Real Estate (RE) refers to land and all the tangible things above and below it, including property and buildings, natural resources of the land, flora and fauna, water, mineral deposits, etc. However, the term ‘real estate’ is commonly used for land and property. Ownership of real estate includes the right to use and enjoy all the land and its improvements. Tenants can enjoy some of these rights, but not all. As an investment, real estate is a unique proposition and preferred by many, due to its solid, permanent nature and ability to generate good returns.
Characteristics of Real Estate
- Permanence: Real Estate is a highly durable asset and hence, has a significant long-term value. Real Estate can be passed on in the same family for generations. It does not have any fixed time period. Therefore, those in the real estate business can chose to sell their property whenever they can capture a good profit.
- Non-identical: Every property is unique. The value of property is dependent on its physical structure and its location in terms of geographical area, connectivity, neighbourhood, urbanization of the region, etc. These factors differ from one property to another, and hence there is a difficulty in comparing properties and their prices. Local knowledge of the community is the key to acquiring valuable property. Successful investors and buyers carry out a tremendous amount of research and prediction analysis before buying a new property.
- Lack of transparency: Investments like stocks, bonds, etc. are regulated and accessible for real time information on the basis of which the investor can take quick and informed decisions to buy, sell or hold. However, real estate investment is very different, in that the seller may choose to withhold information that could affect the sale and price of the property. Sometimes, the seller himself may be unaware of the risks associated with the property. A sweet deal on a property may not always be good, if complete information about the property is not given by the seller.
- Illiquidity: Real Estate is a highly illiquid asset, due to many reasons. Firstly, since it requires a relatively large amount of investment, it is difficult to find a buyer. It could take months, or sometimes years to sell real estate at a desired price. Secondly, real estate prices are negotiable, in which case one might have to forego the fair price and sell property at a discount, if there is a desperate need for selling. However, this lack of liquidity makes Real Estate a more stable and appreciating asset.
Real Estate in India
Real estate is a $120 bn industry in India which is roughly 6-7 per cent of India’s GDP. It is expected to reach market size of US$ US$ 1 trillion by 2030, making it a whopping 13 per cent of the country’s GDP by 2025. This would make India’s Real Estate sector the third largest in the world. Indian Real Estate is currently driven by demand for commercial property as well as residential property. Commercial office space requirement is over 600 million square feet currently. Sectors like retail, IT, consulting and e-commerce have mainly contributed to the ever-growing demand for commercial spaces
Over the last decade, there has been institutional investments worth US$ 30 billion in Indian Real Estate. Private equity players and venture capitalists have also seen Real Estate as a lucrative investment, and have contributed a total of US$ 546 million till 2019. Foreign Direct Investments (FDIs) and equity inflows have contributed up to $25 bn in construction development in the last decade, as per data released by Department of Industrial Policy and Promotion (DIPP). Major developments have taken place in Real Estate segment in terms of affordable housing, improvements in warehousing infrastructure, increase of retail spaces, regulatory reforms, establishment of REITs (Real Estate Investment Trust), industry consolidation, etc.
Real Estate Investment Trusts (REITs)
With the approval of the Securities and Exchange Board of India (SEBI), the advent of REITs have now provided a platform which facilitate all categories of investors, big and small, to invest in the Indian real estate market. These are public listed companies that pool various investors’ capital to invest in a variety of real estate ventures that can produce income. They are distributed as units to investors, similar to mutual fund units. Investments undertaken by REITs are generally held with independent trustees on behalf of the unit holders. REITs have been estimated to attract US$ 19.65 billion investments in the Indian market over the years.
Real Estate (Regulation and Development) Act, 2016 (RERA)
The Government introduced the RERA Act in 2016 to protect the interests of retail buyers of property against malpractices of builders and developers. Under this Act, a minimum of 70% of the investors’ money has to be kept in a separate account and must be used only for construction and land related costs. Buyers must pay not more than 10% of the property’s cost as an advance payment before signing the sale agreement. In case of project delay, buyers are entitled to get back the money, or have to be paid monthly interest on it. There are many other provisions related to carpet area standardization, advertising of the property, proper documentation, grievance redressal, etc. RERA is a milestone act that will enforce transparency and accountability into the real estate market, and subsequently increase consumer confidence.
