Contents

January 2015

The boom and bloom: Trends in Indian real estate 1

November 2014

Check ground realities while you ascend a high rise 4

October 2014

How to pay less tax while selling your house 6

Indian Realty space is poised to see investor demand pick up 9

August 2014

Nuances of commercial realty 12

June 2014

Auctioned properties : an alternative for home seekers 15

May 2014

The 3 Ps of a good resale deed 18

April 2014

Redevelopment : Not a brick Game 21

Mar 2014

How to avoid a hard landing 24

February 2014

Before you rent out the property 27

January 2014

The post possession Trauma 30

Mint Thought Leadership

CITY REAL(i)TY

January 2015

CRISIL Research: CITY REAL(I)TY

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Last updated: May, 2013

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2

January 2015

Boom and bloom: real estate sees many changes Evolution of new housing formats are a few key trends that the residential segment has witnessed

Over the past decade, emergence of new residential markets on the outskirts of big cities has been one of

the most significant changes in the domestic real estate sector. Evolution of new housing formats such as

townships, high-rises, green buildings, and customized dwelling solutions, in the form of luxury, branded and

smart homes, retirement homes, are a few other key trends that the residential segment has witnessed.

Apart from this, developers are turning into formal corporate outfits and deploying modern construction

technology, in the form of pre-fabricated, pre-cast and monolithic structures. But only time will tell if these

trends will help better living solutions to evolve, and whether evolution of smart cities will further redefine

Indias real estate landscape.

Soaring real estate prices and fast-depleting vacant lands triggered several companies to relocate to

peripheral locations, within large and mid-sized cities. This created huge residential demand and attracted

developers to markets such as Hinjewadi in Pune, Hebbal and Whitefield in Bengaluru and Hitech City in

Hyderabad.

Need-driven formats

Need for self-sustained clusters in far-flung areas gave rise to integrated townships. To further differentiate

their offerings, a few developers are offering sewage treatment plants, solar panels, exclusive parking

spaces and housekeeping services, in addition to setting up schools, healthcare facilities, malls and food

chains. Residents in certain townships also enjoy a walk-to-work environment, due to co-existence of

commercial and residential properties.

High-rises also emerged as a new phenomenon in crowded cities. Fast-depleting land spaces may have

halted horizontal expansion of residential projects, but not vertical expansion. With customers increasingly

eyeing elite addresses, the number of high-rise apartments has surged. Besides building apartments with

iconic views, developers have also geared up for emergencies such as fires, earthquakes, power cuts, and

others by using earthquake-resistant building material, earmarking refuge areas and having a power back-up

for critical areas.

Developers are also going green to improve energy efficiency, and trim operational costs. Green buildings

leverage upon natural lighting and ventilation and use environment-friendly raw materials such as fly-ash

bricks, energy saving electrical fittings and water-efficient plumbing fixtures. The cost of constructing green

buildings is 5-15% higher than that of conventional buildings; yet residents save enough on their water and

energy bills to make up for this.

Other kinds of concept homes, too, have caught developers fancy. A burgeoning population of ultra-high net

worth individuals has led to the evolution of branded luxury homes, where domestic developers associate

with global fashion brands and international architects. These are typically large-sized apartments, with

double height ceilings, sprawling lobbies and waiting spaces and rare views. Apart from mainstream

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amenities (gymnasiums, jogging tracks, spas and the like), such homes also offer concierge services, mini

theatres, dedicated areas for pets, valet parking, helipads, and other features.

But smart homes is the newest kid on the block. In such homes, automation allows residents to control home

appliances such as refrigerators, air conditioners and home features such as windows and lighting, via

computers or hand-held devices. Some premium projects even offer integrated entertainment systems,

automated garages and smoke detectors. However, this segment has seen interest and action only from a

handful of developers so far.

Another concept to have gained ground is senior living. Growing nuclearization of families and the economic

independence of retirees have given rise to properties aimed at the aged. These properties offer facilities

such as common kitchens, housekeeping and healthcare services. This space has generated considerable

interest from global healthcare solution providers as well, who have forged agreements with some local

developers.

In step with demand

Recognizing the need to build brand value to target buyers, leading developers have created different teams

for sales and marketing activities. These include on-site teams to manage the initial booking and dedicated

customer relation managers, to act as a point of contact, through the deal cycle.

Developers have specialized teams to manage sales outreach, cater to non-resident Indian clients and run

loyalty programmes. They also have their own research teams, which provide data and analytics to aid in

project planning.

Developers are also opting for new technologies to save time and cost. Construction technologies that bring

operational and cost efficiency are being used, especially in affordable or mass housing projects. Pre-

fabricated structures are manufactured in standard sections on an assembly line, where steel is a key raw

material. In contrast, pre-cast structures are manufactured in a factory or on the site itself, using concrete.

Monolithic structures are built using Mivan formwork/shuttering, which is environment-friendly and can be

reused.

Way forward: will smart cities be the next big thing?

A smart city represents a mix of commercial and residential properties, social and physical infrastructure

and public utilities. These are expected to function as satellite towns to their larger counterparts and will

support urbanization, attract investments and propel growth. Moving ahead, the government plans to set up

100 smart cities by modernizing mid-sized cities. Will this herald yet another paradigm shift in the Indian real

estate industry, in years to come? We will have to wait for the answer.

Binaifer Jehani is director, Crisil Research.

4

November 2014

Check ground realities while you ascend a high-rise If you have zeroed in on an apartment in a high-rise building, here is what you need to be aware of

High-rises, they are the modern days solution to fast depleting land spaces, and are needed for expansion

of real estate projects. They are are much in demand as home buyers increasingly aspire to ascend the

ladder or rather, the stairways. After all, an elite residential address has become a prized possession. So,

if you have zeroed in on an apartment in a high-rise building, here is what you need to be aware of. Right

from completion and handover, infrastructure, personal requirements, to the monetary outgo, there are

several areas that call for both scrutiny and awareness from your side.

