The legal system in India comprises civil law, customary and personal law, and common law. Real estate transactions are subject to central and state legislation, personal/religious laws and judicial precedents. There is also subordinate legislation, such as rules, regulations and by-laws made by local authorities like municipal corporations, gram panchayats and other local administrative bodies. Laws relating to real estate in India can be categorised as follows:
The real estate sector has seen a significant increase in investments in equity instruments, while investments from non-banking financial companies (typically in debt instruments) have reduced.
Legislative trends show continued emphasis on liberalising the Indian economy, with renewed focus on the development of real estate in a transparent manner.
The SEBI (Real Estate Investment Trust) Regulations 2014 (REIT Regulations) deal with real estate investment trusts (REITs) and allow individual investors to enjoy the benefits of owning an interest in the securitised real estate market.
In the Union Budget Speech of 2021-22, the Finance Minister announced that the Debt Financing of InVITs and REITs by Foreign Portfolio Investors will be enabled by making suitable amendments in the relevant legislation. The Finance Bill 2021 proposes to exempt TDS (Tax Deducted at Source) on dividend income received by REITs and InVITs from their Special Purpose Vehicles. It also proposes amendments to the Securities Contracts (Regulation) Act, 1956 to permit pooled investment vehicles (including REITs) to borrow from third persons, and permits the creation of security interest for the amounts borrowed and enables lenders to enforce the security created and proceed against the trust assets for recovery.
RERA has been welcomed by purchasers, and was framed to regulate and promote transparency, credibility and accountability in the real estate sector in India.
The goods and services tax (GST) has subsumed central taxes like central sales tax and service tax, as well as state-level taxes such as value added tax and entry tax, eliminating the multiplicity of taxes and their cascading effect.
The foreign investment environment, including in the real estate sector, has been liberalised.
A tax holiday for project developers in the affordable housing segment is proposed to be extended for one more year. Furthermore, a new tax holiday has been proposed for notified rental housing projects.
The Benami Transactions (Prohibition) Amendment Act, 2016 empowers competent authorities to attach and confiscate "benami" properties, and aims to curb issues of black money and money laundering in India.
In terms of significant transactions, there have been many investments into India, including various investments made by sovereign wealth funds. Large investments have been made into commercial real estate with the intention of moving the interest in real estate assets owned by large developers into REITs.
The documents for leasing arrangements have become significantly more sophisticated and, in several cases, facilities in excess of 1 million sq ft have been taken on lease in single transactions.
Impact of COVID-19 Pandemic
Due to the prevailing COVID-19 pandemic, several temporary changes across various laws have been introduced, including foreign direct investment (FDI) restrictions, extensions and relaxations for compliance requirements, the introduction of moratoria for limitations and the application of force majeure clauses in contracts. These affect the real estate sector as well, and should be kept in mind when dealing with specific transactions.
Real estate has been revolutionised by tremendous evolution in information technology in the past decade. Two such technologies are blockchain and proptech. Blockchain facilitates an entire real estate transaction (buying, selling or renting) online, without the presence of a middleman, attempting to make the industry transparent and efficient. Proptech streamlines and connects the processes for participants in all stages of real estate transactions, including buyers, sellers, brokers, lenders and landlords.
The state government of Andhra Pradesh has partnered with a Swedish start-up to build its blockchain-based solution. In 2018, NITI Aayog highlighted its efforts towards IndiaChain, a blockchain infrastructure for managing public records and building social applications, which will also be used for maintaining land records. Many state governments (Maharashtra, Telangana, Andhra Pradesh and West Bengal) are exploring opportunities to integrate blockchain-based ledgers in the digital land record system.
Despite the introduction of these disruptive technologies in India, there may not be any significant impact on the real estate market over the next year as the Indian government is not currently capable of integrating such technologies.
The government has taken steps to ease the regulations governing FDI in single brand retail trading. While there are no significant indications from the government at this point in time, foreign investors are hopeful that the next progressive step would be in the multi-brand retail trading sphere. Most recently, the government has announced various initiatives to increase investments in the warehousing and logistics sectors, and this is expected to result in growth in the real estate sector as well. In light of several large investment plans for data centres in 2019, the Finance Minister has recently proposed formulating a policy for setting up data centre parks. In 2020, the Ministry of Electronics & Information Technology unveiled its draft Data Centre Parks Policy, which gave a much-required boost to the booming Indian data market.
The categories of property rights are freehold rights, tenancy (lease) rights, and licences and easements.
Under a freehold right, a person acquires absolute right, title and interest (including undivided interest) in a property and becomes the sole owner of the property, with unfettered freedom and the right to deal with the property in the manner deemed fit by the owner.
Tenancy (Lease) Rights
Under a tenancy (lease) right, a person acquires limited interest and rights in relation to a property, with the right to occupy and deal with the property in the manner contractually agreed between parties. Indian law also recognises the concept of statutory tenants, who are protected under the applicable rent control statute and can be evicted only on limited grounds. However, most modern developments leased to corporates are not affected by rent control legislation in some states, as corporates do not generally derive protection under such.
Since land is a state subject under point 18 in List II of the State List of the Seventh Schedule of the Constitution, the states are inclined to formulate their own laws in relation to rent and tenancy. In India, tenancy matters are governed by state-specific statutes/laws, and matters not covered by state legislation are governed by TOPA, which is a central legislation.
Additionally, the Ministry of Housing and Urban Affairs released its draft Model Tenancy Act of 2020 in order to increase the efficacy, ease and convenience in regulating the renting of premises in a transparent manner. The states are at liberty to adopt this template and make amends as required, or to make changes to their existing tenancy and rent laws.
Licences and Easements
Licences are governed under the Indian Easements Act, 1882 (Easement Act); easements are also recognised separately in Indian law. In licences, a licensee acquires the permission of the owner to use the property, and use is restricted to contractual terms without de jure possession being granted to the licensee. On the other hand, an easement is a right that the owner of a property has to compel the owner of another property to allow something to be done or to refrain from doing something on the servient element for the benefit of the dominant tenement.
Generally speaking, a person can acquire title to immovable property through the following means:
Certain states prohibit companies/firms from purchasing/leasing agricultural land, and prohibit people with income above a certain threshold or who are not already agriculturalists from purchasing agricultural land. Certain states also have land ceiling laws that restrict the acquisition of land beyond specified limits.
Documents governing rights/transfers of immovable property are registered before the jurisdictional Sub-Registrar of Assurances. Registrations are mandatory for instruments evidencing a transfer of interest in immovable property of a value more than INR100. Once registered, documents become a part of the public record and can be accessed by anyone. Such transfers also require the payment of duties (such as stamp duty, registration fee and other cess applicable to each state) and are recorded by the revenue departments, which maintain a separate set of documents for each property.
Where transfer is effected through succession, revenue records are updated to reflect the inheritance; these become publicly available once recorded.
Insurance companies in India have started to provide title insurance, although establishing title is often very complicated. Measures are being taken to simplify the manner in which title can be verified, and governments are taking steps to make such records electronic, although it will take some time for all the relevant documents to be sorted methodically and made available in electronic form.
Tracing title to property is often complicated, as records are not centrally located and are maintained by different governmental departments. Antecedent documents in each state are often in vernacular languages.
