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Thursday, June 22, 2017

Anuj Puri, former chief of JLL India buys JLL India’s housing brokerage arm

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MUMBAI: Within two months of moving out as India chairman and country head of JLL India, Anuj Puri has acquired the firm’s India residential brokerage arm. Puri, who left the firm on February 28, will now get complete control of a team of 200 residential brokers across eight Indian cities.

JLL India has extensive expertise in the office, retail, industrial, hotels, logistics and land segment. While the residential brokerage arm will be under the new ownership, JLL will continue to provide consulting, advisory, valuation, research, property management, project and development services, and capital markets services for residential developers.

“This is a great outcome for all parties. After 10 incredible years with JLL, it’s now time to build something new and I’m very much looking forward to focusing on the exciting opportunities in India’s residential sector,” said Puri, who will lead the new organisation as chairman – Jones Lang LaSalle Residential (JLLR).

Puri reckons that the size of Indian residential brokerage market is roughly Rs 18,000 crore, which is eight times bigger than the commercial brokerage market. “There is a huge opportunity for organized brokerage here and that explains our interest in this space. Also, with the eminent implementation of RERA, requirement for transparent and ethical approach to the residential brokerage will rise,” said Puri.

He is looking to build on the model of online property marketing with complete offline support to take the business further.

“With his impeccable track record in Indian real estate and his passion for the residential sector, Anuj is exactly the right person to continue to build this business and we wish him every success in his future endeavours,” said Ramesh Nair, CEO & Country Head, JLL India.

“This has been a smooth and well-planned process as Anuj transitions to his new ventures. For JLL, it is a strategic move that will allow us to focus on new growth areas for our India business and continue to offer best-in-class real estate advice and services to our clients.” Initially the business will retain the brand name JLLR, and going forward, it will be rechristened to reflect the new ownership. Ashwinder Raj Singh will continue in his role as CEO of JLLR, reporting to Puri.

“JLL India has incubated the residential brokerage division over several years. Anuj has shaped it with his trademark passion and expertise and I’m sure its success will continue,” said Anthony Couse, CEO, JLL Asia Pacific.

“Now, as we look ahead and continue to grow JLL’s India business, we know that our clients — both domestic and multinational — are looking to us to help them navigate opportunities in this exciting phase in India’s economic development. I’m confident that we have the right team and structure in place to deliver on our ambitious growth plans.”

Impact of GST on homebuyers

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The biggest reform in the indirect tax regime is set to get implemented very soon. Instead of different types of taxes—central, state, local and so on—soon there will be only one tax: the Goods and Services Tax (GST). Like any other sector, real estate will also come under the ambit of GST. However, as of now, there is lack of clarity on various aspects such as whether the rate of GST will remain at par with current applicable taxes and whether affordable or low-cost housing will remain out of the GST’s ambit. Read on to know what impact GST will have on the real estate sector in India.
Service Tax

When you buy an under-construction house, service tax is levied on a certain percentage of the total value of the property, which is considered the cost of construction. Cost of land is excluded from service tax. To do this, income tax provisions allow abatement to the tune of 75% on under-construction properties costing less than Rs1 crore; hence, service tax is calculated on 25% of the gross value. And, 70% abatement is allowed for properties costing more than Rs1 crore: service tax is levied on 30% of the value.

Given that service tax of 15% is charged only on the construction cost, the effective rate on the entire value of a property costing below Rs1 crore is 3.75% (i.e., 15% * 25% of the property value), and for a property above Rs1 crore, the effective rate is 4.5% (15% * 30% of the property value). Thus, if you buy a property at Rs80 lakh, you will have to pay Rs3 lakh (3.75% of Rs80 lakh) as service tax. And, if the property was Rs1.6 crore, service tax would be Rs7.2 lakh (4.5% of Rs1.6 crore). Once GST gets implemented, “Payment of service tax on the properties under construction does not arise. It will be replaced with GST,” said Kunal Wadhwa, partner-indirect taxes, PwC. Besides that, “Existing abatements under the service tax laws are also to be done away with post implementation of GST,” added Wadhwa. So, it is likely that tax will be charged on the actual construction value.

However, the concern is whether the GST rate would be higher than the prevailing service tax rate or lower. “It is expected to remain around 12% or lower than 15% (the current applicable service tax rate). It will not be on the higher side at around 18%,” said Abhishek Rastogi, partner, Khaitan & Co. If the GST rate remains on the lower side, it will bring down the overall cost of houses.