Timely completion and handover

Construction of a high-rise tower could take between three and five years, or even more. This depends on

the pace of construction, number of floors and flats to be built, raw material and labour, internal and external

amenities, clearances from various authorities and then, finally, sale of these apartments.

Given that several floors are to be built, such properties require clearances from a number of bodies, such as

environment, forestry and airport authorities. Seeking clearances could delay the completion and handover

processes of apartments that were booked while still in the under-construction phase.

What this means effectively is that even if you book an apartment on a lower floor in a high-rise building, you

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could face a delay in possession, due to the pending clearances from these key authorities.

Infrastructural back-up

Living in a high-rise apartment may afford you a view of the sunset from the balcony and the impression of

living amid natural surroundings (i.e, if there a patch of woods or a water body somewhere nearby).

However, you also need to factor in the likely load on basic infrastructure. A quick check on availability of

continuous water supply, strong power back-up for elevators and entrance areas, sufficient parking area for

all residents, and sewage and garbage disposal mechanisms, is a must before you decide to move into your

home in a high-rise.

Having uninterrupted water supply largely hinges on necessary approvals from the local municipal authorities

and pipeline work being completed by the developer, prior to the handover. In addition, you need to check

whether the water tanks and pumps installed by the developer have enough capacity to pull water from

underground levels to supply residents living on higher floors.

Resilience to natural disasters

There is no doubt that high-rise apartments can offer you larger living space and modern amenities.

However, you must ensure installation of fire-fighting equipment and use of earthquake resistant building

material. It is important to check whether the project you have chosen complies with mandatory fire safety

norms, and has been inspected by the local municipal corporation and issued a fire fitness certificate.

Further, residents need to be familiar with the usage of firefighting equipment installed, through regular drills

(held at least on an annual basis). Typically, the no-objection certificate for high-rises is sought at two stages:

prior to construction and before occupation.

To ensure strength, stability and sustenance of the building structure, it is advisable to have it inspected and

certified by a building surveyor or certifier. For instance, depth of rods used in the building structure and use

of earthquake resistant building material need to be scrutinized. Provision of refuge areas at regular floor

intervals is a must so that residents can gather in such areas during an emergency.

Cost-control

Investing in a high-rise apartment does come at a premium, when compared with a regular one in a stand-

alone building.

The cost would factor in the floor-space rise and higher cost involved in providing other amenities. Every

floor that you ascend, beyond the height of a normal building, will increase your flat cost by Rs.50-100 per

sq. ft, depending on the project. Providing an attractive external faade and double-glazed glass on windows

increases the cost of apartments commensurately. Furthermore, paying fire insurance premium could also

weigh heavily on your pocket.

Once you move into your house, there is a regular monthly maintenance charge that you need to shell out.

This could be in the range of Rs.8-13 per sq. ft, depending on the amenities provided, number of

housekeeping or security staff employed and areas such as clubhouses, pools or playgrounds that call for

constant up-keep.

Vertical expansion of cities could help the government meet the growing housing demand from a rapidly

growing population. Nevertheless, it is important that you stay grounded, run a thorough check on the points

mentioned above and measure the size of your wallet, before you begin your ascent upwards.

Binaifer Jehani, director, Crisil Research.

6

October 2014

7

How to pay lesser tax while selling your house

If you want to completely avoid paying tax, you will have to reinvest the capital gain amount

Spreading the news, finding a buyer or seller, setting the price and ensuring complete paperwork are the

customary tasks involved in selling a house. Well, thats just the tip of the iceberg for the seller who needs to

consider the tax outgo after the sale is completed. Whenever a property is sold in India, the seller makes a

capital gain, which is taxed, or it can be reinvested in specific assets or schemes. Timing the sale is crucial

as it determines the tax burden. In fact, capital gains tax may be charged even if the property is being

redeveloped.

While most of us may be aware that selling a house attracts tax, the nitty-gritties are mostly unclear. It is

important to note that the tax is charged not on the entire amount you receive from the buyer, but only on the

gain (differential between your sale price and the initial purchase price, cost of renovation and the transfer

costs). But if you sell your property within three years of purchase, the incremental gain is termed as short-

term capital gain and will be taxed directly, as per your income tax slab. You can reduce your tax outgo only

if you hold on to your property for at least three years, after which any gain from a sale is a long-term capital

gain, which attracts a flat tax rate of 20%. Regular tax deductions (from section 80C and others) do not apply

to capital gains, but other benefits are available.

This method basically relies on using the Cost Inflation Index released each year since 1 April 1981. Lets

say you purchased your property in 1994 (1994-95) for Rs.10 lakh and are now selling it (in 2014-15) for

Rs.1 crore. Thus, the basic capital gain on this sale will be Rs.90 lakh, on which the tax charged will be

Rs.18 lakh. However, if you apply indexation, your net gain shrinks drastically, and so does your outgo. In

this example, applying indexation will reduce the capital gain to Rs.39 lakh, and the resultant tax outgo to

just Rs.7.8 lakh.

In case the property you are selling has been inherited or gifted to you, the capital gain (and indexation) will

be computed based on the acquisition cost of the original owner.

If you want to completely avoid paying tax, you will have to reinvest the capital gain amount. Heres how.

Buy or build a house: You must purchase a new house from your capital gain proceeds, within two years of

your selling your current property. If you like planning in advance, you could book a house a year before

selling your current one, and set off all expenses that arise thence, against your capital gain. You can also

build a house, but you must complete the construction within three years of the sale of the older property.

