The present year, 2016 can be termed as a year of transformation for Realty sector. A year-end review of the sector will provide an insight of the decisions that will change the course of functioning. Given below are top 10 real estate stories that shall be a game changer for this sector.

Interest subsidy for first-time buyers:

The start of this financial year brought some good news for homebuyers. The budget 2016, provided for an additional deduction of Rs. 50,000 on the home loan of Rs 35 lakhs for the home that costs up to Rs. 50 lakhs.

No service tax for affordable housing:

The central government, in order to augment the affordable housing for the poor, has exempted levy of service tax on homes having carpet area up to 60 sq. mtrs.

Home Loan Interest cut:

This year, unlike bygone years, RBI declared rate cut for several times, but the banks did not respond positively to the cut. It was after continuous persuasion by the Apex Bank that the commercial passed the benefit to homebuyers.

 RERA (Real Estate Regulation Act:

The act to protect Consumers interest came into existence this year. The act also provides for realty sector regulation. It will regulate residential and commercial real estate, developers, brokers and homebuyers alike. Though, the effectiveness of the act will depend on how much of it is adapted by the states and its implementation by them.

GST (Goods and Service Tax):

Touted as biggest indirect tax reform since Independence, GST will create a unified taxation regime. Its impact on property prices will depend on the adoption of lower or higher rate slab.

Clarity on RIET and invIT’s

This year SEBI, in order to facilitate RIET and invIT’s simplified regulation for both instruments.

Private Equity Funding:

PE investment in the real estate sector grew 22% during Jan-Sept. 2016 to Rs 28,300 Crores from Rs. 23,200 Crores during the corresponding period last year.

Benami Property Act:

 This act came into effect on Nov. 1, 2016. The aim of this act is to prohibit Benami transactions in Real Estate sector and curbing Black money menace in the sector.

Demonetization:

This move by the Government is expected to impact primary, resale segment and land prices in short term. The short-term slowdown is expected but in long-term, there will be clean up of black money in real estate.

 Unprecedented Consumer activism:

This year, 2016 will go the annals of history as the landmark year om terms of legal judgments pronounced in favor of homebuyers.

Different segments of the real estate market, like primary, resale, land, will be impacted differently by the recent demonetization. Here is an analysis how each segment is likely to fare in the short to long term

People look to buy a resale flat as their second investment, so that it could be let out on rent. Generally, such investment is supported by taking a home loan and it is not possible to proceed in nine out of the 10 projects owing to the presence of a substantial cash component in these deals. On the other hand, many people who have recently sold their properties and accepted partial payment in cash have no option but to declare the amount and pay taxes on it.

Demonetization has resulted in a slowdown in sales, as buyers and sellers wait for cash availability to normalize.

The primary market (purchase of properties directly from developers) will not be affected much because it is already at the bottom of the price trends and further corrections are not possible. Moreover, the primary market is mortgage driven, especially at the lower and mid-end and will not face many problems. However, the luxury segment could see a bit of Land sale and the secondary (resale) market are likely to be hit for some time though due to the liquidity crunch, as investors wait for better returns.

Will all property deals be in white post demonetization?

Property consultants maintain that in the primary market, nearly all the reputed builders in metros have stopped taking cash. With transactions occurring through accounted payments, such as cheques, demand drafts or bank transfers, experts opine that the primary markets will not be affected.

Nearly 90% of the primary market in the metros, will not be impacted. The tier-2 and tier-3 cities will surely be affected though as the cash component is relatively higher in these cities.

Demonetization may also cause a slight spike in distress sales. Earlier, consumers with ready payment abilities were able to bargain and get a good deal. Now, this may be more unlikely.

Demonetization’s impact on artificial inflation

A common belief is that the real estate market is artificially inflated, due to the circulation of black money. However, developers maintain that this is not true for primary markets, as investors are no longer present in this market. The primary reason for this is that the return on investment in properties for investors is not sufficient. The purchasers are actual end-users. Thus, there should not be a significant effect on the prices.

