility, the entire property of a person, association, corporation, or estate applicable or subject to the payment of debts. We can also say that asset is anything which the business owns or has title to, in short, have ownership of.

An enterprise usually employs its assets to produce goods or services capable of satisfying the wants or needs of customers; because these goods or services can satisfy these wants or needs, customers are prepared to pay for them and hence contribute to the cash flow of the enterprise. Cash itself renders a service to the enterprise because of its command over other resources.


1. Current Assets

A balance sheet account that represents the value of all assets that are reasonably expected to be converted into cash within one year in the normal course of business can be termed as a current asset. Current assets include cash, accounts receivable, inventory, marketable securities, prepaid expenses and other liquid assets that can be readily converted into cash.

In personal finance, current assets are all assets that a person can readily convert to cash to pay outstanding debts and cover liabilities without having to sell fixed assets. Current assets include cash in hand and in the bank, and marketable securities that are not tied up in long-


2. Fixed Assets

A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be consumed or converted into cash any sooner than at least one year‘s time.

Buildings, real estate, equipment and furniture are good examples of fixed assets. Generally intangible long-term assets, such as trademarks and patents, are not categorized as fixed assets but more specifically referred to as “fixed intangible assets”.

Fixed assets are items that are for long-term use, generally five years or more. They are not bought and sold in the normal course of business operation. Fixed assets include vehicles, land, buildings, leasehold improvements, machinery and equipment.


Fixed Assets As Investments

Money invested in fixed assets or as per the Income Tax Act, Capital assets‖ attract the provisions of the Income Tax Act, 1961, in various ways, such as, Capital Gains, Income from House Property, Income from Business and profession, etc.

i. Long term investments :As per Section 2(29A) of the Income Tax Act 1961, long-term

Capital Asset means a Capital Asset which is not a short-term Capital Asset As per Section 2(29B) of the Income Tax Act 1961 long-term Capital gain mean Capital gains arising from the transfer of a long-term capital asset.


ii. Short term investments:As per Section 2(42A) of the Income Tax act 1961, short-term

more than thirty-six months immediately preceding the date of its Capital asset means a Capital asset held by an assesses for not more than thirty-six months immediately preceding the date of its transfer.

• Fixed assets as Stock-in-trade :As defined in Section 2 (14) of the Income Tax Act 1961, an asset held as stock in trade does not get covered in the definition of a Capital Asset hence the capital gains provision does not apply to them. Any transfer of Stock-in-trade is covered under the profits and gains of from Business or Profession.


1.2 What Is The Meaning Of The Term Real Estate?

The term ‘real estate’ refers to land as well as building. The word ‘land’ includes the air above and the ground below and any buildings or structures on it. It covers residential houses, commercial offices, trading spaces such as theatres, hotels and restaurants, retail outlets, industrial buildings, factories and also government buildings.

• The transaction includes: 1. Purchase 2. Sale 3. Development of land


The main players in the real estate market include the following :

1. The landlords.

2. The builders.

3. The developers.

4. Real estate agents.

5. Tenants.

6. Buyers.


Transfer of Property Act, 1882

According to (Sec 3), ‘Immovable Property’ does not include standing timber, growing crops or grass. Thus, immovable property constitute of ‘Building’ and ‘Machinery’ if embedded in the building for the beneficial use thereof. Then it must be deemed to be a part of the building and the land on which the building is situated.

General Clauses Act, 1897

As per Section 3(26), ‘immovable property’ shall include land, benefits to arise out of land and things attached to the earth, or permanently fastened to any thing attached to the earth. This definition of immovable property is also not exhaustive.


The definition of the term ‘Immovable Property’ under the Registration Act 1908, which extends to the whole of India, except the State of Jammu and Kashmir, is comprehensive. Section 2(6) defines ‘Immovable Property’ as under:

Immovable Property includes land, building, hereditary allowances, rights to ways, lights, ferries, fisheries or any other benefit to arise out of land, and things attached to the earth or permanently fastened to any thing which is attached to the earth but not standing timber, growing crops nor grass.

The Registration Act 1908 :


1.3 Why Real Estate Has Become Buzzword?

• The US$ 50b Indian real estate market is booming and • expected to grow at 25 per cent annually.• The boom owing to the consumption powered growth of • the country‘s economy has seen investors planning nearly • 250 new shopping malls by 2008, as against just three • that existed till 2002.• The central government adopted a regulation in 2005 • allowing foreigners to bid for Indian construction projects • with local partners and also reducing their minimum • land holding limit from 100 acres to 25 acres.• Enthused by the liberalized investment guidelines, a slew • of foreign builders are rushing to launch projects in Asia‘s • third largest economy.• Expected annual shortfall of 20 m housing units by 2011. • Mumbai alone would need more than 180,000 housing units.


Real Estate Sector in India is the second largest employment generator next only to agriculture. About 250 ancillary industries directly or indirectly depend on real estate activity. It is difficult to estimate the exact contribution of the real estate sector to gross domestic product (GDP) as it appears in a disaggregated and dispersed form in the National Accounts Statistics.