When conducting due diligence, one may not discover all litigation, mortgages by deposit of title deeds and unregistered contracts (which do not require registration under the Registration Act) that have a bearing on the title of the property, so it is important to take detailed representations and warranties. In some states, litigation cases are required to be registered with the Sub-Registrar in order to become binding or be considered as constructive notice to a person buying immovable property subject to litigation.
Taking possession of original title deeds at the time of sale is also extremely important, as they can be used to mortgage/encumber a property. Where the original title deeds are not available, great care needs to be taken to ensure there has been no mortgage/encumbrance by deposit of title deeds by the seller or his predecessor-in-interest.
Due diligence also sometimes requires the issuing of public notices in local papers inviting claims in respect of the property and making searches before the court offices, also referred to as negative searches. If any claim is made or litigation is discovered, the purchaser then makes a call on whether or not he should still go ahead with the transaction.
Representations and warranties vary depending on the nature of the transaction. In most transactions, representations and warranties are comprehensive, except where a transfer is on an "as is, where is" basis, and the liability of the seller is limited to the purchase price or a portion thereof. It is common to back representations and warranties by indemnities and, very often, there is no limitation of liability. That said, in India, only direct damages are awarded (ie, damages that naturally arose in the usual course of things from a breach, or which parties knew, when they made the contract, were likely to result from the breach of it). Indian courts do not award indirect, consequential, special, exemplary or punitive damages to plaintiffs for breach of contract.
The important areas of law include:
The buyer will not be responsible for soil pollution or environmental contamination of a property if they can prove that they were not responsible for it. Typically, the buyer is indemnified against any action initiated by the government department for contamination of a property prior to its purchase. However, proceedings for environmental contamination are few and far between, although this may change as environmental issues are attracting more recognition.
Approvals are issued with respect to the property, and pass along with the property under the sale transaction to the buyer. Presently, the seller/buyer has no disclosure obligations toward the environmental authority. However, the owner/developer of the property is required to submit periodical reports to the authorities confirming compliance with the terms and conditions based on which the approvals are issued. Furthermore, the onus is on the owner/developer to make the necessary applications for timely renewals of the consents obtained from the respective State Pollution Control Board.
The buyer can ascertain the permitted uses of a property based on zoning regulations formulated under state-specific town and country planning statutes. To aid the development of strategic areas, government entities may also enter into agreements with developers, whereunder they allot land with certain obligations imposed on its development.
The Constitution of India no longer recognises the right to hold property as a fundamental right. However, Article 300 (A) was included in the Constitution of India to affirm that no person would be deprived of his property except by authority of law.
State governments are authorised to acquire lands for public purposes. The current land acquisition statute prescribes the following:
Land parcels acquired by the state governments vest with the state governments free of all encumbrances and any title defects. This reduces the complexity of conducting due diligence on land acquired and then allotted by the government, as ordinarily no antecedent documents need to be reviewed.
Any transfer of property requires the payment of duties levied by the government, such as stamp duty and cess (which differ from state to state), and registration fees. Where the asset is under construction and not ready for use, GST is also required to be paid by the seller. However, GST is an indirect tax, so can be recovered from the buyer.
In an asset transfer, the duties are generally paid by the buyer, unless they are otherwise agreed to be shared between the buyer and the seller. Most stamp acts provide that, where there is no agreement to the contrary, the stamp duty will be paid by the purchaser on a sale and by the lessee on a lease.
For transactions involving the transfer of shares, stamp duty at 0.015% of the value of consideration for the shares is also payable upon transfer. Stamp duty under the head of conveyance need not be paid if property is contributed into a partnership firm. However, any exit from the partnership by the original contributor will attract the payment of stamp duty as if it is a conveyance. The rate of stamp duty will vary from state to state.
Exemptions on the payment of stamp duty and certain tax benefits are available to entities operating out of free trade zones known as "special economic zones".
A person who is resident outside India can acquire property or invest in real estate in India only in accordance with FEMA, which prescribes limited circumstances for such matters.
While foreign investment into real estate construction and development has been liberalised significantly, certain restrictions remain. An important restriction is that the investment has to be locked in for three years, calculated with reference to each tranche of investment, except in cases where the construction of "trunk infrastructure" is completed. Furthermore, the transfer of a stake from a person resident outside India to another person resident outside India, without the repatriation of foreign investment, is subject to neither any lock-in period nor any government approval. The lock-in is also not applicable to the construction of hotels and tourist resorts, hospitals, special economic zones, educational institutions and old-age homes.
In respect of completed projects, FDI is specifically permitted in certain projects, such as the operation and management of townships, malls/shopping complexes and business centres, with a lock-in of three years (calculated with reference to each tranche of investment) being applicable to investments in such completed projects. Furthermore, earnings of rent/income on the lease of a property, not amounting to a transfer, will not amount to real estate business. This provision enables FDI in completed projects if the building is leased and units are not sold. Foreign Venture Capital Investors can invest in securities issued by entities engaged in certain specific sectors prescribed by the Reserve Bank of India (RBI).
It must also be noted that certain changes have been introduced by the Indian government in the NDI Rules by way of notification of Press Note 3/2020. This Press Note 3 regulates foreign investments in India by countries having land borders with India wherein, if a beneficial owner in an investing/acquiring entity (ie, any foreign entity holding directly or indirectly more than a 25% shareholding in such investing/acquiring entity) is an entity set up in, or an individual resident in, China, Pakistan, Afghanistan, Nepal, Bhutan, Bangladesh or Myanmar, such investing/acquiring entity would have to seek prior government approval in respect of their proposed investment or purchase of shares (or other equity linked securities) in an Indian company. To ensure compliance with this requirement, dealer banks in India that have been authorised by the RBI secure necessary declarations and undertakings from foreign investors certifying that the necessary threshold of beneficial ownership has been duly complied with.
Certain additional conditions may need to be fulfilled, especially under any project-specific approvals obtained, lease documents, etc, in relation to a transaction wherein (for instance and by way of an example) a foreign entity is investing in, or gaining control over, an Indian investee entity, or if there is any reconstitution of the board of directors of the Indian investee entity, or where the Indian investee entity takes on additional debt (including in the form of optionally convertible debentures or non-convertible debentures (NCDs)) and if any charge is created on the project land, pledge of shares, etc. In any change of control, there may be additional compliance requirements, including but not limited to obtaining pre-facto approvals and/or authorisations in connection with the proposed transaction under such project-specific approvals obtained and/or lease documents (as applicable).
Typical fundraising means for companies engaged in the real estate sector include FDI, REITs, alternative investment funds (AIFs), debt financing and external commercial borrowings (ECBs).
The foreign exchange regime prohibits foreign investment into companies that are engaged purely in "real estate business", which is defined as dealing in land and immovable property with a view to earning profit therefrom but does not include the development of townships, the construction of residential/commercial premises, roads or bridges and REITs registered and regulated under the REIT Regulations. Accordingly, FDI of up to 100% is permitted under the automatic route for companies engaged in these sectors, subject to certain limited conditions.
Entities engaged in real estate broking services are also permitted to receive up to 100% FDI under the automatic route.
FDI may be through subscription to equity shares and instruments that are compulsorily convertible into equity and are required to comply with pricing guidelines prescribed by the RBI.