Value added Tax

Some states like Haryana and Delhi also charge value added tax (VAT) on under-construction properties, which is again borne by a homebuyer. However, once GST gets implemented “the current composition schemes for developers under VAT laws of respective states would come to an end,” said Naveen Wadhwa, deputy general manager, Taxmann.com. VAT is a state subject and varies between 1% and 5% of the property value. However, “There is a lot of litigation going forward on this account,” said Nangia. There are many contentious issues for both developers and homebuyers regarding VAT. Some cases have also reached the apex court. Once GST gets implemented “it will simplify tax structure and reduce the scope for litigation, however this may increase the cost of real estate in states that never had VAT,” said Nangia.
Stamp Duty

A homebuyer has to pay stamp duty to get the property registered. Even after GST, “Stamp duty will continue, as GST will not subsume stamp duty levied by government,” said Wadhwa.

Stamp duty is calculated as a percentage of the agreed value of the property, or the circle rate (the minimum price on which a property can be transacted, which is decided by the government), whichever is greater. In addition to stamp duty, typically 1% of the value of a property is charged as registration fee for registration of property documents (sale deed). In some states, if a property is bought in the name of a woman, the stamp duty levied is lower. For instance, in Delhi, properties registered in the name of women attract 4% stamp duty, compared to 6% otherwise. However, in case of joint ownership, where the property is bought jointly in the name of a man and a woman, buyers have to pay stamp duty of 5%, in case of Delhi.

In some states, stamp duty also depends on the region in which a sale deed is executed. For instance, in Haryana a man is required to pay 8% stamp duty in urban areas and 6% in rural areas, while women have to pay 6% in urban areas and 4% in rural areas.

“The Task Force on Goods and Services Tax recommended in the Thirteenth Finance Commission that real estate sector should be integrated into the GST framework by subsuming the stamp duty on immovable properties levied by the states, to facilitate input credit and eliminate the cascading effect,” said Nangia.

But “due to political and economic considerations, stamp duty—which is a good contributor of revenue to state government—is not subsumed in the GST framework for the time being,” added Nangia.

As of now, taxes and duties can increase the cost of property by 15-18% for homebuyers. After GST gets implemented, whether the cost of houses will come down or increase, will depend on the rate at which GST is charged and whether there will be any abatement or not.

HDFC Property to launch $500 million offshore fund

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Bengaluru: HDFC Property Fund, backed by mortgage financier HDFC Ltd, is set to launch a $500 million offshore fund that it has been planning since early 2016, a company executive said. The fund will invest up to 40% in office spaces and the rest in residential projects with a focus on affordable housing.

This will be HDFC Property Fund’s third offshore fund. Earlier, it raised an $800 million fund in 2007-08 and a $350 million fund in 2014-15, which is in the last leg of deployment.

The new fund, which will make equity and equity-linked investments, has a nine-year fund life and will invest in residential projects, townships and office projects which are in the early stage, greenfield mode. The fund will look to invest in individual projects that are not more than 2 million sq. ft to ensure they are not too large to be developed within a certain time frame. It is targeting an internal rate of return (IRR) of 20-22% and will also look at Hyderabad apart from the other top metros.

“The markets were not conducive to raise offshore money in the last year or so. It was important that we made some profitable exits before we went out to raise more capital. But real estate is on a gradual recovery mode and we will launch the fund in the second half the of year,” said the fund executive cited above, asking not to be identified.

Indian real estate funds have been finding it tougher than usual to raise money as investors demand a more rigorous due-diligence process in an uncertain environment and large pension funds and global investors seek exclusive and direct partnerships with developers instead of parking money with fund managers who are essentially intermediaries.

Besides deploying money from the new fund, HDFC Property Fund has been pushing for quicker exits for some time now. Last year, it exited its Rs500 crore investment in Lodha Developers Pvt. Ltd’s project in central Mumbai with almost 3X returns of Rs1,500 crore. Piramal Finance Ltd put in Rs2,320 crore in Lodha’s projects, paving the way for this exit.

From its earlier $800 million fund, the firm has already returned Rs3,100 crore to investors and is gearing up for the balance exits, which will return another Rs2,800 crore. The IRR may be lower than expected, but the fund doesn’t plan to slow down on exits on account of that, said the fund executive quoted earlier.

It also plans to exit another Lodha project in Hyderabad, where it had invested a smaller amount and an IT project of the Embassy Group, which will be part of the various exits expected over the next few months.

“Overseas fund-raising is indeed challenging in the current scenario and the challenge is more when a fund manager is trying to raise an India-specific fund, in which case the past track record specific to India comes into play. However, there is a renewed confidence for India, and LPs (limited partners) are being cautiously optimistic,” said Shashank Jain, partner, transaction services, PricewaterhouseCoopers India.

“The last few years have seen challenges in exits, which directly impacts the returns that the investors make in a fund. Today, investors clearly look at a fund manager’s track record in its entirety – from quality of investments, to asset management, the relationships built with the portfolio companies and exit performances. A fund manager which has a successful track record of exits and return money to the investors clearly has an edge in raising fresh money,” Jain said.