Experts explain that inflated property prices are a result of the presence of black money. As a result, the prices of resale flats will come down by 20%-40%. With demonetization, such artificial demand will go down in the medium term, which is a major positive for realty.

Experts don’t rule out the possibility of artificial inflation in the long run. If a seller is unable to accept a ‘black’ component for the sale consideration, he may simply ask for the entire consideration in ‘white’ and levy on the purchaser, all the taxes that will be additionally incident in the process, resulting in increased prices. The same thing could happen in the primary market if upstream transactions have unaccounted components.

In this scenario, recent laws on real estate, like RERA, GST, and Real Estate Investment Trusts (REITs), can bring in the much-needed transparency and increase buyers’ confidence in the real estate market.

Which property markets will be affected by demonetization?

• Nearly 90% of the primary market in the metros will not be impacted by demonetization.
• Tier-2 and tier-3 cities are likely to be affected, as the cash component is relatively higher in these cities.
• Land sales and the secondary (resale) market are likely to be affected for some time, due to the liquidity crunch.

Real estate does give better ROI than any other investment instrument but can an end-user afford to act like an investor? Here are some answers

The psychology of home buyers and their expectations vis-à-vis return on investment (ROI) have traditionally been different for investors and end-users. However, this difference may be gradually disappearing, at least in the top eight cities.

Thinking in terms of risk-versus-return is something that is predominantly done by investors. The mindset of an average end-user is similar to that of a seasoned investor today, is very much debatable. Take the case of a person who rented an apartment in Atta Market, close to the central business district of Noida, at Rs 18,000 per month. With 12 years to go before his retirement, he invested in a property in Ghaziabad.

He did this with the belief that he made a sound investment decision. He felt that when he can buy the same kind of property at Rs 60 lakh in Ghaziabad then what is the point in investing Rs one crore in Noida? It does not make sense to pay extra for a property that has lesser chances of appreciating; as against an upcoming market, was his logic. Moreover, this investment gave him the flexibility of mobility, if he is transferred in future.

This raises a fundamental question, as to whether houses have become more like trading commodities and the emotional quotient associated with its purchase, has diminished in leading Indian cities. In real estate, even if the investor does not have very sound economic wisdom, the chances are that he will not lose his money. Compared to real estate, stocks are risky, as most of the companies are not blue chips and will have debt. So, even if the quantum of return is not that high in real estate, it remains a safe investment avenue, he maintains.

Experts point out that one also has to consider the buying pattern. Indians generally prefer to buy property in the top eight cities where they work, or in their hometowns where they intend to retire, even if they live on rent in the city where they work. So, if a person is not an investor and even if he is advised that the research has established that there is fantastic return in a city other than his place of work or hometown, it is unlikely that he will invest there.

Analysts maintain that end-users should not buy homes on the basis of expected price appreciation. A house may give better ROI than any other investment instrument but one has to look at a long-term time frame – of around ten years. In the residential segment, even if you pick the right project at the right price, it may take three to five years to get ROI. The time frame is important for investors as well, and the product will vary accordingly. For instance, in the residential segment, speculators can opt for pre-launch properties in north India and make money in one or two years. For mid to long-term investors, the commercial and retail segments may be a better option.

However, if one is looking at a fairly long-term period, then, investing in the land would be ideal, as the returns are highest in this category. There are instances where people have made returns worth a thousand times their initial investment, over a period of 15-20 years. Ultimately, each homebuyer has to take a conscious call, on whether s/he is an investor or an end-user.

Any difference between the agreement value and the ready reckoner value of a property, has implications, not only on the stamp duty payable but also on the income tax of the buyer and seller.

When you enter into an agreement to buy a property, you have to pay a certain amount to the government, which is known as stamp duty. The amount of stamp duty is generally based on the value of the property mentioned in the agreement.