Each phase of a construction development project would be considered as a separate project, so an investor can potentially exit before the completion of an entire project, subject to a lock-in period of three years, as mentioned in 2.11 Legal Restrictions on Foreign Investors.
This is a relatively new mode of fundraising, with only five REITs having been set up in India so far, although several developers and investors are looking into REITs as an attractive means of fundraising or (in the case of investors) liquidating investments and exiting. REITs in India are private trusts set up under the Indian Trusts Act, 1882 and compulsorily registered with SEBI. The set-up of REITs would include the sponsor (who sets up the REIT), the manager (who manages the REIT’s assets, investment and operations) and the trustee (a SEBI-registered debenture trustee who is not an associate of the sponsor or manager, and who holds the REIT assets in trust for the benefit of the unitholders/investors). Furthermore, the REIT Regulations have been modified to permit, inter alia, REITs to issue debt securities for raising funds.
AIFs are privately pooled investment vehicles that collect funds from investors (Indian or foreign) for making investments and are regulated by the SEBI (Alternative Investment Funds) Regulations, 2012. AIFs have to be compulsorily registered with SEBI. AIFs may invest as private equity or debt funds, or both. There are, however, certain restrictions with which AIFs have to comply.
One INR25,000 Crores Category II AIF has been formed under the Special Window for Affordable and Mid-Income Housing. The fund aims to provide last-mile financing to enable the completion of the construction of stalled housing projects. This scheme was approved by the cabinet on 6 November 2019. The AIF will likely be investing in real estate companies through NCDs.
The most common means of fundraising for real estate developers is by the issuance of NCDs to non-banking finance companies, banks, financial institutions and other private lenders. Debt investments by banks are subject to certain prudential norms relating, inter alia, to the exposure of banks to such investments, as stipulated by the RBI. While this has motivated several developers to seek investments from non-banking finance companies, financial institutions and other private lenders, which can provide typical loans as well as other structured lending solutions, market conditions have affected investments by non-banking finance companies in recent times.
The RBI has recently eased the definition of beneficiaries eligible for ECBs to include all entities that can receive FDI. Funds borrowed under ECBs cannot generally be used, inter alia, for real estate activities, except when used for:
Restrictions on ECBs for funding real estate transactions broadly remain similar under the new framework. In lieu of the existing sector-wise limits, all eligible borrowers are now permitted to raise up to USD750 million or equivalent per financial year under the automatic route.
Typical security includes:
Where security is in the form of a mortgage, the mortgage deed will have to be registered with the jurisdictional Sub-Registrar of Assurances. Where an equitable mortgage is created by the deposit of title deeds, the recording of said deeds may need to be registered in certain states in India. Secured lenders are required to register their security interest created on such assets (tangible or intangible) with the Registrar of Companies (ROC) and the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI), which is a central database for all security interests created, that was established for the purpose of checking and identifying fraudulent activity when loans are advanced against security interests in assets.
FDI in Indian companies cannot be secured and must be treated as equity investments wherein investors take risks typical to equity investments. Accordingly, foreign investors investing under the FDI route are not permitted to have assured returns at the time of exit. However, where investments are made in NCDs, the NCDs can be secured, including where they are issued to permitted foreign investors. Security in such cases is typically created in favour of a security/debenture trustee. In the case of an ECB, a pledge over shares of an Indian company in favour of a foreign lender requires compliance with ECB guidelines and the approval of the authorised dealer bank (AD Bank). The creation of a charge over assets situated in India in favour of a foreign lender will be subject to compliance with Non-Debt Rules and Debt Regulations, and approval from the AD Bank.
Stamp duty is payable on all documents. State-specific statutes determine the stamp duty payable on different kinds of documents. Insufficiently stamped documents may be impounded and may not be admissible as evidence in Indian courts. Some documents need to be registered under the Registration Act, with payment of the applicable registration fees. Certain documents, such as powers of attorney, are also required to be notarised and are subject to notarisation fees.
Certain corporate authorisations are required under the Companies Act, such as board resolutions and shareholder resolutions. Any charge is required to be filed with the ROC and, in the case of non-compliance, such security interest would be held as void against the liquidator and the other creditors of the company in the event of the winding-up of the company, although the obligation for the repayment of money secured by the charge will continue to subsist.
Under RERA, there are some restrictions on the ability of companies and real estate developers to secure their borrowings.
Where the borrower in default is solvent, it is not particularly difficult for a lender to seek to enforce its security.
Where a borrower is insolvent or unable to repay its dues, provisions of the Insolvency and Bankruptcy Code, 2016 (IBC) are applicable.
Separately, banks and financial institutions that have lent monies to a borrower are entitled to enforce their security interest without the intervention of a court/tribunal, subject to strict compliance with the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI). This Act defines borrowers to mean any person who has been granted financial assistance by any bank or financial institution or who has given any guarantee or created any mortgage or pledge as security for the financial assistance granted by any bank or financial institution, and includes a person who becomes borrower of an asset reconstruction company consequent to the acquisition by it of any rights or interest of any bank or financial institution in relation to such financial assistance or who has raised funds through issue of debt securities. However, it should be noted that action under the IBC and SARFAESI cannot be taken simultaneously, since a moratorium is declared upon the admission of an insolvency application under the IBC by a National Company Law Tribunal.
As a general rule, where the priority of security is not contractually agreed between the parties involved, security created earlier in time will rank in priority to security that is created subsequently. A first ranking charge will have priority over a second ranking charge at the time of the enforcement of security. However, it is possible for existing secured debts to become subordinated to new debts when an intercreditor agreement setting out the ranking of debt or a subordination agreement is signed.
Typically, in Indian lending transactions, shareholder/promoter loans are unsecured and subordinated.
Lenders will not ordinarily incur liability under Indian environmental laws simply by holding a security interest. If a lender takes over management and control of the borrower after the enforcement of security, such lender may incur liability as the person in possession of the polluting premises, or as a person responsible for the conduct of the borrower’s business.
The optimum outcome of an insolvency application under the IBC is a successful corporate insolvency resolution process (CIRP). However, when a CIRP fails, liquidation follows. There are also provisions for voluntary liquidation. Where such a debtor goes into liquidation, the IBC provides the manner in which secured debt will be discharged. Typically, workmen’s dues are prioritised over dues to lenders who have relinquished their security interest to the liquidation process. Similarly, wages and dues owing to employees (other than workmen) are ranked pari passu with such lenders who have relinquished their security to the liquidation estate.
The exposure of the real estate industry in India to foreign currency borrowings per se has been negligible because of RBI restrictions, and the expiry of the London Interbank Offered Rate (LIBOR) index in 2021 would have limited impact. However, going forward, this topic may need to be analysed, given the recent liberalisation of the ECB regime in India, and alternative interbank interest rates should be used, such as the Euro Interbank Offered Rate (EURIBOR). The extant ECB guidelines use the words “LIBOR or any other 6 months interbank interest rate applicable to the currency of borrowing such as EURIBOR”.
Planning authorities are constituted for the implementation and governing of zoning regulations for the orderly development of a state. Considering the changing dynamics of a city, every state facilitates the updating and revising of an existing master plan at least once every ten years, by carrying out a fresh survey of the area within its jurisdiction, with a view to revising the existing master plan and indicating the manner in which the development and improvement of the entire planning area is proposed.
