Real Estate Investments in India

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Real estate in India offers huge investment demand in sectors ranging from commercial, residential, retail, hospitality, health care, industrial etc. This is proved by the following facts:

  • Commercial Office space requirement is led by the outsourcing and IT industry. The major MNCs looking to set up their centers across major cities in India alone demanded 150mn sq.ft. In 2010.
  • In residential sector, there is a shortage of about 19.4 million housing units.
  • Exposure to organized retail formats has turned the consumption pattern towards many retail project across India.
  • The increase in purchasing power, favorable geographics and demographics, customer friendly banks and favorable government reforms have attracted foreign investors from across the globe.

Foreign Investment in Real Estate Sectors

In India, Foreign Direct Investment (FDI) is permitted in the following sectors:
  • Special Economic Zones (SEZs)
  • Commercial Real Estate
  • Regional and local infrastructure
  • Housing Resorts Hospitals
  • Hospitality
  • Tourism
  • Recreational Facilities
  • Educational Institutions
  • Township

Conditions for Foreign Investment

FDI in real estate sectors in India is subjected to many conditions, some of which are:
  • A minimum land area of 10 hectares is required for serviced housing plots. Also, a minimum built-up area of 50,000 sq m. is required for construction projects.

  • A minimum capitalization of $10 million and $5 million for a wholly-owned subsidiary and for a joint venture is required respectively. The investment should come in within six months starting of business.

  • At least 50% of the integrated project must be completed within a 5 year period starting from the date of receiving all clearances.

  • Undeveloped plots are not allowed to be sold. The company has to provide complete infrastructural backup and obtain the completion certificate from the concerned local body.

  • The original investment cannot be taken back before three years from completion of minimum capitalization. Approval of the FIPB is needed for early exits.

  • Confirmation to all applicable laws, regulations and norms is required.

Present status of FDI

In the past, only NRI and PIO investors were allowed to invest in the housing and the real estate sectors. Other investors were allowed to invest only in integrated townships and settlements either through a wholly-owned subsidiary or a joint venture.

With the course of time many changes have been made to the FDI policy. By 2005, FDI in real estate in India was fully opened.

Some important features of current FDI in real estate are:
  • Norms of minimum capitalization and area requirement for wholly owned subsidiaries and joint ventures as stated before.

  • In march 2005, the Department of Industrial Policy and Promotion allowed FDI in real estate in projects in a minimum area of 25 acres.

  • External commercial borrowing (ECB) in realty projects involving integrated townships of 25 acres or 50,000 sq m. was allowed by the Finance Ministry.

  • The government is considering the option of permitting Foreign Institutional Investment (FII) as well, in real estate. Presently, only FDI is allowed in real estate.

  • Foreign venture capital investment (FVCI) is still not permitted in the real estate sector.

  • The RBI has classified lending to SEZs on par with commercial real estate, according to higher risks and some provisions. This prevents distorting of the realty market by the SEZs.

  • A large portion of money is required for land acquisition under working capital in real estate. But there are still many restrictions like not allowing ECB money to be used for working capital.

Real Estate Laws in India

In India, investing in real estate requires compliance with many old and new federal as well as state laws. Some of the important federal laws that govern real estate in India are:
  • Indian Transfer of Property Act -
    It governs the transfer of property by various means. Sales, mortgages and exchanges of immovable property must be registered with this act and all documents must be written and registered.

  • Indian Registration Act, 1908 -
    This act ensures conservation of title, publication of documents, evidences, assurances as well as prevention of fraud. It gives details of registering instruments which require mandatory registration such as:

    1. Gifts of immovable property.
    2. Non-testamentary instruments which either in present or future operates to create, declare, assign, limit or extinguish any right, title or interest, contingent to immovable property.
    3. Non-testamentary instruments which acknowledge the receipt or payment of any consideration on account of above mentioned instruments.
    4. Leases of immovable property.
  • Optional registration is provided in the section 17 of this act. An unregistered document will not serve as evidence of any transaction affecting such property.

    Hence, the doctrine under Section 53 A of the Transfer of Property Act and the provision of Section 49 of the Registration Act together protect the buyer in possession of an unregistered sale deed from being dispossessed. This has led to a large number property transactions being accomplished without proper registration.

    Hence, investors in real estate must be careful while using such instruments which may be indiscriminately used to effect change of ownership.

  • Indian Urban Land Regulation Act, 1976 -
    This act fixed a ceiling on the vacant land in urban areas that an individual, family, firm, company, association etc. can acquire and hold.The ceiling limit ranges from 500-2,000 sq.m, beyond which the vacant land has to be surrendered to the Competent Authority under the act. In return, a small compensation is given. The holder of the land also has the option of developing it for specific purposes.

    Appropriate documents that meet all the provisions of this act have to be submitted to the Registering Office before registering instruments under the Registration Act.The federal government repealed this law in 1999. This change does not affect the vesting of the vacant land which has already been taken in possession by the State Government or any authorized person under the Urban Land Act.

    The repeal of the act is credited with eliminating large amount of litigation and releasing huge chunks of land into the market.The repeal of the act was initially adopted in Haryana, Punjab and all the Union Territories. Later, the State Governments of Uttar Pradesh, Gujarat, Karnataka, Madhya Pradesh and Rajasthan also adopted it leaving behind Andhra Pradesh, Assam, Bihar, Maharashtra, Orissa and West Bengal.

  • Stamp Duty -
    It is required to be paid on all documents which are registered. India has one of the highest levels of stamp duty rates which vary from state to state. Stamp duty rates in some places are; 13% in Delhi, 14.5% in Uttar Pradesh and 12.5% in Haryana.Some states enforce double stamp duty, first on land and then on its development.

  • Rent Control Acts -
    In India, rent legislation was introduced long ago by the government. After the Second World War, rent control acts were used as a temporary measure to protect the exploitation of tenants by landlords. Later on, these rent control acts became a permanent feature. These controls ensure that fair rent is paid to landlords and protect tenants against eviction. Also, they effectively allow tenants to alienate rented property.

  • Property Tax -
    The Municipal Authorities charge property tax as a levy for providing and maintaining basic civic services in the city. In India, the owners of property are liable to pay these municipal taxes. Usually, the property tax is levied on the basis of reasonable rent at which the property is rented annually. If the actual rent is found to be fair, it may be used as the reasonable rent. If the property is not rented, the rental value is to be estimated on the basis of renting rates in the locality.