To avoid evasion of stamp duty through the undervaluation for agreements and to minimize the disputes on the quantum of stamp duty, all state governments publish an area-wise, stamp duty ready reckoner on a yearly basis. If the value of the property based on the ready reckoner is higher than the value of the property stated in the agreement, then, you will have to pay the stamp duty on the basis of the value computed from the rates in the ready reckoner. However, if the agreement value is higher than the ready reckoner valuation, the stamp duty payable will be calculated with reference to the agreement value. The stamp duty valuation also has implications on the income tax of buyers and sellers.

Importance for the seller under income tax laws

As per Section 50C of the Income Tax Act, in case the agreement value is lower than the stamp duty valuation, the law presumes that the seller has received an amount equal to the stamp duty valuation and the capital gains are computed accordingly. However, if the seller claims that the stamp duty valuation is higher than the fair market value of the property, the income tax officer can ask its valuation officer to assess the value the property for capital gains purpose. The value determined by this officer shall be treated as the sale consideration of the property for income tax purpose. However, if the valuation given by the income tax officer is higher than the stamp duty valuation, such excess valuation shall be ignored and only the stamp duty valuation shall be treated as the sale consideration. This provision is applicable to all the taxpayers, including limited companies.

In cases, where the Stamp duty valuation is higher than the agreement value, and the taxpayer invests the net sale consideration under Section 54F to claim exemption from long-term capital gains, s/he may have to borrow money as the money received may be lower than the amount required to be invested.

Importance for the buyer under income tax laws

As per Section 56(2) (vii)(b) of the Income Tax Act, in case the stamp duty valuation of the purchased property is higher by more than Rs 50,000, then, the difference between the stamp duty valuation and the agreement value shall be treated as income of the buyer. This provision applies to Hindu undivided families (HUFs) and individuals only.

However, if the agreement date and the date of registration are different and thus, the values on these dates are also different, the valuation as on the date of agreement can be considered for this purpose, only if full or part consideration was paid by means other than cash, either on or before the date of the agreement.

The choice of a fixed, floating, or semi-fixed interest rate home loan, depends on factors such as the tenure of the loan, age of the applicant and prevailing market conditions

When opting for a home loan, buyers have a choice between three types of schemes – fixed, semi-fixed and floating interest rates. Choosing the correct scheme can be a tricky affair. Various factors can affect buyers in short and long term if a wrong home loan scheme is selected.

In a home loan with a fixed rate of interest, the equated monthly installments or EMIs will remain constant over the tenure of the loan. It is useful to opt for this if interest rates have bottomed out. However, fixed rates are usually higher than floating rates at any given point. On the other hand, for floating interest rate loans, the EMIs would fluctuate as per the market dynamics, as interest rates increase or decrease.”

A semi-fixed rate home loan is a combination of fixed and floating rates. The interest rates on such loans remain unchanged for a specified period of time, after which, the rate of interest is converted to floating.

What suits you?

Experts point out that when interest rates were rising, very few banks and financial institutions were willing to offer fixed rate loans. They were charging at around two to three percent higher than the prevailing floating interest rates. However, now that interest rates are on a downturn, banks have cut the margin spread and are trying to woo customers, with fixed and semi-fixed rate loans.

A home loan seeker must analyze all the factors before finalizing a loan and opt for a scheme that best suits his/her needs and not be lured by the bank’s lucrative offers.

Who should go for Floating Vs Fixed Vs Semi-Fixed rate loan

Floating rate is suitable for the persons who take the loan for a longer period which is more than 20 years. The Fixed rate is apt for short/medium term loan seekers while semi-fixed rates are suitable for medium term loan seekers.

When interest rates are struggling to stay afloat or when the rate is to fall it is advisable to go for floating rate. The Fixed rate is suitable when the interest rate is subject to adopt higher trajectory or go up. Semi-fixed rates will ideally be suited to the situation when in short term the rates are expected to rise and fall down in further course.

When the financial tide is in your favor or the income is enough to support rate fluctuation it is proper to go for floating rate. In contrast, if the tide is not in your favor i.e. the income flow is expected to remain stagnant, opt for fixed rate. The option of semi-fixed rate is also viable for such loan seekers too.