Certain states facilitate the acquisition of lands by government organisations or agencies for industrial and residential developments. The developments in such areas are mainly governed by the rules and regulations framed by such government organisations/agencies.
Any change in the zoning regulations will require the prior consent of the state government, the process of which is time consuming and does not always result in consent being given.
The construction of new buildings and refurbishments in any state is governed by the National Building Code, the applicable town and country planning statute, and the applicable municipal law, including the building by-laws framed by the respective planning authorities. The building and development control regulations state that various approvals are required to be obtained from different authorities for the construction or refurbishment of buildings.
Development is also required to be in compliance with the zoning regulations and building by-laws. Zoning regulations sometimes have provisions for the protection and preservation of properties that are identified as heritage properties. Consents from the pollution control board, the environmental department, the fire department, the airport authority, the water supply and sewerage board and the electricity board are also required.
There is no single regulatory authority or statute to govern the entire real estate sector, so the relevant authorities have been covered separately.
An application is required to be submitted to the jurisdictional planning authority along with all relevant title documents, plans/designs/drawings of the development, and in-principle approvals from the relevant authorities.
Once the planning authority is satisfied that the building, when constructed, would comply with the building by-laws, it provides its consent.
In some jurisdictions, a certificate is also often issued by the planning authority after the pillars are constructed, confirming that the construction has commenced in compliance with the sanctioned plan.
Pursuant to completion of the development, the planning authority also issues a certificate confirming that the building is fit to be occupied. Although minor deviations are compounded by collecting a fee, any major deviations in the development may result in the project not being issued a completion certificate.
The applicable town and country planning/municipal statutes prescribe timelines within which the planning authorities are required to grant approval or reject plans for the development of buildings.
Where a plan submitted for approval to the authority has been rejected or not expressly approved, the applicant may prefer an appeal to a higher authority, which is required to grant or reject the application within a prescribed time period. Where no response is received, the plan is often deemed to have been approved.
In the event of any arbitrary action initiated by a planning authority, the aggrieved party can approach a High Court, invoking its high prerogative writ jurisdiction.
Government entities enable parties to procure land for the development of strategic projects/areas – whether industrial, commercial or residential – by entering into:
The property is conveyed in favour of the allottee only upon compliance with the conditions in the agreements.
Where land is allotted by the government, the process of obtaining approvals for the implementation of the project is generally faster. In some large projects, the developer may be required to lease/relinquish a small portion of the property in favour of the electricity supply company for the setting up of a sub-station to supply power to the development.
For enforcement, parties are given sufficient notice and an opportunity to be heard prior to initiating any action against the developer or the development. The affected parties will have the right to approach a High Court, invoking its high prerogative writ jurisdiction, in the event of any arbitrary action initiated by the planning authority.
Real estate assets can be owned/held by private limited companies, public limited companies, Limited Liability Partnerships (LLPs) and partnerships. In addition, REITs are increasingly being considered by investors.
Private and public limited companies are required to be incorporated under the Companies Act, 2013 and to adopt Articles of Association and a Memorandum of Association, which would set out the objects and regulate the operations of the entity.
LLPs are incorporated under the LLP Act, 2008. Foreign investment into LLPs engaged in construction development activities requires regulatory approval.
Partnerships can also hold land, but foreign investment requires regulatory approval.
REITs are set up and operated in accordance with the REIT Regulations, 2014.
Typically, foreign investors prefer private limited companies, while domestic investors prefer partnerships and LLPs for smaller holdings.
There are no minimum capital requirements for public limited companies, private limited companies, LLPs or partnerships. REITs are required to comply with regulations relating to asset size and minimum offer.
Private limited companies are required to have at least two directors on their board, while public limited companies need at least three directors. One-person companies can be incorporated by Indian citizens who are resident in India. It has been proposed that non-resident Indians should be allowed to incorporate one-person companies.
Public companies also need to comply with additional requirements, such as having independent directors on their board.
LLPs and partnerships are required to have at least two partners.
Separately, every listed company and certain other unlisted companies that have paid-up capital over a prescribed threshold are also required to appoint a company secretary.
The costs for entity maintenance vary based on the type of entity involved. Annual compliance costs for a private limited company would typically be around GBP10,000 and similar or lower costs can be anticipated for compliance by LLPs.
The law recognises the concepts of leases and licences that permit a person, company or other organisation to occupy and use real estate for a limited period without acquiring the absolute title to said real estate.
The simple difference between a lease and a licence is that a lease is the transfer of a right to enjoy the premises for a limited time, while a licence is a privilege to do something on the premises which would otherwise be unlawful without permission. The transaction is a lease if it grants an interest in the premises; it is a licence if it gives a right to a permissive user with no interest in the premises.
The law does not differentiate between different types of commercial leases. Most commercial leases are based on a fixed rental and fixed term concept. There are triple net leases where the tenant bears the cost of the property tax, the insurance of real estate and maintenance charges, and profit-sharing leases where the rent is based on a percentage of the lessee’s revenue, but these are not as common.
Rent or lease terms are freely negotiable in contracts entered into between parties, except in a few states in India where some properties are regulated by rent control statutes and where there are statutory tenants. The rent and the lease terms largely depend on the city, the location of the building and the present market rents payable for similar buildings.
Duration of Lease Term
There are no regulations governing the term of a lease, which can be contractually agreed and recorded by the parties in the lease deed.
The initial term of a lease is generally between three and five years. There are also cases where the tenant opts for a longer lease of ten years. It is common to have an agreement to lease for a longer period (paying nominal stamp duty) and to execute lease deeds thereunder, as such structuring arrangements result in a lower stamp duty payment.
Maintenance and Repair
Maintenance and repair of the actual premises occupied by the tenant are generally the tenant’s responsibility. In most cases, major or structural repairs (that are not attributable to the tenant) are excluded from the tenant’s scope of responsibility.
Frequency of Rent Payments
In most commercial leases, rents are payable on a monthly basis in advance. For retail leases, malls, hotels and so on, the lease rent or a portion thereof can be based on the turnover of the lessee’s revenue at the establishment. Where a furnished space is provided, rent may be payable on the furniture and fittings only until the cost of such furniture and fittings has been fully depreciated.
Under TOPA, the tenant has the option to terminate the lease if the property is destroyed or becomes unfit for occupation because of fire, tempest, flood, violence by mob or any other irresistible force. After the outbreak of COVID-19, several tenants were not using the premises due to the lockdown imposed by the government, which resulted in claims for waivers and reductions of rents. In some cases, landlords agreed to such. Courts have held that the inability to use the property due to the lockdown is a temporary event and such an event will not entitle the tenant to seek the suspension of rent, unless there is a clause in the rent deed that specifically exempts the payment of rent during a period when the tenant is unable to use the property during a pandemic.
In a typical commercial lease in India, the rent will escalate every three years; the rate of escalation is generally between 10% and 15%.
The concept of a rent review and escalation of rent based on market rent is not common in Indian leases. Where a rent review is agreed to in a long-term lease, the prevailing market rent is determined by an independent expert. The determination of rent is typically subject to certain exclusions, including disregarding (i) any goodwill attached to the premises by reason of the tenant’s business or occupation of the premises, and (ii) the effect of any improvements made by the tenant at the premises.