Capital Gains Account Scheme: If you want to bide your time and do not want to hasten into an

investment, you can invest the capital gains in a special Capital Gains Account Scheme (CGAS), with your

bank, which serves to inform the taxman that you do plan to invest in a property, but at a later date. Deposits

under CGAS are eligible to exemption from capital gains tax, but there are some conditions:

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Such a deposit must be done before you file your income tax returns for the fiscal in which the sale has

been completed.

This is only a stop-gap arrangement, as the funds have to be used to buy or build a house within the period

specified.

Funds withdrawn have to be used within 60 days.

You will have to pay tax arising on the interest paid.

Specified bonds: Another option, and one with some scope of returns, comes from specified bonds, such as

bonds of the Rural Electrification Corp. Ltd and the National Highways Authority of India, within six months

from the date of sale. Such bonds usually have a tenor of three years, and even pay a quarterly or half-yearly

interest. Earlier, you could invest a maximum of Rs.50 lakh per financial year to reduce the capital gains tax,

and if the six-month deadline extended into the next fiscal, you could invest another Rs.50 lakh over two

succeeding financial years. However, this rule has changed, and will not be applicable from assessment year

2015-16. The exemption is now being restricted to Rs.50 lakh both in the year of transfer of the capital asset

and in the subsequent year.

When you sell a house, you can make a capital gain but you may also bear the brunt of a capital loss, owing

to adverse market conditions, or due to a distress sale. Such a loss, if it is short-term, can be set off against

the capital gain from a short-term or long-term sale of any other asset such as gold or equity shares.

However, a long-term capital loss cannot be set off against a short-term capital gain from any other asset.

It is also interesting to note that even when your building is being redeveloped, the resultant transfer of the

property to the builder in the interim period is termed a sale, in the eyes of the income tax department.

However, such a capital gain can be set off when you acquire the property back, in lieu of the extra cost you

may have to bear. You can also ask the developer to provide extra space for such cost, thereby reducing the

tax outgo.

You must also remember that you are allowed to purchase or construct only one new asset from the capital

gain that accrues. This means that you cannot make multiple property acquisitions and thus seek to reduce

your tax outgo.

However, if you sell more than one property, you can invest the resulting cumulative capital gain amount in a

single new property. Hence, plan wisely and carefully to reduce your tax outgo.

Binaifer Jehani is director, Crisil Research.

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10

Indian realty space is poised to see investor demand pick up Improved buyer sentiment and pent up demand would gradually prop absorption of properties

Has the Indian real estate industry finally reached the threshold of a revival? Will an improved

macroeconomic scenario help revive demand for real estate? Can investors now look at buying properties in

key destinations across Indian cities?

As a real estate investor, you may have raised these questions several times over the past few years; the

answers may sound a tad different and more reassuring now. Investors may now have a reason to rejoice as

recovery in the domestic realty sector seems underway with Indias gross domestic product (GDP) growth

likely to average 6.5% by 2018-19. Improved buyer sentiment and pent up demand resurfacing would

gradually prop absorption of residential properties. We believe that certain key micro markets could see

faster appreciation in capital values as compared with others in major cities and deliver higher returns to

investors.

Birds eye view: spotting the right micro market

Real estate investors have several opportunities to look out for, over the medium term. After witnessing

stagnation during the past 10-12 months, residential property prices are likely to appreciate by a moderate

3% in 2015 and by 5% in 2016, across the top seven citiesMumbai, National Capital Region, Hyderabad,

Bangalore, Pune, Kolkata and Chennaitracked by Crisil Research. Prices would be mainly driven up by a

slew of infrastructural developments and commercial projects.

Like in the case of Mumbai, while most of the micro markets are likely to see capital value appreciation of 4%

on an annual basis during 2015 and 2016, micro markets such as Thane and Kurla-Ghatkopar could witness

a higher annual rise in prices in the range of 6-8%. The faster increase in prices in Kurla-Ghatkopar will be

mainly be driven by improved connectivity with the completion of large infrastructure projects (Eastern

Freeway, Metro Rail VAG Line, Santacruz-Chembur Link Road and Monorail Phase 1). And, in Thane, good

socio-economic development will push up prices. Construction of new flyovers has improved connectivity to

the main Mumbai city, both on the central and western lines. In fact, commercial development has also led to

rise in demand for rented properties in and around the micro market.

In case of Pune, micro markets such as Kalyani Nagar, comprising locations such as Kharadi and Wagholi,

will see a faster annual increase in prices at 6-8% in 2015 and 2016 as compared with 5% for the other micro

markets. This will be driven by expected growth in the information technology (IT)/IT-enabled services (ITeS)

sectors and the resultant healthy end-user demand for residential units.

Similarly, in Bangalore, micro markets such Hebbal and Whitefield are expected to witness annual increase

of 5-7% in prices led by end-user preference, more participation by investors and improvement in social and

physical infrastructure.

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Residential demand to surge; Mumbai to lead revival

Residential real estate absorption has remained southbound since 2010, with the top seven cities seeing an

aggregate demand decrease. Demand for residential properties is likely to take a hit by 4-5% in 2014. Weak

macroeconomic conditions, soaring residential capital values and uncertainties on the job front and future

income growth deterred property buyers. Further, rising inflation and interest rates, a wobbly political

situation and stringent lending norms kept buyers and investors on a cautious mode.

With India now on the right trajectory for growth, residential property demand in the top seven cities is likely

to revive by 6% in 2015 and further, by 8% in 2016. Mumbai is expected to witness the sharpest growth in

demand (by 11% compounded annual growth rate between 2014 and 2016) as the pent up demand from

past few years is met. While Mumbai has been one of the most favoured destinations for non-speculative

investors, affordability has played a dampener of sorts, in recent times. As uncertainty on the

macroeconomic outlook diminishes, buyers could anticipate better income prospects and improved

affordability. Hyderabad, which saw the greatest slump in demand (by 12% during 2008-12) due to the long-

drawn Telangana issue, will also see demand revive significantly (by 11% over 2014-16). Pune and

Bangalorethe two popular IT hubscould continue to see a steady rise in end-user demand, mainly led by

growth in IT/ITeS industries.