Impact of GST
Most experts are divided in their view of whether implementation of GST isan advantage or a disadvantage for the real estate sector. As per GST rates, a residential buyer will have to pay 12% GST to purchase an under-construction house. Introduction of GST has definitely increased transparency and uniformity in taxation, compared to multiple taxation channels that existed earlier. The cash component in property buying is also expected to reduce as one will have to purchase inputs from registered vendors to get input tax credit. However, the overall impact of 12% GST will be higher tax paid by the buyer compared to 5-6% (including VAT and service tax) earlier. However, the input tax credit to the developers may reduce the impact of tax on the end buyer. Implementation of the efficient and easy to understand GST is also expected to attract more foreign investment in real estate, reducing the cost of financing, and ultimately benefiting the buyers. Impact of GST of 15% on commercial property is likely to be neutral on an overall basis.
Challenges faced by Indian Real Estate Sector
- Red-tapism: Many realty investors have faced hassles of lengthy approval processes, unavailability of relevant land records and higher financing costs.Removal of bureaucratic delays and fast track clearing process would greatly reduce unnecessary construction delays and impact the demand for real estate.
- Corruption:As per the ‘Indian Real Estate and Construction: Consolidating for growth’ report by National Real Estate Development Council (NAREDCO) and Asia Pacific Real Estate Association (APREA), on an average $700 million of outflow is being made towards bribes at land registrars every year throughout the country.It is therefore imperative to maintain transparency in aspects like land ownership rights, maintaining of records, sourcing correctly priced goods and services, etc to reduce the corruption in real estate sector.
- Lack of capital:It is difficult for investors to get a loan from banks and non-banking financial institutions (NBFCs) due to improper documentation and lack of required credit score. At the same time, real estate developers are also finding it difficult to raise funds for residential projects as there is a lack of confidence towards the housing sector, despite governmental policies towards affordable housing. Low cost of capital is causing a liquidity crunch in NBFCs.
- Oversupply of housing: Due to decrease in housing demand, poor planning, delayed completion of projects, etc. there has been a huge pile up of unsold houses. The builders are unable to repay debts on time, leading to NPAs and credit crunch. In spite of regulations like RERA, over 80% buyers do not perceive much change in their property buying experience, as per a Track2Realty survey conducted across India.
- What is built-up are, carpet area and super built-up area in buying residential property?
Carpet area: This refers to the area of the apartment bounded by the walls, excluding the area of the walls.
Built-up area: This is the area of the apartment including the walls.
Super built-up area: This includes the external area of the apartment such as the lift, lobby, stairs, etc.
- What taxes do I have to pay as a property buyer?
You have to pay the following taxes as a property buyer
- Tax deducted at source @1% on exceeding ₹50 lakhs (except agricultural land)
- Stamp Duty
- GST @ 12% on the deal value
- What is the procedure to register my property?
For carrying out any property transaction, one has to register the documents of transfer, sale, lease or any other disposing of an immovable property. This is a compulsory procedure for all properties under Section 17 of Indian Registrations Act, 1908. Registration is the proof of lawful ownership of property. Registration of a property includes stamping and paying registration fees for a sale deed and registering it at the sub-registrar’s office of the applicable jurisdiction. Purchasing property from a developer directly and getting it registered amounts to act of legal conveyance. If the purchased property is a secondary transaction, the transfer deed has to be duly stamped and registered. Today, most states have a computerized registration process.
- What are the documents one should peruse before buying any property?
Before buying any property, one should always check if the following documents are in place:
- Sale Deed
- Title Deed
- Building plan
- Completion Certificate/Commencement certificate/Conversion certificate (as applicable)
- Occupancy Certificate
- Encumbrance Certificate
- Latest Tax Receipts
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