VAT has been subsumed by GST, which is payable on leases of property/asset for commercial use, and is borne by the tenant. The tenant can claim input tax credit, subject to conditions in law, of such tax paid to the landlord. Also, tax on the lease rent is deducted at source in terms of the Income Tax Act, 1961 by the tenant prior to paying rent to the landlord.
In most commercial leases in India, a tenant is required to pay the landlord an interest-free refundable security deposit, also known as a premium, which is held by the landlord as security for the tenant’s obligations during the lease term. The quantum of the deposit is commercially agreed but the practice differs from state to state and can start at three months’ rent and go up to 12 months’ rent.
In addition to rent, tenants usually pay maintenance charges and a fixed parking fee based on the number of parking spaces provided exclusively to the tenant. The landlord (or a third party nominated by the landlord) generally takes responsibility for the maintenance and repair of the common areas, the cost of which is charged back to the tenants on a fixed-cost basis (with an agreed escalation) or on an actual cost-plus basis, with the landlord receiving a management fee of 15% to 20% of the cost incurred in providing the services.
All such payments (other than municipal taxes borne by the tenant) made to the landlord for use of the property are subject to withholding tax as well as GST. Any non-refundable deposit is subject to the deduction of tax at source as rent.
Utilities (including power, back-up power, water, etc) are paid by each tenant of the building based on the quantities actually consumed.
In most instances, the insurance policy obtained is a fire and perils policy covering loss of property. The cost of insurance is sometimes charged back to the tenants as part of the maintenance charges.
The usage of a project/building is dependent on the zoning of the land and any conditions running with the land. At times, land is allotted to a landlord for a determined purpose, such as biotechnology or IT-related uses, and accordingly the landlord would impose the same restrictions on the tenants under the lease. Non-compliance with the usage provision could result in a termination of the lease.
Generally, a tenant is only permitted to perform non-structural alterations at the premises (including fit-outs); structural alterations are only permitted with the prior consent of the landlord. The landlord may impose conditions, such as requiring the landlord’s consent on the contractors to be engaged or the materials to be used. The landlord may also require the tenant to reinstate the premises to the condition prior to the alteration upon the expiry or termination of the lease.
Where a tenant takes land on lease for a long period, the tenant would have the right to develop the land as he requires, subject to applicable law. Upon the expiry or termination of the lease, development on the land would revert to the landlord, at no cost or at an agreed cost, based on the contractual understanding.
Under Indian law, the owner of the land and the owner of the building constructed thereon can be different people. Any gain on a transfer of development rights in a property is subject to tax as income of the landlord. The transfer of development rights to the tenant for developing the land and for commercial exploitation is subject to GST and is taxable in the hands of the tenant (under the "reverse charge mechanism"). GST payable by the tenant is subject to conditions and is calculated in the manner prescribed under law.
Laws relating to leases do not differentiate between residential, industrial, commercial or retail leases, but commercial treatment may differ from market to market.
No asset class distinctions relating to leases have been introduced due to the COVID-19 pandemic.
Usually, a tenant’s insolvency will result in the termination of the lease as the tenant would not be able to comply with its obligations under the lease.
Payment of a refundable security deposit/premium is the most common security provided to the landlord. At times, the landlord may require the tenant to provide a bank guarantee for securing certain payment obligations.
If contractually agreed, the tenant may have the right to continue to occupy the premises as a monthly tenant after the expiry or termination of the lease or in the specific instance where the landlord does not refund the security deposit paid by the tenant in time. In all other cases, the tenant would have to leave the premises on the date of the expiry or termination of the lease. Where the tenant does not vacate the premises, the landlord would have to approach the court to evict the tenant, who will have the status of a trespasser. The landlord would also have the right to claim mesne profits from the tenant for such unauthorised occupation.
Under TOPA, a lessee may transfer absolutely, or by way of mortgage or sub-lease, the whole or any part of his interest in the property, and any transferee of such interest or part may again transfer it, subject to the lessee not ceasing any of the liabilities attached to the lease and there being no contract to the contrary. In respect of a statutory tenant, state legislation also prescribes restrictions on transfers. For example, under the Maharashtra Rent Control Act, 1999, tenants cannot sub-let or assign their interest in the premises without the express consent of the landlord. The sub-lessee has to abide by the lease agreement executed between the lessor and the lessee.
Events of default and termination rights are contractually agreed between parties, including the granting of a cure period following an event of default before the termination rights arise.
Leases of immovable properties from year to year or for any term exceeding 12 months or reserving a yearly rent require mandatory registration at the office of the Sub-Registrar of Assurances. The Registration Act requires the deed to be registered within four months of its execution. An extension of an additional four months may be granted by the Registrar at his discretion, by levying a penalty, provided such non-presentation of the instrument within four months of execution was due to unavoidable circumstances. After registration, the lease is recorded in the local Registry of Deeds.
Stamp duty is payable on the lease deed before it is registered.
Although licences are not normally required to be registered, certain states mandate it. For example, under Section 24 of the Maharashtra Rent Control Act, a leave and licence agreement is compulsorily required to be registered.
Where a tenant is in breach of the terms of the lease, the landlord would have to follow the procedure set out in the lease deed to require the tenant to leave the premises. The process for eviction of the tenant may take between three and seven years. This may include giving the tenant an opportunity to cure the default if the lease deed provides for such a step. Thereafter, the landlord can issue a notice of termination and proceed to initiate legal action to recover the premises where the tenant remains in occupation. The landlord can seek mesne profits from the tenant for unauthorised occupation. Where termination is during the lock-in period, the landlord may be able to seek lease rent for the balance of the lock-in period.
A third party cannot terminate a lease unless contractually agreed. In the event of a condemnation event by a government body, the lease will stand terminated as the property will vest with the governmental authority concerned. Compensation payable for such acquisition is typically paid to the owner of the property, unless the sharing of compensation is contractually agreed between the owner and the lessee.
Construction industry contracts are typically lump-sum turnkey fixed-price contracts, bill of quantities-based contracts (item-rate contracts) or work package-based contracts.
For projects where a detailed bill of quantities is possible, owners opt for an item-rate contract, which gives them greater control of the contract price. For large infrastructure sector construction projects, lump-sum turnkey construction contracts are common.
In India, fixed-price contracts prove problematic since the prices of raw materials fluctuate quite significantly, being dependent on the rate of inflation (which is in the region of 4% to 7% in India).
Split structure and design and build structures are commonly used for risk allocation and rewards for construction projects. Owners have a right to review and certify the contractor’s compliance. Contractors are often responsible even after completion, and during any agreed defects liability period and latent defects liability period.
In a split structure, owners appoint an architect for design and a contractor for construction. This is prevalent for the construction of real estate or manufacturing units.
For design and build structures, the owner enters into a lump-sum turnkey contract with a qualified entity who is responsible for the entire project, entailing managing, supervising and co-ordinating all other contractors/subcontractors to ensure that work is carried out safely as per the project schedule and to meet the owner’s standards.
The owner may, at the contractor’s cost, have the contract performed through a third party in the case of non-performance by the contractor. This right has been bolstered with the Specific Relief (Amendment) Act, 2018.