Timing and location is key Both timing and location could be in your favour now. At a time when the new

government is expected to announce effective policy measures and speed up completion of infrastructure

projects, investors can eye properties in key micro markets and look forward to positive gains. Having a

medium- to long-term investment horizon and a keen eye for detail across micro markets could help you lay

your hands on the best possible deal.

Binaifer Jehani, director, Crisil Research

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August 2014

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Nunces of commercial realty

While you would have tick-marked several checklists while investing in residential properties, parking your

money in a commercial real estate project could be a different ball game altogether. A detailed comparison

between the two shows a world of difference in the underlying nature of these assets, purpose of investment,

lease tenors, terms and conditions involved and, most critically, the need for larger quantum of funds and a

wider investment horizon. What then should an investor look for when she scans the commercial real estate

market for investment?

Where should you park your money?

While parking your money in commercial properties, you can either choose to partner with a developer to

build one or invest in a completed project and subsequently lease it out. You can also choose to invest via

indirect modes such as real estate investment trusts (Reits), private equity funds or venture capital financing.

It is also essential to note that commercial real estate typically requires larger ticket investments as

compared to residential property. You also need to work out the cost-benefit trade-off, between the potential

rental income and the various overheads in the form of maintenance expenses, taxes, insurance premiums,

and so on.

Place and time is critical

The location you choose is most crucial. It is preferable to invest in a citys prime locations, around its Central

Business District. However, high prices are moving demand for office space towards peripheral areas.

Hence, if you choose a suburb, you must also take note of the availability of transport and social

infrastructure. Investing in mixed-use (integrated residential and commercial real estate complexes) may

fetch better rental yields.

Alternatively, you could opt for smaller properties while investing in prime locations. The performance of local

industries determine how lucrative your investment will be in the long run. While Bangalore and Pune are

perceived to be information technology hubs, Chennai is emerging as a major nucleus for automobile

companies. Mumbai, needless to say, is the countrys financial capital and banks as such contribute majorly

to office space demand. The prevalent occupancy rates in a particular micro-market will also reveal a lot

about the demand potential. Investing in areas with high occupancies will make it easier to find tenants and

also boost rental income.

Inking the deal: Choose your tenants carefully

High commercial real estate prices have led to an increasing preference for lease, rather than an outright

purchase. However, while leasing out commercial properties, you would need to understand a whole new

gamut of terms and conditionstenors, occupancy/vacancy levels and other terms of the agreement, before

you give your property on lease.

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Commercial real estate deals, typically, have a lock-in period of three years. You also need to be aware of

the fact that exiting from a commercial property deal is a greater challenge, compared to a residential

property as lease tenors are relatively longer. This highlights the need to have an exit clause included in the

agreement, which clarifies the conditions under which an investor can exit the deal in case the situation

demands.

Occupancy levels play an important role in deciding the rentals for commercial properties. Shorter

agreements entail frequent tenant changes and sometimes even lead to prolonged vacancies, which could

dent your returns. A macroeconomic slowdown and a muted business outlook significantly impact demand

for leased commercial properties, with a commensurate effect on rental income.

Diverse client base can ensure stable rental income

A balanced approach here is essential. A way to tackle fluctuation in occupancy levels is to invest in smaller

commercial properties. This is a valid approach if you want to invest in a prime location but are unable to find

a big client. Smaller multiple investments rather than a single big ticket investment can help diversify your

client base and ensure steady stream of revenue.

Smaller office spaces are apt for professionals as they prefer to set up offices across multiple locations in a

region. For instance, leasing out commercial properties to professionals such as doctors and lawyers can be

a safer bet as the underlying demand for services of such individuals would drive footfalls and accordingly,

boost incomes for both the tenant and the owner (you).

Thus, choosing the right location, understanding the demand scenario and being familiar with terms of the

lease may help an investor choose the right commercial property and lease it out to the appropriate client.

Binaifer Jehani, director, Crisil Research.

15

June 2014

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Auctioned properties: an alternative for home seekers A property gets auctioned if a home loan borrower defaults on three consecutive EMIs

Paintings by renowned artists, pieces of antique furniture, collectibles such as rare stamps, coins or cars,

vintage wine bottles...these are bought at auctions after much ado and at a premium. But in a real estate

auction, the numbers could benefit you. Properties auctioned by banks are an attractive alternative and, at

times, sport a price tag that is about 10% lower than the market value. While this sounds lucrative, it does

involve a great degree of preparedness, scrutiny and prudence. Homebuyers looking at auctioned properties

must also take note of price fluctuations possible during the bid, the tight deadlines involved and the

groundwork necessary before signing on the dotted line. What else does it take to turn an auction into a

dream deal? Read on.

Keep an eye on daily classifieds, online auction portals and feature good deals: A property gets

auctioned if a home loan borrower defaults on three consecutive equated monthly instalments. The borrower

gets a 60-day window to raise objections. If none are forthcoming, the bank takes over the property under

the SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest)

Act and issues advertisements in one English daily and one regional daily. The auction date is set a month

after the 60-day window expires. The auction notice usually specifies details such as location, the amount

due from the defaulter, the time of the auction, the payment schedule, and others.

The final value of the property is usually based on the reserve price set by the bank, which is based on the

outstanding loan amount and the propertys market value.

While keeping an eye on the usually ignored classifieds in newspapers may help you spot property auctions,

online auction portals may also present some good deals. Online portals have also given rise to the trend of

e-auctions. In an e-auction, while all else remains the same, time and agility are critical.

