Real estate in India has a significant prominence in the economy and has seen a substantial change in the past two decades. Earlier it was fragmented and unorganized, but in recent years it has seen immense changes due to favorable demography, increased purchasing power, consumer-friendly banks and housing finance companies and the presence of large real estate organizations with source funding.
In the past twenty years, the face of the real estate industry has seen a tremendous change in the development of the state of art infrastructure developments, buildings, townships, and shopping malls not only in the urban towns of the country but the Tier II & Tier III cities as well. This change has not only led to the development of the country but has also provided sustenance to 250 ancillary industries.
With the new entrants in the market, there is a segregation of real estate such as commercial offices, residential units, shopping malls, the hospitality industry, the manufacturing sector and logistics parks, etc. The sector comprises four sub-sectors on the basis of the use of real estate – housing, retail (retail shops, malls, single brand retail stores, etc.), hospitality, and commercial (office spaces, industries, hospitals, etc.).
The Government has relaxed FDI limits for townships and settlements development projects to 100 percent. Real estate projects within the Special Economic Zone (SEZ) are also permitted 100 percent FDI. The Indian real estate industry has seen a lot of dynamics consequent to the government’s policy to allow Foreign Direct Investment (FDI) in 2005. Post-2005, this industry has seen many ups and down regarding FDI inflow, revenue, demand, employment generation, new projects, etc. Relaxed norms of FDI in Indian real estate were to make the sector more organised and inject a sense of professionalism.
FDI has a positive impact on the economy and the villages adjoining the metropolises have experienced an upsurge in land prices due to the presence of huge real estate projects for developing commercial and residential property. Such massive Realestate projects have lured several farmers to sell their land and get good money in return. For example, Gurgaon which was once a small dusty agricultural village, emerged at one stage to become the city with the third-highest per capita income in India. Due to well-developed real estate Gurgaon has ensured the presence of about 250 or 50% of the Fortune 500 companies. The real estate industry’s growth is due to developments in the retail, commercial and hospitality industries, economic services (hospitals, schools) and information technology (IT) companies.
Due to increased diversification in the real estate industry, there is a huge scope of growth for professionals as per their specialization. There is also the likelihood of the emergence of niche areas of consultancy for professionals and managers.
Factors driving the growth of the real estate sector
The major factors driving the growth of real estate industry and the creation of new opportunities continuously are listed below. Professionals who choose to develop their expertise and specialize can reap significant career benefits:
1. Make in India initiative has led to an increase in the demand for commercial leased spaces. Earlier, there was a huge demand for commercial leased spaces by the IT sector, but in 2016 tremendous amount of demand for commercial leased space has been created by the manufacturing industry which is twice of the demand created by the IT sector. With the increased demand for commercial leased spaces, there is an opportunity for commercial leasing managers and consultants to expand their practice. There is a huge scope in India for agencies which can guide corporations through complex leasing documents with a strategic and proactive approach.
2. SEBI (Securities and Exchange Board of India) has notified regulations on REITs (Real Estate Investment Trust) and INVITs (Infrastructure Investment Trust). These real estate and infrastructure trusts have opened opportunities for humongous investments in real estate. An investment of USD 1 Trillion has been projected by the Government for the infrastructure sector until 2017, 40% of which is to be funded by the private sector. For lawyers, investors, investment bankers and other working professionals a new avenue has opened up to expand their practice.
3. The Government has launched smart city projects under which real estate projects will be introduced in 100 new cities. With the introduction of new schemes, there be construction development in the residential, retail, hospitality and commercial sectors. With the launch of the smart city project, Government aims at acquiring technologies and solutions for smart sustainable cities and integrated townships which gives an opportunity to all the CRE (commercial real estate) tech startups and MSMEs to get associated with the Government.