Standard indemnity provisions are prevalent in construction contracts, and the limitation of liability usually varies between 50% and 100% of the contract price.
Contractors may be required to provide the owner with a corporate guarantee or a fund-based performance guarantee.
The retention of payments is also common, and such guarantee/retention amount is released after completion of the defect liability period.
Warranties as to workmanship and quality, fit-for-purpose warranties, adherence to technical specifications, and adherence to prudent industry practice are generally undertaken by contractors, subject to industry-specific and technical exceptions.
Lastly, contractors are usually required to obtain and maintain adequate insurance.
It is common to penalise delays in the performance of work by requiring the contractor to pay damages, or by deducting liquidated damages from payments due.
Usually, an "advance payment bank guarantee" (ABG) is required to be furnished by the contractor upon payment of the "mobilisation advance" by the owner. In most cases, the ABG is valid until the completion of construction.
In addition to the ABG, a "performance bank guarantee" (PBG) is also sought by owners to secure the performance of the work/construction commissioned by the contractor. Such a PBG would be required to be furnished on the effective date of the contract along with the ABG, and is usually valid until the expiry of the defect liability period.
Unless contractually agreed, the contractor is not permitted to create a lien on the property.
In most states, a building comprising more than a prescribed number of floors can only be occupied after an occupancy certificate has been obtained from the relevant planning authority.
VAT has been subsumed by GST, which is payable on the leasing, licensing or transfer of development rights of land (at 18%), and on the transfer of under-construction property. The leasing of residential apartments for residential use is exempt from the levy of GST.
GST on transfers of under-construction property varies for different types of projects, with the following examples:
However, GST is not applicable on the sale of constructed property. The burden of such taxes can be passed on to the buyer commercially.
Because of the COVID-19 pandemic and in order to boost the real estate sector, the State of Maharashtra reduced stamp duty from 5% to 2% for sale transactions taking place between 1 September 2020 and 31 December 2020, and to 3% for sale transactions taking place between 1 January 2021 and 31 March 2021.
Stamp duty can be reduced by contributing a property to a partnership firm. The partnership firm can thereafter even be converted into a company. By such transfers, the property owned by an individual can ultimately be transferred and owned by a company without the payment of stamp duty and the registration fee.
Municipal taxes are generally calculated based on the location, size, age and occupation of the property (self-occupied or tenanted). Sometimes, taxes are based on rents received. There are no exemptions for the payment of property taxes, except for properties used for charitable purposes/religious institutions.
Any income of a non-resident from property situated in India is subject to tax in India, and withholding tax applies. The payment of consideration for the purchase of a property from a person resident in India is also subject to withholding tax at the rate of 1%, subject to certain thresholds.
The income of a foreign company is usually taxed at a rate of 40% (plus applicable surcharge and cess). However, gain on the sale of real estate held as an investment is taxed at a rate of 20% (plus applicable surcharge and cess) or 40% (plus applicable surcharge and cess), depending on the period of holding. If the property was purchased by bringing foreign currency into India, gains on disposal are computed so as to adjust for changes in the rate of currency.
Where consideration received on the transfer of an immovable property (whether held as a capital asset or as a business asset) is less than 90% of the value of the property for the purpose of the payment of stamp duty as per local laws, the value of the property for the payment of stamp duty is deemed as consideration received for the levy of income tax under the IT Act. Similarly, where the consideration paid for the acquisition of an immovable property is less than 90% of the value of the property for the purpose of payment of stamp duty as per local laws, the difference between the value of the property for the payment of stamp duty and the consideration discharged is taxed as income of the purchaser, at applicable rates. Due to the COVID-19 pandemic, the safe harbour has been increased from 10% to 20% for the first-time allotment of a residential unit by a builder for a consideration of up to INR20 million where the allotment is made between 12 November 2020 and 30 June 2021.
Tax on non-resident taxpayers may, however, be reduced if favourable tax treaty provisions apply.
Rental income also qualifies for the following deductions/rebates:
However, the set-off of loss arising from interest paid in excess of rental income is subject to certain limitations. It is mandatory for parties entering into a purchase or sale of immovable property to obtain and quote their Permanent Account Number (PAN) allotted by the Indian tax authorities on the conveyance document.
Depreciation and other business expenses may be claimed as deductions only if the taxpayer is in the business of commercially letting out properties, or where plant and machinery that are inseparable from the property are let out together with the property.
India – Real Estate and COVID-19
2020 will be etched in our memories as the year in which the COVID-19 pandemic brought the entire world to a grinding halt and forced each one of us into an individual as well as a collective battle against COVID-19. Concepts such as "lockdowns", "quarantine" and "social distancing", which were unknown to most of us a year ago, now form a part of our everyday lives as the pandemic continues to impact our lives. While mankind has faced multiple epidemics and pandemics in the past, it has not faced a pandemic of such magnitude so as to impact almost every nation across the globe, infecting more than 132 million people and causing more than 2.8 million deaths (at the time of writing).
This financial year had been predicted to be a year of recovery for the Indian real estate sector, especially the housing segment, after the slump caused by multiple factors like demonetisation, the implementation of GST and the NBFC (non-banking financial company) crisis. However, all such anticipations were thwarted as the pandemic forced the central and state governments to impose stringent measures, including a nation-wide lockdown for multiple months, which had a devastating impact on most businesses, and real estate was no exception.
The already ailing real estate sector witnessed a further slump in sales and an erosion of 40-50% of business in the residential segment. Barely out of the IL&FS-induced crisis, NBFCs witnessed activity drying up at the grass roots level, which affected the flow of credit within the Indian economy. Barring a few large NBFCs with strong parentage, most NBFCs faced a threat from plummeting liquidity and acutely reduced growth projections.
However, in the face of an existing crisis, the Indian government and concerned stakeholders formulated an effective and robust rescue operation for the real estate sector by introducing a plethora of schemes in order to boost demand and pump cash flows into the real estate industry.
The Rescue Operation
Pre-2016, the real estate sector was unregulated and completely lacked transparency and accountability vis-à-vis all stakeholders (developers, brokers and end-use consumers), resulting in dampened investor interest over multiple decades. However, certain key policy reforms such as the enactment of the Real Estate (Regulation and Development) Act, 2016 (RERA) and the Insolvency and Bankruptcy Code, 2016 (IBC), played an important role in kickstarting the revival of the real estate sector. The outbreak of COVID-19 and consequent restrictions, unfortunately, delivered a huge blow to the revival of the real estate sector and pushed it closer to the brink of a recession.
That said, the government and policy makers rushed to brainstorm ideas and reforms, and interested stakeholders were also proactive in providing suggestions and offering unparalleled co-operation to effectively and efficiently implement measures to combat the negative ripples caused by the pandemic. The effective and timely implementation of the reforms was equally important to ensure that they bear fruit and do not get restricted on paper from a macroeconomics standpoint. Some of the key reforms that provided a much-needed fillip to the real estate sector and saved it from slipping into depression are outlined below.
COVID-19 recognised as "force majeure"
As early as February 2020, the government gauged the manner in which COVID-19 was playing havoc with the global supply chain, and promptly issued a notification declaring that COVID-19 could be considered as a case of "natural calamity" and that a "force majeure clause" may be appropriately invoked in accordance with the applicable procedure.