Ensure adequate funds. Do not lose the 25 for want of the 75: Once you zero in on your choice,

place a bid application and fees with the concerned bank. It is essential that you inspect the property (banks

usually arrange site visits). You will also have to initially pay 10% of the reserve price as earnest money

deposit (EMD). If the borrower repays the loan within the 30-day period before the auction, the auction is

cancelled and the EMD is refunded. But if the auction takes place, bidding begins at the reserve price set by

the bank and then climbs higher depending on the number of bids and the propertys attractiveness.

Once you win the bid, the conditions tighten a bit. Assuming that the reserve price does not fluctuate much

during the auction, you will have to pay 25% of the reserve price (this is effectively 15%, excluding the EMD

paid earlier) on the same day. However, if the bid price is volatile, you may have to shell out a higher

instalment on the auction day. The balance amount has to be paid to the bank within the next 30 days.

If you are unable to pay the balance 75% within the stipulated period, you also forfeit the 25% amount paid

earlier. Thus, it is better that you set aside a personal kitty to meet any contingencies. You could also seek a

bank loan; either from the auctioning bank itself or your own bank. A loan will ensure a second layer of

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verification of all the paperwork related to the property. Besides the title deed and the conveyance deed, you

will also need a no-objection certificate from the society and the defaulters bank, in case you opt for a loan.

Look out for unpaid dues: Usually, auctioned properties are sold on an as-is-where-is, as-is-what-is

basis. The brighter side of this clause is that you get all the fittings and props that the auctioned apartment

has. On the flipside, you must also check with the society for any unpaid dues, utility bills or municipal taxes.

You will have to factor in these charges while computing the total cost you will incur.

Avoid legal tangles; ensure complete paperwork: No real estate deal comes without lengthy paperwork

and rightly so. In case of auctioned properties, one may safely assume that since the deal is originating from

a bank, the titles and other documents will be clean. However, oversights are always possible. Hence, a

prudent option is to purchase the property through your own bank or appoint a lawyer to verify all documents.

In the absence of a clear title, the borrower may come up with multiple claimants, leading to unnecessary

legal hassles. Last but not the least, check the living conditions. A personal visit to the property site will

apprise you of the surroundings, facilities available and whether a society is functioning well or not.

Finally, auctioned properties are definitely an attractive bet, but it is better to play safe.

Binaifer Jehani is director, Crisil Research.

18

May 2014

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The 3 Ps of a good resale deed Ensure that the physique, price and papers of the property are in place

Second-hand is always a frowned upon phrase, but not when it comes to buying a house. For house-

hunters battling rising prices and delayed projects, a resale flat may just be the right deal. Quicker

possession and a lower maintenance bill may attract anyone, but even a resale purchase has its own

checks. The key is to ensure that the 3 Psphysique, price and papersare in place. Enlisting the services

of real estate agents, lawyers and availing a bank loan will greatly ease the process. Heres what you need

to check.

Physique: age and structure

Ensure that your flat is structurally fit. It is unwise to choose old properties only for the benefit of lower

maintenance charges and quicker possession. Ideally, a resale flat should not be more than 5-7 years of

age. While maintenance charges may be slightly higher for recently constructed resale flats, getting a bank

loan for these is easier. Also, fewer owners means such properties usually have clear titles. Moreover,

maintenance charges of a resale flat will be lower than that of a new under-construction flat.

There may, however, be exceptions, depending on where the property is situated. For instance, old buildings

in prime areas such as South Mumbai still command higher prices and are structurally fit as they are well

maintained.

Another differentiator when it comes to a resale flat is amenities. Older apartments may not have, say, sports

facilities. The positive side of this is that not having too many amenities may also reduce your maintenance

bill. The one amenity that you must be careful about is parking areaensure that the parking space allotted

to the previous owner is passed on to you.

Watch out for illegal extensions. If you spot any additional construction in the flat that deviates from the

original building plan, it is better to notify the societys managing committee, who will examine the issue.

While redevelopment is a good bet for investors who want to cash out (provided additional floor space index

is available), end-users may land in a fix if the society decides to redevelop the building after you occupy

(and worse, renovate) the house.

This is usually the case if you are eyeing a flat in a property that is more than 20 years old.

Price: bank loans help

There are two ways to look for a resale house. While word-of-mouth may make you aware of the prevalent

rates in the locality, enlisting a real estate agents services will help you clinch a better deal: from locating the

flat, to negotiating with the seller (for a fee, of course). Once you have found a suitable resale property, you

will have to pay for it in big lump sum payments, unlike for a new apartment. A bank loan would ease some

of the funding concerns. Approaching a lender also reveals possible loopholes in the documentation. For

instance, if the flat has had multiple owners, then the bank asks for all the respective registration and stamp

duty papers, without which the loan would not be disbursed.

20

Essentially, if all the requirements are met, banks finance 70-80% of a resale flats cost. However, it is

important to note that some banks do not finance older resale flats, or, they lend a lower amount. Therefore,

if the lender tightens his purse-strings, you will have to loosen yours.

Apart from the cost of the house, there are other sundry expenses. Maintaining a separate kitty of funds will

help to pay for expenses later such as on renovation.

Also, ensure that the old owner hasnt left any unpaid dues: society fees, utility bills, parking charges, and

others, that you may have to pay later.

Papers: reveal many loopholes

As mentioned above, any resale deal is accompanied by a long list of mandatory documents. The most

important of these are the sale deed and the mother deed (title document). Obtain all documents in original

from the seller, while also verifying that she is the actual owner and has rights to sell the property. A check

will also reveal whether other parties (such as heirs) have rights to the property, or whether it is mortgaged. If

the flat is mortgaged, your bank will pay the unpaid dues of the previous owner (if any) to the previous bank

from your loan amount and transfer the balance to the seller.

Registration is another key issue, irrespective of the age of the property. While you will re-register the flat

when you buy it, the same applies to each of the previous owners to ensure a clear chain of documents. If

registration or stamp duty documents for even one of the previous owners are missing, then ensure that the

current seller pays the dues. A late realization means you will have to pay.