4. Foreign investment in India (FDI) in real estate has again led to the growth of real estate sector. India is the fourth largest country which receives FDI in real estate sector and 100% FDI has been allowed in townships and settlements and SEZs. The real estate industry is the fifth largest destination for foreign investment and has led to increase in construction development projects such as townships, residential/commercial premises, roads or bridges, hotels, resorts, hospitals, educational institutes, recreational facilities, etc. The government has, from time to time, introduced relaxations in the FDI Policy to encourage investments in real estate.
Scope of the real estate industry in India
A huge challenge in being able to understand the working of the real estate sector is that the sector is fragmented and chaotic, and there is a lack of organized literature on the same. The intention of this chapter is to give you a holistic perspective from which you can view the entire spectrum of the real estate sector. To start with, we are classifying real estate transactions into consumer-side transactions and development transactions. Later in the course, we will get into the depths of each kind of transaction.
Consumer-side real estate transactions in India:
The major types of real estate transactions that you may be familiar with are:
i) Sale – The sale of immovable property is a transfer of ownership for a price. In a sale, there is an absolute transfer of all the rights to the property.
ii) Leases and leave and license agreements – The lease is a transfer of the right to enjoy property made for a certain time in consideration of a said price. In this case, there is no transfer of ownership. In certain cases, lease agreements can create further statutory rights to stay on the property or protections against an increase in rent, in case state-level laws create ‘tenancy’ rights.
Leave and license agreements create a more limited right to do something on a property or otherwise enjoy it in a specified manner. Most property owners attempt to characterize rent agreements in the form of leave and license agreements so that they have maximum freedom to increase the rent or evict a person on the basis of the agreement between the parties (and not the operation of any other state-level law).
These are called consumer-side transactions because they have an interface with the end user of the real estate. Note that the end-user can be a business. Hence, corporate leases and corporate sale transactions are also covered in this category.
Real estate development transactions
The other side of real estate transactions is development transactions.
The development of townships and settlements has led to sophistication in the structuring of real estate businesses and development transactions. New techniques for building projects have also evolved.
To understand how real estate development transactions work, let’s divide the transaction into different components:
(a) Creation of the business entity involved in the development:
The business entity that will be involved in the acquisition and development of the land needs to be created. The builder could operate as a proprietor, partnership, LLP or company, though professional builders now operate as LLPs or companies. In large cases, companies are the norm. If you look at a large entity such as Indiabulls, you will see that the main entity is called Indiabulls group, which has subsidiaries called Indiabulls Housing Finance Limited (IBHFL) and Indiabulls Real Estate Limited (IBREL) for construction and development of specific projects in different locations. These entities may be unlisted. There may be foreign investment or partnership with other private landowners by entering into shareholders agreements or joint development agreements respectively.
(b) Entry into necessary collaboration / partnerships:
Collaborations in the real estate industry can be seen between landowners and construction companies, among two construction companies or Government and construction companies for sharing expertise, resources, risk sharing etc. A very prominent example of collaboration/partnership is the Delhi International Airport (P) Limited (DIAL) which is a collaboration of GMR Group, Airports Authority of India, and Fraport AG & Eraman Malaysia.
(c) Financing the business:
Finance in real estate can be raised either through investments or loans. Investments can be raised either by equity, debt or private investments. A lot of developers also rely on pre-booking funds for the completion of real estate projects. As far as loans for real estate are concerned, the Reserve Bank of India has enacted separate regulations for commercial real estate lending/ infrastructure lending. For this purpose, commercial real estate has been categorized as hotels, hospitals, multiplexes, malls, warehouses, industrial parks, integrated township projects, etc.
(d) Acquisition transaction:
Acquiring ownership rights over the immovable property is necessary before going ahead with the development of any project. Acquisition of any property can be done either by private landowners or the government through compliance with necessary regulations which may differ from state to state.
(e) Sales / Leasing – This part has been explained above.
(f) Post-sales arrangement:
In the case of residential housing, builders may transfer ownership and maintenance to a cooperative housing society, while in commercial buildings they may retain the ownership and management rights to the constructed property.