Timely introduction of loan moratoriums
In the last two or three fiscal years, financing in the real estate sector predominantly involved refinancing, distress acquisition and stressed lending. The outbreak of COVID-19 only made things worse for the beleaguered real estate sector. However, the Reserve Bank of India (RBI) was vigilant in foreshadowing the downward spiral and, within two days of the imposition of the national lockdown in March 2020, proactively issued a circular permitting banks and lending institutions (collectively, Lenders) to grant a moratorium on the repayment of loans (principal plus interest) for the period of March 2020 to the end of May 2020, which was further extended until the end of August 2020. The RBI also provided a one-time restructuring option to Lenders of specific loan categories that were affected by COVID-19-induced pressure.
These RBI initiatives were targeted to strike a fine balance between providing relief to anguished borrowers facing unpredictable disruptions in business revenue and/or income levels and preventing such loan accounts from being categorised as "non-performing assets" and consequently averting the Lenders from taking a hit on their credit ratings.
Suspension of insolvency proceedings
The government suspended the initiation of fresh insolvency proceedings against defaults occurring on or after 25 March 2020, for the subsequent six months. With the temporary suspension of certain provisions of the IBC in tandem with the RBI moratorium, no fresh insolvency filings could be made by financial creditors, operational creditors or the corporate debtor itself, thereby effectively shutting down all insolvency filings against any company. The IBC suspension was effective until late March 2021.
Reduction in stamp duty
Stamp duty (a statutory levy) to be paid on transfers of immovable properties in Tier-I cities is very steep due to the colossal circle rates that apply in urban areas, driving up property costs. Mindful of this fact, the central government nudged the states to consider reducing stamp duty to revive velocity in real estate transactions, generate revenue and aid the overall economic wellbeing of India Inc. The states of Maharashtra and Karnataka were proactive in substantially reducing the levy of stamp duty for certain immovable property transfers. Reduced stamp duty lowered the cost of acquisition and, coupled with other benefits offered by developers, etc, provided sufficient thrust to sales in the Indian real estate sector.
Launch of "Atmanirbhar Bharat Abhiyaan" (Self Reliant India)
Similar to other countries, the Indian government announced a financial stimulus of INR20 lakh crore, which is tantamount to almost 10% of the country’s GDP, with "infrastructure" as a key focus area, introducing measures such as the following.
Six-month extension for government projects and release of bank guarantees
An automatic extension of six months was granted to contractors to honour their contractual obligations related to government projects such as the construction of highways, railways, public works department, etc, without any additional payments. Contractors breathed a sigh of relief, avoiding penalties for failing to complete project milestones and other contractual time-bound obligations. Furthermore, in order to boost liquidity and combat cash flow issues among small and mid-sized contractors, concerned government agencies were permitted to release bank guarantees on a pro rata basis to the extent of a project's actual completion.
Ability to seek extension from state RERA vis-à-vis project completion
The pandemic and ensuing restrictions had a direct negative impact on the availability of raw materials and manpower for projects that were already under construction, bringing construction works to a complete standstill as the distressed labour class migrated to their hometowns in the wake of the pandemic. However, such distress did not stop the clock for the developers under law, especially RERA – which requires developers to adhere to the stipulated project completion timelines, failing which consumers are entitled to claim certain reliefs and developers can face dire consequences, including the revocation of project registration.
In light of the pandemic, state RERA authorities introduced an option to seek an extension of project completion timelines by three to 12 months, along with certain other statutory compliances depending on the on-ground situation in their respective states. This came as a major relief for developers, who could now seek a much-required "grace period" and re-plan completion modalities without being penalised for delays.
Relaxation on external commercial borrowings in affordable housing scheme
Historically, the National Housing Bank (NHB) determined whether a project was eligible to be a "low-cost affordable housing project", directly impacting the developer’s ability to raise project finance through external commercial borrowings (ECB). However, the categorisation of "affordable housing" as a sub-sector of infrastructure has enabled developers to utilise the ECB route for financing "affordable housing projects" without being at the mercy of the NHB.
Steep premium-related cuts
Because the state of Maharashtra houses one of the costliest real estate markets (Mumbai), the types and quantum of premiums levied for construction there are higher than in other Tier-I cities, which escalates construction costs and percolates down to the sale price offered to the end consumers. Accordingly, the government reduced construction-related premiums by 50% to stimulate and simultaneously provide holistic stability to the real estate sector.
General Measures to Revive the Real Estate Sector (Before COVID-19)
The measures introduced in response to the COVID-19 pandemic, combined with the following key reforms pioneered by the government even before the advent of COVID-19, insulated and pushed for the revival of the beleaguered real estate sector and radically mitigated the impact of COVID-19 on India Inc.
Homebuyers as financial creditors under the IBC
The IBC was amended to prescribe a threshold of the lesser of 100 allottees or 10% of the total number of allottees of a real estate project to initiate insolvency against the developer. The constitutional validity of this amendment was upheld by the Apex Court in Manish Kumar v Union of India. The amendment applies retrospectively, thereby affecting pending applications and further safeguarding developers from individual allottee complaints.
Real estate alternative investment funds
The government announced the setting-up of a real estate investment fund (RE AIF) with a corpus of INR25,000 crore, with an initial fund of INR10,350 crore raised through the Special Window for Affordable and Mid-Income Housing Investment Fund I (SWAMIH Fund) set up by SBICAP Ventures Limited. This fund provides last-mile funding to stressed affordable and middle-income housing projects. The fund has attracted the attention of multiple large public sector banks and financial institutions, such as SBI, LIC and HDFC, and was formed to assist the timely delivery of homes to homebuyers and unlock capital tied up in struggling projects, thereby buttressing demand for real estate and the larger Indian economy.
Shifting Focus of Real Estate Trends in India
Real estate has recently re-emerged as the preferred asset class, with 57% of the audience preferring real estate over other classes of investment such as gold, fixed deposits and stocks.
Upward surge in demand in the housing sector
The shift towards "working from home" by various small and large-sized companies, coupled with the drive of working professionals to exercise effective cost-saving measures in their daily lives, has boosted demand in the housing sector, with individuals and families aiming to save steep expenditure towards rental housing in their work locations, which mainly lie in Tier-I cities. Furthermore, as housing in Tier-II cities is more affordable, there has also been a positive shift in demand in the residential sector in Tier-II cities.
Staggering increase in property registration across prime cities
Tier-I and top Tier-II cities witnessed rising housing sales and property transfer registrations on account of lower home loan rates, stamp duty reduction, tax reliefs, etc, with property registrations in Mumbai boosted by 70% in February 2021 (year-on-year basis). In December 2020, Mumbai clocked a record 19,552 property transfer deals, which was a 204% increase on a year-on-year basis.
Increase in demand for home loans and substantial decrease in home loan interest rates
Leading banks slashed home loan interest rates to stabilise the dropping sales velocity for residential properties and bring credit circulation back on track. Leading public and private sector banks and housing finance institutions are currently offering an all-time low home loan interest rate for certain categories of borrowers based on their CIBIL score, marking the lowest in the last 15 years. Such attractive interest rates along with reverse migration has led to a recovery of the real estate market, resulting in a 78% increase in total sales of home units in seven cities across India in the last quarter of 2020 as against previous quarters.