Future claimants are another bother, if the registration papers are missing. To prevent any such eventuality,

you will have to first place an advertisement in two dailies (an English and a regional language) through one

of the lenders empanelled lawyers. If no claim is raised within a fortnight, the lawyer will issue an affidavit

clearing the papers and paving the way for the disbursal.

The other necessary documents include:

No-objection certificate from the co-operative housing society stating that all dues have been paid as on

date

Encumbrance certificate

Tax receipts stating that taxes to authorities have been paid

Occupancy certificate

Original building approval plan

Possession certificate

Conversion certificate: Verify whether the property has been built on non-agricultural and non-forest land

To bring matters to a close, verification is the keyword while purchasing a resale flat.

Binaifer Jehani is director, Crisil Research

21

April 2014

22

Redevelopment: not a brick game

Checks and balances are needed to make redevelopment a win-win for both residents and

builders

In a large metro like Mumbai, once a building crosses the age of 25, it gets the redevelopment-tag. The usual

disadvantages: lack of amenities, poor maintenance, safety issues and advantages: larger apartments,

sturdier structures and better amenities are cited in favour of residents. For land-starved developers,

redevelopment is a huge bonus, offering them extra floor space index (FSI), apartments with a higher selling

price and greater development rights. Checks and balances are needed to make redevelopment a win-win

for both residents and builders.

Consensus is necessary

Before saying redevelopment, the housing society must break the ice with its members. The best way to do

so is to call for a meeting and ask members themselves to fetch proposals from developers who they deem

fit for taking up the project. Such a move will make the process more transparent. It is a lack of mutual

understanding between members that has spoilt many redevelopment deals in Mumbai. Often, it is only a

few members who stall a redevelopment project.

Once a majority consensus is built, the law comes to your rescue. Guidelines under Section 79 (A) of the

Maharashtra Co-operative Societies Act and recent court rulings state that if 75% of society members agree

to redevelopment in writing, the proposal can be implemented.

PMCs: saviours in difficult times

Now, the next mandatory step is to appoint an architect or project management consultant (PMC) to vet the

proposals and cherry-pick the best deal. A PMC advises the society on all aspects of the redevelopment

process. It also handles legal intricacies and other requisites. Choosing the PMC must be done in a

transparent manner so that the entity selected is above the board and is not accused of colluding with the

developer. Most housing societies choose to do without a PMC. But hiring a PMCs services will not affect

the societys purse strings as the entitys fees can be recovered from the developer.

However, in case legal issues crop up later and the project gets delayed, the society will not be able to file a

suit against the developer as they failed to follow the mandatory norm of appointing a PMC.

Developers track record

Do not fall for the developers proposal and initial claims. You may be promised the sky, but to ensure that

the developers claims are true, check if they have successfully executed redevelopment projects in the past.

Moreover, carefully assess the financial status of the builder and technical feasibility of the proposal. Also,

note the quality of construction, and the amenities provided.

A holistic agreement

Any redevelopment agreement must clearly define all the transactions between the developer and society

members, so that the members do not suffer any financial losses if it is delayed. Though a society has an

umbrella agreement with the developer, individual members can choose what they want. Firstly, a member

can sell her flat to the developer for a lump sum amount and altogether exit the deal. Secondly, members

who want larger flats, can negotiate with the developer. The developer will offer more space at a mutually

23

determined rate that is at some discount to the prevailing market rate. It must also clearly mention the

obligations of both the builder and the society members, and the consequences that each must bear for

breach of contract. Lastly, members must not vacate their flats unless the developer completes all the

formalities.

The members should ensure that essential clauses are specified clearly in the agreement before signing on

the dotted line.

Bank guarantee: Amounting to 20% of the project cost, bank guarantees may be encashed by the society to

meet expenses in case the project is not completed on time.

Corpus fund: This is a lump sum amount given by the developer to take care of the rise in residents

maintenance expenses post-redevelopment.

Date of completion: Failure to finalize a date for the project to be delivered will land the flat owners in

trouble.

Larger apartments: Carpet size of each new apartment must be specified clearly in the agreement, in line

with the extra FSI that accrues to the society.

Rent payments to tenants: While the building is being redeveloped, the developer must pay the rent charges

incurred by residents for securing alternate accommodation.

Such payments should be collected in advance through post-dated cheques for a period of two to three

years, in line with the date of completion.

Parking spaces: All parking spaces in the new property must be first allocated to the original members.

Other amenities: Also check whether other amenities within the apartment and other common facilities,

have been provided properly by the developer, before you occupy the property.

In conclusion, redevelopment is a conscious and collective decision by a housing society: ensure that you go

through the due process after getting all parties concerned on the same footing.

Binaifer Jehani, director, Crisil Research.

24

Mar 2014

25

How to avoid a hard landing

There are a whole host of issues to take care of if land has to be a profitable investment

Land equals huge money; this is because it appreciates faster than apartments and offers higher returns.

However, returns alone do not seal the deal. There are a whole host of issues to take care of if this has to be

a profitable investment. It is better to invest in land only if you have the holding power (at least 10-15 years),

as it will not generate instant cash for contingencies such as medical expenses, education, and so on.

Moreover, a mix of the right buyer, timing, price and economic climate are needed to ensure that land pays

off in the long run. Added to that, it may be hard to find buyers in times of an economic downturn and

banking on land to bail you out may be a huge risk as it is essentially an illiquid investment.

Land neither ages nor depreciates

This is the trump card for those who advocate buying land as it has zero depreciation and does not age.

Another positive is that you may get ready possession of your land upon completion of payment. However, to

ensure that your investment pays off, it is preferable to invest in large land parcels (2.5-3 acres) so that

significant returns are assured when you sell it. Given the scarcity of land in prime city areas, developers are

interested only in large land parcels. Location is also important, as the value of land may take time to

appreciate in far-flung areas. The availability of essential infrastructure is also crucial; otherwise, there may

be few or no buyers.

