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January 2016

Wishlist 2016 for Real Estate Sector in India

by Kritika Krishnamurthy

Agricultural land in the rural areas and real estate in  cities has always been  a stable rock for economies and investors since time immemorial across the world.  Warren Buffet in his annual  letter to shareholders about investing in real estate in 2014 said  “Whatever the chatter, corn would keep growing in Nebraska and students would flock to NYU.[1]

For 2016, however, Fitch predicts a negative to stable outlook for real estate sector in India.[2] To prove Fitch wrong, like Indians often do, the real estate sector in India needs a regulatory tide to ride on, which the year 2016 will hopefully provide. To begin 2016, here are some new-year resolutions India needs to achieve to give a boost to the real estate sector.

Foreign Investment

Foreign investment in “real estate” sector is prohibited but the constituents of this sector underwent changes in the policy from time to time to move certain activities from prohibited to ‘permitted’ while some of it remained subject to legal interpretation. Recently, Press Note No. 12 of 2015 (‘Press Note’) issued by Department of Industrial Policy and Promotion, Government of India on 24th November 2015 has clarified some of the grey areas and removed some long pending doubts. Now,  real estate means dealing in land and immovable property with a view to earning profit there from and does not include development of townships, construction of residential/ commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships. Further, a developer is allowed to lease developed property and earn rent/ income on lease of the property and so long as it does not amount to transfer, the activity shall not be considered real estate business.

With new and disruptive business models emerging, doubts continue on whether business facility centres, service apartment facilities, leases on timeshare basis are within or outside the purview of prohibited real estate business in terms of foreign direct investment. To add to the confusion, though notified more than a month and half ago by DIPP, the Press Note is yet to be notified through amendments by Reserve Bank of India (RBI) till which time, it is yet to have the force of law. Considering the increasing efforts to increase foreign investments in India, the definition ought to be favorably interpreted in favour of the innovative business models so long as the services do not lead to a transfer of the immovable property involved. Additionally, suitable amendments in foreign exchange regulations will provide the much required breather to the sector.

Real Estate Investment Trusts

Since 2014, India has been working on the regulatory regime of Real Estate Investment Trusts (REITs). In November 2015, foreign investment in real estate investment trusts and infrastructure investment trusts was allowed without government approval.[3] The recent 2015 Budget, removed the issue of capital gains tax for sponsors and allowed ‘pass-through’ on rental income. However, capital gains tax will apply on the direct transfer of real estate to these trusts. Moreover, the stamp duty and registration fees implication on any transfer of immovable property to the REIT or the special purpose vehicle continues to attract a huge transaction cost. As of now, the government has not made any move to iron out this crease in the structure.

In 2016, we hope REITs become a more commercially viable and adopted structure in India. REITs, if implemented sustainably in India can provide an exit route to developers from completed commercial assets, aid in development of smart cities in India, attract investors seeking investment in high-quality investment grade properties and facilitate introduction to new set of large moderate (risk v. return) investors like insurance and pension funds looking for long term investments with steady returns.

Parking Space Conundrum

Developers around India have adopted the trend of selling parking spaces within the common facilities of an apartment to apartment dwellers and third party. In 2016, this trend is a bubble waiting to burst leading to series of litigation in the real estate sector. The Supreme Court of India has held that a parking space is an integral part of the common facilities required to be provided with an apartment and that the parking space shall not be sold separately for valuable consideration. Additionally, the ownership of common areas around an apartment building or within a township vest among the apartment owners jointly in the proportion of their interest in the apartment building.[4]The judgments were delivered based on interpretation of State legislations but shall have ramifications pan India if the state laws are similarly worded. A word of caution to the real estate developers in India.

Title Due Diligence

For ages, India followed the jagir and zamindari system where proprietary rights in land remained with the king who doled out the right to cultivate and the right to collect revenue on his behalf to jagirdars and zamindars. With the advent of British rule in India, the jagirdars and zamindars usurped title to the land through various legislations passed by the British in a half-hearted attempt to regularize land ownership rights in India. They also developed a complex record of land survey and revenue collection through various registers prescribed under State laws which are unfortunately still existing in India.[5] If you have ever purchased land in India, you will be lost in the maze of registrations and records you need to update to fortify your title to the land.[6] Even after all these measures, if the land was reserved for a specific class of persons[7] or for the service of a God,[8] your title to land may end up void. Title due diligence is one of the costliest and riskiest exercises taken up by real estate companies in India.

In 2016, India needs at least a step towards a centralized documentation system which records the nature of the land (whether it is reserved for a certain category of individuals or institutions), financial encumbrances and of course, the flow of title of the land. A single window registration system for revenue as well as land records can be created through the offices of the registrar of assurances where it is compulsory to pay registration fees and stamp duty on the title deed for any new transfers.[9] Some forward looking states like Andhra Pradesh have made attempts to digitize land revenue records and ownership but  existing mess of land title for the past centuries is another story fraught with minefields for the new buyer.

Way forward

All in all, the rise and fall of business segments and changes in market trends are all dependent on the psychology of the consumer and the governments. So long as there are Indians looking for stable investment returns either through increasing property value or rentals in a country with high inter-migration rates and a burgeoning young population, the saga of real estate sector in India will continue. But laws, being the accelerator of this growth story, need to keep pace with the changing dynamics and the demands of the market and the stakeholders. Although the present government seems to be trying hard to amend and repeal archaic laws, only time will tell if the country is able to withstand the fast pace of the global economy.

[The author is a Senior Associate, Corporate Practice, Lakshmikumaran & Sridharan, Gurgaon]


[1]Buffett's annual letter: What you can learn from my real estate investments, Fortune, February 24, 2014
[3]Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Eleventh Amendment) Regulations, 2015 dated November 16, 2015
[4]NahalchandLaloochand Pvt. Ltd. v Panchali Co-operative Housing Society Ltd., (2010) 9 SCC 536; DLF Limited v Manmohan Lowe and Ors.,  2014 (2) SCJ 144
[5]G. Satyanarayana v Government of Andhra Pradesh, 2014 (3) ALT 473
[6] This includes mutation for updating revenue records and application for updating the local ‘Pattadar Passbook’
[7] Various state laws in India prohibit transfer of certain notified land except to protected category of persons as a social welfare measure.
[8] As recently illustrated in Sri Jagannath Temple Managing Committee v. Siddha Math & Others, Civil Appeal No. 7729 of 2009 decided by Supreme Court of India on December 15, 2015
[9] Section 54, Transfer of Property Act, 1882 read with Section 3, Indian Stamp Act, 1899 and Section 17, Registration Act, 1908

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