COVID-19 proved to be an opportunity for existing investors to expand their portfolio, and an entry pass for new investors/portfolio managers. While private equity investments tapered in the first nine months of 2020, the real estate sector nevertheless attracted private equity investments of USD2.31 billion across 11 deals, with more than 81% claimed by the commercial office segment, 10% by warehousing spaces and 9% by the residential sector. However, this lull was short-lived, and from November 2020 onwards the sector witnessed unprecedented M&A and private equity deal activity with 149 transactions, three of which were valued at more than USD1 billion each. This is the highest transaction volume noted in the country since November 2015. Private equity funds infused USD5 billion into the Indian real estate sector in 2020, with more than half of this investment being made in November and December 2020.
The sector also reflected a strong investor appetite for the acquisition of distressed assets and last-mile funding to projects. Accordingly, while the larger organised developers witnessed equity infusion coming their way, the medium and small-sized developers resorted to development management models and bridge funding options to aid completion of their projects that were otherwise on the verge of being stalled.
Launch of real estate investment trusts
Bridging the chasm between the sophisticated commercial real estate asset class and the common man, the real estate investment trust (REIT) is a modern-day instrument that makes it possible for small-time investors to participate alongside large institutional investors. REITs were first contemplated in India in 2014, but only hit the ground running in 2019, with the bumper listing of the initial public offer (IPO) launched by Embassy Office Parks (a joint venture between Blackstone and Embassy Group) receiving over 181 million bids.
The pandemic did not dampen investor enthusiasm for rent-yielding, transparent and lucrative asset classes. The 2019 trend continued with the launch of K. Raheja and Blackstone-owned Mindspace Business Parks REIT IPO and Brookfield’s REIT IPO. Leading Indian real estate developers such as DLF and Godrej are also set to launch REITs later this year.
Launch of equity IPOs by leading real estate developers
In order to take advantage of the speedy economic recovery of India Inc. and the overall bullish trend in equity markets, India’s leading real estate developers based out of the Mumbai Metropolitan Region, such as Lodha Developers (renamed as Macrotech Developers) and Puranik Builders, are aiming to launch their respective IPOs in the next few months, the proceeds of which will be channelled towards debt reduction, land acquisition and the launch of new projects.
Increase in demand for warehousing and logistics spaces
The warehousing and logistics segment is highly dependent on other subsectors like e-commerce, retail, logistics and technology. Amidst the pandemic, this segment emerged as the dark horse of the real estate sector. The sudden and prolonged lockdowns resulted in massive disruption of the supply chain and shortages of basic necessities. Sourcing raw material became difficult with each passing day, severely impacting the production cycle of fresh goods and materials. The industry was forced to adapt and maintain a stock of requisite inventory, especially with COVID-19 and the ensuing lockdowns subsisting until the human population has been inoculated. Due to restrictions on movement for safety, consumers immediately switched to online shopping for daily groceries as well as electronic goods and furniture, requiring e-commerce sellers to service this sudden surge in demand by leasing more warehouses and cold storage units.
Co-living spaces – a trend amongst millennials
This “plug-and-play” model offers a host of amenities, increased safety and flexibility far beyond the traditional rental agreement, all at a highly competitive price. India has emerged as a pioneer in the move towards co-living spaces. Co-living is particularly gaining traction amongst students and migrant millennials, who were displaced during the lockdown and did not have the opportunity to return to their hometowns. The opportunities have attracted big players, with Shapoorji Pallonji announcing plans to start co-living spaces in Pune and the Mumbai Metropolitan Region to diversify its portfolio and target the needs of the new workforce.
Transit retail segment
The recent growth of the transport infrastructure and connectivity along with COVID-19-induced lifestyle changes has led to the evolution of transit retail at transportation hubs – an easy on-the-go solution from refreshment stalls to mainstream retail like popular food outlets, restaurants and cafés. This segment is set to witness unparalleled growth due to the government’s focus on privatising and modernising the management of airports, railway stations and highways.
The Future of the Real Estate Sector in India
The outlook for 2021 and recovery from COVID-19
Real estate is set to thrive as the preferred asset class and is on the cusp of a sector-wide recovery, a new stage of growth, the emergence of new segments, robust innovation and active investments on account of increased decentralisation, redistribution, restructuring and stable returns on investment. The sector is looking forward to a sustained growth for stable, insulated assets that will propel overall investment volumes by 15-20% in the next fiscal year, along with an optimistic outlook towards key asset classes such as offices, data centres and warehousing. Last-mile funding for projects in the residential sector may prove to be an attractive investment, aided by increased demand for residential assets as the economy rebounds.
The government has decided to eliminate around 6,000 compliances, at both the central and state level, by August 2022. This will be implemented in two phases. Phase 1 is already underway, focusing on the reduction of regulatory burdens across the areas of licence renewal, undertaking inspections, standardisation in regulatory filings, the digitalisation and simplification of manual records, etc. Phase 2 of the reform will focus on identifying and repealing archaic and obsolete laws and regulations, decriminalising certain civil offences and the intensive usage of technology in the approval process. The ultimate aim is to create an integrated single-window portal for all clearances and approvals at both the central and state levels.
With the government considering options such as permitting 100% FDI in completed housing projects, India’s ease of doing business ranking – which has improved by 79 positions from #142 to #63 between 2014 and 2019 in the spate of revolutionary measures – is primed to improve even further, making India a more lucrative investment destination.
Technology has emerged as a guiding star to various stakeholders, who have introduced and successfully implemented various digital initiatives in the real estate realm – through either pre-existing third-party digital platforms or indigenous software and devices. The government has proposed measures to bring transparency and accessibility to land and property records, and further streamlining the process of obtaining approvals from governmental authorities, which will benefit all types of stakeholders in this sector.
Furthermore, real estate developers are using artificial intelligence to undertake "smart construction" of projects – ie, surveys through drones, extracting blueprints and simulating construction plans, as well as predicting perilous events, project risks and enhancing the overall quality of construction. On the sales front, organised developers have adopted the new age technology, using virtual guided reality for on-site visits in a bid to market properties by offering a holistic site visit experience through 3D maps and e-tours without requiring a physical presence on-site.
While COVID-19 has, without an iota of doubt, been a bane for many, it has proved to be a blessing in disguise for the slumping Indian real estate sector. The pandemic has changed the way we live, work and play, and has also transformed the manner in which real estate is marketed and consumed. Lucrative and timely reforms introduced by the government, backed by active implementation, has restored faith in the real estate sector as the government leaves no stone unturned to proactively identify robust and effective measures to save and revive the Indian real estate sector.
The Indian real estate market has managed to correctly gauge consumer interest despite the advent of a global pandemic, with organised real estate developers and institutional investors being key catalysts, coupled with conducive and robust legal and financial aid paving the way for a swift recovery and growth of the real estate sector. The aggressive inoculation drive by the Indian government will also provide additional impetus to the rapid revival and growth of the real estate sector. The democratisation of newer platforms and the offering of newer investment avenues in light of the COVID-19 pandemic have brought about massive shifts in investment preferences, which will continue to outlive the pandemic and endure to boost the Indian real estate sector in the years to come.