Huge upfront funding required

The cost incurred in buying land is high, ranging from a few lakhs to crores, depending on the location and

the property typeresidential or commercial. Buyers need to arrange the entire payment upfront, as external

funding for land purchases is hard to come by. The Reserve Bank of India (RBI) bars banks from providing

loans for land purchases.

Keep an eye on encroachers

Given the rapid urbanization and the lack of living space, especially in large cities, squatters often encroach

on vacant land. Their proliferation may turn into an illegal slum dwelling colony. Over the long run, it will also

be difficult to evict such trespassers, who may claim living rights.

Employ proper security personnel from recognised agencies to stop trespassers. Get the hiring contract and

other paperwork in order so that the guard himself may not turn a squatter. Purchase land in the city where

you are residing and preferably not in far-flung areas. Visit the site at least once in six months.

No regular income, but recurrent outgo

Land does not provide recurring income as opposed to apartments, which can offer a rental yield of 2-4%

annually. One can make significant capital gains only when the land parcel is sold. The tax outgo is higher

for land, where you have to regularly pay municipal taxes and any other levies as stated by the urban

development authority. Tax issues also have an implication on the sale and proceeds. One cannot save tax

on short-term capital gains (if property is sold within three years of purchase). Further, such a sale is also not

26

eligible for any tax exemptions. By contrast, if you sell your property after three years of purchase, the

resultant gain is treated as a long-term capital gain (LTCG), and a tax of 20%is levied. To claim actual

exemption on LTCG, you will have to reinvest the gain in residential property within two years of the sale.

The agri (t)angle

Agricultural land come at throwaway prices, but also with a host of other issues. Under Indian law, only

farmers can explicitly buy or sell agricultural land. Others can buy it if the land is converted to a non-

agricultural plot. Laws regarding holding and conversion of arable land for non-agricultural purposes differ

across states. For non-resident Indians or persons of Indian origin (NRIs/PIOs), the laws are more specific.

As per RBI regulations, no person belonging to this category can acquire agricultural land or plantation

property or a farmhouse in India. They can, however, inherit and hold immovable property from a resident

Indian.

Legal due-diligence

A holistic way to take care of such issues is to get all the documents verified by an independent lawyer and

other relevant authorities. The critical factors to be verified are:

Title documents: The title must be clear and registered in the name of the seller only.

Easement issues: This refers to any rights of access granted by the seller to a third party, affecting your

ownership.

Litigation: Verify whether the land parcel has been in litigation in the past, and whether all such cases have

been settled.

Tax receipts and bills: Receipts for all payments made by previous owners must be up-to-date.

Encumbrance certificate: Ensure that the seller provides a proper encumbrance certificate attested by the

sub-registrar, which will then rule out any legal dues attached to the land.

Pledges: Be sure to obtain a Release Certificate from the respective lending institution.

Demarcation letter: This should clearly state the boundaries of the land, as verified by a recognized

surveyor.

Then there are issues that may not be under your control. For instance, there is a risk that the government

may seize the land.

So the bottomline is that when you invest in land, you cannot just forget about it. There are many factors that

one should take care to avoid a hard landing. It is not an easy investment, so place your bets carefully.

Binaifer Jehani is director, Crisil Research.

27

Feb 2014

28

Before you rent out the property

Picking a tenant for your apartment can be very tricky

Looking to rent out your apartment? Well, there are factors besides the income that you should mull. The first

step is to seek a good tenant, either by placing advertisements in newspapers, Web portals or seeking

referrals through family or friends. In either case, a thorough background check is a must (including police

verification of the tenant). Once you have your tenant, draft a detailed rental agreement with specific clauses

on everything from tenor to damages to termination. It is mandatory to draft a short-term agreement, to

prevent squatting by tenants.

For non-resident Indians (NRIs), besides the above, turning their apartments into corporate guesthouses

may be a better option.

Get the rental math right

Though rental rates largely depend on demand-supply, they do not directly reflect actual real estate prices.

High real estate prices in India have kept rental yields (rent as a percentage of the annual value of your

property) limited to 2-3%.

But besides the hard numbers, key factors such as location, availability of social infrastructure, connectivity

to the main city, age of the property, and so on, are critical in determining the rent you will be able to charge.

With tenants becoming more selective by the day, a tidy, spruced up apartment will fetch higher rent than a

plain one. A sound knowledge of rentals charged in other properties in your neighbourhood and community

will also help.

Spread the wordbut choose the tenant carefully

The first step to renting out your apartment is to advertise. Though newspapers are the traditional route to

spread the word, in the age of social media and real estate Web portals, going the online way will expedite

your search process. Alternatively, opt for the referral routeask friends and relatives to scout for potential

tenants. Approaching the local real estate agent/broker will also help you make a stronger pitch. In case you

utilize the services of a broker, you may also have to split the brokerage with your tenant.

The trickier part, though, lies in picking the right tenant. A complete check into your prospective tenants

antecedents is necessary to ensure that you get a clean deal. Though a well-paying tenant may seem ideal,

it may not be enough. Besides the usual set of identification proofs, ensure that you obtain the following

documents:

Police verification: You must also ensure that your tenant is not involved in illegal activities.

Verification of the tenant at the local police station is now mandatory. Ignoring this could even render

you punishable under section 188 of the Indian Penal Code.

Certificate from employer: Obtain a letter from your tenants employer certifying that she is indeed

working with the said organization (for at least three months in the same firm).

29

Reference from previous landlord: This could be very useful in selecting/eliminating a tenant as

previous landlords could reveal critical aspects such as payment history, lifestyle and behaviour.

Permanent address: In case the prospective tenant is a migrant bachelor/spinster, make sure you

obtain a valid permanent family address and cross-verify the same.