If the borrowers are in the age group of 30-35 years then they should go for floating rate of interest. Loan seeker above 50 years of age should opt for fixed rate due to their low ability to take risks. The same logic will apply on loan seekers who dither from taking risks.

Nowadays, banks are providing flexible tenures for repayment of loans, for a maximum period up to 30 years as per their requirement/eligibility. Some websites and newspapers also give a comparative analysis of housing loan schemes of various banks. Loan seekers can visit the websites of various banks, to get details of housing and other loan products and select a suitable bank accordingly.

The type of interest rate you choose has an impact on the monthly EMIs you pay. It is important that one should know the difference between the fixed rate home loan and floating rate home loan.

Market conditions and its bearing on interest rate schemes

Multiple rate cuts by the RBI, indicate that the market is entering a period of low-interest rates and the same is likely to fall further, in the coming years.

After a series of rate cuts, the RBI is now focusing on its transmission and has been urging banks to pass on the rate cuts to customers, through their lending rates. Consequently, banks may reduce their rates, which would benefit borrowers of floating rate home loans.

With the government’s demonetization move affecting the availability of cash and also impacting banking transactions, the RBI has provided an additional 60 days, for the repayment of loans that are due between November 1 and December 31, 2016.

In view of the cash crunch being faced by borrowers, the Reserve Bank of India (RBI), on November 21, 2016, provided an additional 60 days, for the repayment of housing, car, farm and other loans, worth up to Rs 1 crore.

This is applicable to loans payable between November 1, 2016 and December 31, 2016, the RBI said in a notification. “It has been decided to provide an additional 60 days, beyond what is applicable for the concerned regulated entity for recognition of a loan account as substandard,” it said.

The above relaxation is available to entities running working capital accounts with any bank, with the sanctioned limit of Rs 1 crore or less. Term loans, whether business or personal, secured or otherwise, the original sanctioned amount of Rs 1 crore or less, on the books of any bank or any NBFC, including NBFC (MFI) would also get the benefit of this relaxation. This will also include housing loans and agriculture loans, it said.

The apex bank further said that all regulated financial institutions, should note that this is a short-term deferment of classification as substandard due to delay in payment of dues, arising during the period specified above and does not result in restructuring of the loans. The demonetization of higher value currency notes has affected normal banking activities, including clearing of cheques. Besides, borrowers are unable to get payments from their creditors, due to various restrictions including cash withdrawal limit of Rs 24,000 per week, limiting their options to repay their dues.

It is a welcome move by the RBI, as many people are experiencing inability to repay dues in time, because of the ongoing demonetization drive. For many of them, EMIs are due in the first half of the month. So, the relaxation will help to keep their account standard, even when the payment is not received. Neither will the borrowers’ credit score be impacted negatively due to non-payment, nor will financial institutions have to make additional provisions for sub-standard accounts.

With demonetization likely to have a major impact on cash transactions, the Indian real estate market may become more attractive to foreign investors, who are willing to bet long-term

The demonetization of Rs 500 and Rs 1,000 notes, is likely to result in an immediate reduction in cash transactions, in the real estate sector. Buyers are expected to shift towards more legitimate transactions, thus, having a structural impact over a period of time. Liquidity will contract over the short-term and prices will become more attractive. Investors will have fewer opportunities, for short-term gains.

Initiatives to attract foreign investors to Indian reality

Demonetization is the latest in a series of moves taken by the government in the last few years. The others include the introduction of the Real Estate Regulatory Act (RERA), improving the policy framework for real estate investment trust (REIT) regulations and liberalizing the foreign direct investment (FDI) policy.

These moves will make India more attractive for foreign investors and developers, as transparency is important. Earlier, they were competing with local developers and it was not a level playing field. This will send out a positive message about India to the world, with its move towards a transparent economy,

With increasing institutional investor participation, best practices are adopted and the sector matures. Thus, experts believe that we are at the start of a progressive growth cycle, in reality. One may also see consolidation among developers. These factors will surely attract more foreign investors into Indian real estate.