Residential housing and real estate services (activities of all types of dealers such as operators, developers and agents connected with real estate) is covered under the category real estate, ownership of dwellings, business and legal services. The gross value added in the ownership of dwellings is equivalent to gross rental of the residential dwellings less cost of repairs and maintenance. Gross rental is estimated as a product of average gross rental per dwelling and the number of census dwellings and includes imputed rent of owner-occupied houses.

1.4 Contribution of Real Estate Activity to India’s GDP


The future of the real estate sector in India is going to be guided by some important factors viz., suitable amendments to the Foreign Direct Investment guidelines in the townships, housing built-up infrastructure and the construction development projects as well as the abolition of service tax on the construction industry especially the housing sector. Conversely, if the abolition per-se is not possible then drastic changes/ modifications in the service tax norms are the need of the hour. This sector is already over-burdened with taxes; any further imposition of taxes in any form would adversely affect the growth of this sector and also the whole economy as such.

1.5 Future of Real Estate Sector in India


I. Foreign Direct Investment :Till recently, FDI in real estate was restricted to

development of industrial parks, hotels, integrated townships and SEZs. On March 3, 2005, Government of India replaced the integrated township policy to permit FDI up to 100% in townships, housing, built-up infrastructure and construction development projects, under automatic route (Press Note 2 (2005 series)).

FDI is now permitted in Townships.• Housing• Commercial premises.• Hotels.• Resorts.• Hospitals


• Industrial parks.• Resorts hospitals.• Educational institutions.• Recreational facilities.• SEZ‘s, etc.Certain guidelines exist within the reform measures.


II. Public Private Partnership :

Real estate development in India is estimated to be in the region of USD 12 billion, growing at a pace of 30 per cent each year. Almost 80 per cent of real estate developed is residential space and the rest comprise office, shopping malls, hotels and hospitals. This double digit growth is mainly attributed to the off-shoring business, including high-end technology consulting, call centers and programming houses which in 2003 is estimated to have accounted for 10 million square feet of real estate development.


1.6 Selection of Mode of Business for Conducting Real Estate or Construction Business

The various modes in which an enterprise can be started are as follows: A. Proprietorship B. Partnership C. (a) Private limited companies (b) Public limited companies D. HUF E. Trusts F. Co-operative societies Distinguishing characteristics of each of the above:


A. Proprietorship :1. It is a single person operation. There is no difference 2. between the owner and the company. 3. It is the easiest to set. 4. Profit of the company is the owner‘s income. 5. Liability is unlimited, i.e., Losses may have to be made good out

of the personal assets of the proprietor. 6. The greatest advantage of such an organization is that it requires

minimal of legal documentation. 7. There is no separate law on sole proprietorships.


B. Partnership :1. Two or more persons can start a partnership. 2. The maximum number of partners which are permissible 3. in a firm is 20 and in the case of banking firms it is 10. 4. The liability of partners in Indian partnerships is joint 5. and several. 6. There is no minimum capital to be subscribed for a 7. partnership.

C. Companies :1. Company as a legal person—can borrow, lend, enter into

contracts, can sign, can sue and be sued. 2. Has a life beyond the life of the promoters. 3. Can hold assets of its own. 4. Company seal acts as its signature.


(a) Private Limited companies :Private Limited company means a company formed with the

word private in its name. A private limited company can be formed with a minimum of 2 members.

• articles of association restricts the right to transfer its shares.• The minimum paid up capital for a private company would be Rs.

100,000.

(b) Public Limited companies :Public Limited company means a company which is not a

private limited company. It does not carry the word ‗private‘ in its name and also do not have the restrictions as carried out in the private limited companies. Public limited companies are generally large companies with widespread shareholding with shares being quoted in the stock exchange. The minimum paid up capital for a public company would be Rs 500,000.


D. HUF :The joint Hindu family form is a form of business organization

in which the family possesses some inherited property. The inheritance of the property is among the male members. The share of ancestral property is inherited by a member from his father, Grandfather and great grandfather.

The important features of the joint Hindu family business are as follows:

1. Membership By Birth: Membership of the joint Hindu family business is

automatic by birth of a male child and is not created by an agreement between persons.

2. Management: The management vests in the Karta, the eldest

member of the family. However, the Karta may associate other members of the HUF to assist him.


E. Trusts:A Trust is created when a donor attaches a legal obligation to

the ownership of certain property based on his confidence placed in and accepted by the done or trustee, for the benefit of another.

• A trust can be created: 1. By any person competent to contract. 2. With the permission of a principal civil court of original jurisdiction

by or on behalf of a minor. 3. Any person or corporation capable of transferring property or

interest in property can create a Trust.

F. Co-operative Societies : A cooperative form of business organization is different from

other forms of organization. It is a voluntary association of persons for mutual benefit and its aims are accomplished through self help and collective effort.