Once you arrive at a verbal agreement with the tenant, you proceed to the most important stepdrafting the

rental agreement (leave and license agreement).

Pen to paper

A rental agreement must be carefully drafted, checked and verified by an independent property lawyer to be

complete in all respects. Moreover, any rental agreement must be prepared only for a short tenor of 11

months. Moving to details, any rental agreement must cover the following aspects:

Paperwork and verification: Ensure that the tenant submits all documents and get them

independently verified.

Payments: This is a long list, but ensure that all expenses are equally split with the tenant. The

agreement should also spell out clearly whether the tenant bears recurrent expenses.

Nature of lease: This must be clearly specified and normally restricted to residential purposes, so as

to prevent tenants from unduly profiting from commercial activities or subletting.

Item list and damages: If its a furnished flat, the agreement must include a list of items offered along

with the flat and specify the damages, in case of any damages caused by the tenant.

Termination and renewal: The agreement must also contain detailed, special clauses indicating the

notice period to be given for vacating the property at the end of the 11-month tenor.

Last but not the least, while it is the owners decision to rent out her property, the cooperative housing

society, to which the owner belongs to, also has a say on the tenancy and can even deny it based on certain

bye-laws. All charges, such as maintenance charges, water tax, parking charges, utility bills may also be

charged to the tenant (or included in the monthly rent).

The way out for NRI landlords

NRIs looking to let out apartments in India could go the traditional way or turn their apartments back home

into corporate guesthouses. With multinational companies (especially in the information technology sector)

spreading their wings across the country, the need for residences to house migrating employees is steadily

rising. Therefore, corporate guesthouses could prove a steady source of income for NRIs. Moreover, the

idea of a corporate tenant brings with the reliability and credibility that may not be the case with individual

tenants. And your house will be well-maintained. Nevertheless, the legal aspects stand the same even for

such deals.

Saying to let, therefore, may seem attractive monetarily, but say so with caution and prudence.

Binaifer Jehani is director, Crisil Research.

30

Jan 2014

31

The post-possession trauma

Seeking complete clarity and documentary proof on all critical matters should not be

compromised

If you thought that all the pain and strain of buying a house ceases once you receive possession of your

apartment, you may want to think again. You drew a checklist to select the right project, the location and

social infrastructure in the vicinity, amenities (both internal and external), and the paperwork at the time of

purchase, the registration and handover of your apartment. Well, now theres another checklist you need to

refer to after you have moved in to your new home. Taking over the common area maintenance functions

from the developer and forming your own residential society is a tough task in the current scenario and so,

warrants a separate checklist.

Forming a residential society

Typically, a builder is supposed to form a housing society after he has sold 60% of the flats in a project,

within a four-month time frame. If the builder does not initiate the required proceedings, residents are free to

form the society on their own. Given that flats in any project are handed over to buyers in a staggered

manner, it takes 1-2 years for all buyers to either move into the new apartments or lease them out.

Once a building is largely occupied, residents need to come together and take stock of key issues, which

need to be resolved prior to a complete takeover from the developer. First, they need to identify and appoint

representatives from different wings or buildings of the same project to form the core society.

Next, they need to take stock of key issues awaiting immediate resolution from the developers end. These

could include non-functioning of external or internal amenities, an incomplete clubhouse/gymnasium,

leakages during monsoons, faulty electronic gadgets or sanitary fittings, etc. The society can also draw up a

final checklist wherein they could highlight all these issues and hand the list over to the builder as a formal

record.

Getting vital documents

Members need to draw up a list of the important documents that they need from the developer. These

include property documents executed between the original landowners of the building site and the developer,

an approved construction plan, the completion and occupancy certificates, and others. In addition, the

developer must be asked to furnish the no-objection certificates from the fire and electricity departments.

The newly formed society should insist upon the developer to share the final plans and layouts of electrical

wiring, water pipelines, sewage treatment plants and waste disposal systems, along with a certification from

the architect concerned and the pollution control board.

The society must also seek a copy of the annual maintenance contracts, warranties and invoices for assets

such as generators, transformers and elevators, equipment installed in the swimming pool, gymnasium and

clubhouse, etc. Contracts with local vendors or facility management service providers must also form part of

documents handed over finally.

32

Other key documents include copies of tax payments, sale deeds, share certificates, records of car parking

allocations and a copy of the certificate exempting the project from the Urban Land Ceiling Act, issued by a

competent authority. Finally, builders also need to submit a list of sold and unsold flats with the stamp of the

firm or on company letter head. As a final confirmation, the residential society can also appoint a legal expert

to ascertain the veracity and validity of these legal documents.

Managing maintenance

Even after the project is handed over to respective buyers, the developer manages the maintenance

activities either through local vendors or jointly with a facility management service provider. Once the society

is formed, it is the prerogative of residents whether to continue with the same service provider or seek the

services of external agencies for functions such as security, housekeeping, garbage collection, maintenance

of common amenities, etc. Alternatively, residents can also work out the cost economics of managing

maintenance functions on their own or availing facility management services from the existing agency.

Developers typically obtain advance payments from buyers towards maintenance charges for the first few

years, after the handover of the apartment. While it is a common practice where residents pick fault with

maintenance activities carried out by the developer or the service provider during the initial phases, after the

handover, it becomes a back-bending task to assume the full range of roles and responsibilities.

Of late, another area of ambiguity for several residential societies has been the concept of common area

maintenance charges payable by residents from the date of handover.

Forming a society is definitely one of the most important milestones of any residential project. Nevertheless,

seeking complete clarity and documentary proof on all critical matters is something that society members

should never compromise upon. Practising thorough scrutiny and due diligence would alone ensure a

smooth takeover of the project from the developer, leaving less room for repentance later.

Binaifer Jehani is director, Crisil Research.

33

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