How demonetization affects the credibility of the property market

Demonetization could also improve the ease of doing business in the long term. Corruption in obtaining approvals is cited as the key impediment to improving ease of business in the country. By limiting the avenues to exhibit this behavior, there would be a definite positive impact on the ease of doing business. This will encourage economic growth and boost participation from local and global businesses.

However, demonetization by itself, will not bring about greater transparency or eliminate unscrupulous intermediaries.

This needs to be supplemented through appropriate regulation in real estates, such as eventual minimization of Benami property transactions, a ban on all transactions above a particular value in cash and a regime that naturally compels disclosure through the better understanding of valuations.

Impact of demonetization on REITs

Will demonetization force investors to consider other avenues for investing in real estates, such as REITs? Experts point out that investors typically engage with developers in the primary markets, which offer relative safety of their investments.

Demonetization will add to the credibility of developers, to the extent that there is likely to be less unaccounted cash transactions, even during the process of development. So, if anything, investors should actually feel safer working with developers.

Also, investors, who do not wish to get directly involved in the cycle of development and disposal of a property, typically prefer REITs. Moreover, REITs in India focus only on certain forms of income generating property, such as commercial offices, retail, hospitality, and warehousing. This leaves the residential market out of the ambit of REITs. Consequently, investors looking to invest in bulk in the residential market, will not shift focus to REITs.

Will demonetization result in lower interest rates?

With demonetization, banks are receiving massive amounts of liquidity, in the form of cash deposits. This means that there will be a surge in the funds available to them for lending and is likely to result in lower interest rates. Demonetization may also widen the tax base and improve the fiscal deficit position. A high fiscal deficit puts upward pressure on interest rates. Any improvement in the fiscal position could result in lower interest rates over the long term. Alternatively, the government can also pass on some of the additional collections to the public, through lower income tax rates. This would result in more capital in the hands of the common man and boost residential sales.

While it is not possible for all homes to be Vastu Compliant, we list the faults that homebuyers should not ignore. Vastu Shastra has a lot of relevance in Indian households and business places. People buying a house or setting up an office or a shop try to adhere to Vastu norms for leading a stress-free homely life or running a successful business. Here under a brief on the methods useful in rectifying Vastu faults.

Is it possible for every apartment that is put up for sale, to comply with Vastu Shastra norms? The answer is no! So, how can homebuyers identify which apartments to buy and which one they should avoid vis-à-vis Vastu norms?

Vastu experts maintain that buyers should preferably focus on the most important rules of Vastu and make alternative arrangements or corrections, for construction aspects that do not conform to Vastu.

The arrangement of different areas in our home should be as per Vastu norms. Otherwise, it may create unrest in the occupants’ minds, health problems and other problems in life. One should buy a home that at least conforms to 70%-80% of Vastu norms.

Vastu norms to be considered while buying a home:

• Opt for a house where all the four corners are intact, i.e., without any corner being cut.
• Avoid southwest facing homes.
• The staircase should always be clockwise and should not be in the northeast direction.
• The kitchen should be in southeast or northwest direction. It should not be in the northeast direction.
• The master bedroom should be in the southwest direction. It should not be in the southeast direction.
• Toilets should be in the northwest direction. It should not be in the northeast direction.

Solutions for homes with severe Vastu faults

In case you have bought a house with a large number of Vastu faults, they can be rectified with the help of minimal expenses and changes.

The faults that cannot be rectified fully without demolition include problems pertaining to the wrong placement of toilets, kitchens, or staircases, especially if they are constructed in the northeast and if the main entrance of the house is in the south/southwest direction.

Some critical defects can be corrected with pyramids or crystals.

Traditional methods, using mirrors, colors and special metallic wires, can also be used for corrections, depending upon the individual case.

One can also demolish the wrong area and reconstruct it properly. However, this may involve substantial cost, time and complication.

Another Vastu defect is the presence of high voltage wires passing over a house and this can be corrected by incorporating a plastic pipe filled with lime, from one corner of the affected area to the other, in such a manner that both ends remain outside by at least three feet each, will eliminate the negative effects of energy being generated by the overhead wire.

To conclude, experts suggest that homeowners should not ignore Vastu defects that do not require structural changes, as these can be corrected by making internal arrangements.

While the current market slowdown would suggest that investors have ‘deserted the real estate sector’, the fact remains that developers have come to rely on their funding and will continue to do so. A short analysis in this regard.

Although not many developers may be willing to publicly admit it, the fact is that developers find it advantageous to have investors as anchors for their projects. Developers need money, even before they can commence a project, to buy land and often, only the investors will give them money at that early stage, without any collateral or receivable.

Approvals can take any amount of time but not less than one year. During that phase, nobody is going to stand by you, except the investor says an expert on the advantages of having investors to anchor a project.

Even banks will not fund you. All the organized funding starts, only when you have something ready to offer to them. However, developers cannot keep waiting till a project gets approved, to launch it; you need some quasi-investment at each stage.

In this scenario, there are two models in real estate investment. The first involves a pre-launch with funding only from an investor and a minimum amount of understanding as to what kind of a project it would shape up to be, in the future. The second kind of pre-launch is crowd funding, where there is better clarity on the project’s details. In this case, the developer has the plans for the project (including layouts, floor plans and unit plans) ready but does not have sanctions. Consequently, this is a mass pre-launch and does not depend only on a select set of investors. Although laws do not allow such opaque transactions, it is an open secret in the Indian property market and akin to an IPO model. The advantage for developers is that the price point here is higher than the price point at which they offer it to the select set of investors.

Unlike end-users, investors are not problematic as they do not ask too many questions. Even if there are some escalation charges, it is easy to deal with one investor than 15 or 20 other people who will keep fighting. So, an investor is an easier person to deal with, once he comes in.

Developers have to brave various odds – courts, ministries, municipalities, local factors, environment and market forces. Under these circumstances, an investor is an asset for the developer. Even when an investor exits, in many cases, he does not sell it to the end-users but sells it back to the developer, who buys it at a thousand-odd rupees cheaper than the price at which the developer will sell to the end-user.

A new law to prohibit Benami property transactions and curb the menace of black money will provide for more stringent punitive measures comes into effect from November 1, 2016

A new law to prohibit Benami transactions, which provides for up to seven years’ imprisonment and fine, for those indulging in such activities, will come into effect from November 1. With a view to curb the menace of black money, the Parliament in August 2016, had passed the Benami Transactions (Prohibition) Act, after assurance from finance minister Arun Jaitley that genuine religious trusts will be kept out of the purview of the legislation.

“The rules and all the provisions of the Benami Transactions (Prohibition) Act, shall come into force on November 1, 2016. After coming into effect, the existing Benami Transactions (Prohibition) Act, 1988, shall be renamed as the Prohibition of Benami Property Transactions Act, 1988,” a CBDT statement said.

While the existing law provides for up to three years of imprisonment or fine or both, for carrying out Benami transactions, the amended legislation would provide for seven years’ imprisonment and fine. The act defines Benami transactions, prohibits them and further provides that any violation is punishable with imprisonment and fine.

The PBPT Act prohibits recovery of the property held Benami from Benamidar by the real owner. “Properties held Benami, are liable for confiscation by the government, without payment of compensation,” it said.

An appellate mechanism has been provided under the act, in the form of an adjudicating authority and appellate tribunal. A joint or additional commissioner of IT, an assistant or deputy commissioner and a tax recovery officer in each principal CCIT region, have been notified to perform the functions and exercise the powers of the approving authority, initiating officer and administrator, respectively, under the act, the statement said.

While the 1988 act has nine sections, the amended law would have 71 sections. “Section 58 of the law clearly states that in case of charitable or religious organisation properties, the government has the power to grant exemption,” Jaitley said, responding to concerns of some parliament members about the applicability of the amended law, on properties in the name of deities, churches, mosques, gurudwaras or temples.