Real estate developers turn to courts to counter new Benami Act

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Kolkata: Real estate developers are seeking judicial intervention to protect them from the Benami Transactions (Prohibition) Amendment Act 2016, which was amended in 2016 to give the taxman powers to seize properties registered in another person’s name.

Because of restrictive land ceiling laws, it was commonplace for real estate developers to amass land holdings through proxies—normally through firms not directly controlled or owned but funded by way of loan or subscription to share capital. There are at least 17 land ceiling laws in 16 states of India.

Despite the Benami Transactions (Prohibition) Act being in force from 1988, nobody cared much about acquisition of land through proxies because the law had no implementing agency until now and hence was rarely applied, said a leading lawyer in Kolkata, who asked not to be named.

With the income tax department now starting to crack the whip on benami transactions, or ones in which the actual beneficiary is different from the registered owner, many real estate developers across India are looking for cover.

In the run-up to last year’s amendment, many real estate developers hurriedly “reversed” benami transactions by transferring properties back to themselves from their proxies who previously held them, according to the lawyer. But under the amended law, such ‘re-transfers’ are banned with retrospective effect.

Of the 77 sections of the amended Benami Act, only three came into force last year; the rest were made effective through the amendment from 1988.

Real estate developers claim that their acquisitions through proxies should not be treated in the same manner as any other transaction aimed at tax evasion or concealment of wealth. Proxies were used only to get past restrictive land ceiling laws, they claim.

However, Meenakshi J. Goswami, a spokesperson for the Central Board of Direct Taxes, said motivation is not important in this case and that the Income Tax department will not treat any benami transaction differently. “The law simply says if the property belongs to you, it should be registered in your name,” she added.

Under the amended law, people involved in benami transactions face up to seven years in jail and confiscation of properties without compensation.

Nandu K. Belani, a leading real estate developer from Kolkata, said the aim of the Benami Act is to curb black money. Real estate developers will be in difficulty if it is used to take on land aggregation through proxies, added Belani, who is the president of the West Bengal chapter of lobby group Confederation of Real Estate Developers’ Associations of India (Credai).

“But I am of the view that if through legal challenge we can establish the motivation for creating multiple ownership in land aggregation, the income tax department will not treat these transactions in the same manner as any other benami transaction,” said Belani.

Strong legal challenge will lead to a more pragmatic application of the Benami Act, according to Belani.

Real estate developers across India are currently in a quandary over how to deal with properties they have aggregated over the years through proxies, said the lawyer cited above. The law clearly specifies the exceptions—such as ownership through the head of a Hindu undivided family.

“Only after the income tax department starts proceedings over illegitimate land aggregation, and such action is challenged in courts, clarity will emerge if the law is to be implemented in letter and spirit completely unaltered,” the lawyer added.

For now, developers will delay launch of real estate projects to keep land aggregated through proxies under wraps until there is clarity on how land aggregation is to be treated under the amended Benami Act, according to the lawyer.

Real estate euphoria premature as demand continues to be elusive

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On Thursday, a cursory mention in the Reserve Bank of India’s monetary policy that banks can invest in real estate investment trusts (REITs) was enough to fire realty stocks. The BSE Realty index closed 2% higher although other benchmark indices were down.

That isn’t all. Real estate stocks have been on a roll for about six months. Since January, the index representing the realty universe has returned 33%, thrice as much as the benchmark Sensex. But the concern is that the rally is yet to be backed by revenue and profit expansion.

The recent triggers have been mainly policies like the government’s initiative to boost mid-segment housing and more recently the establishment of the Real Estate Regulatory Authority (RERA) that promises a fair deal for both developers and stranded or short-changed buyers. While RERA aims to regulate the real estate sector to ensure that developers deliver projects on time and set penalties to be paid for delays, the question is if it would serve the purpose, given the time taken for settlement of disputes and grievances in the country.

However, the recent case where directors of real estate firm Unitech Ltd were arrested for cheating customers, has raised confidence in the realty segment.

Be that as it may be, the developers are still on shaky ground. A report by JLL India says that the National Capital Region, Mumbai and Bengaluru are the three biggest markets with unsold units. Worse, less than 5% units in the unsold inventory are ready for possession. That’s why most developers put new launches on hold in 2016 and the inventory overhang was reduced.

Data analysis of the BSE Realty index stocks is a dampener. The last three quarters show a year-on-year contraction in revenue and rise in interest cost as a percentage of sales. The situation was aggravated in the December quarter when the currency ban sucked out liquidity and unaccounted money, which is significant in real estate transactions. Average revenue of 12 realty firms contracted by 19% year-on-year and interest cost as a percentage of sales rose to 21%.

In fact, investors must be cautious now. Given the deplorable base, the March quarter performance will look appealing. If at all, the financial health of firms with a higher mix of commercial assets would do better. Lease rentals are rising steadily on the back of strong demand and lower supply. Stocks like Phoenix Mills Ltd and Prestige Estates Projects Ltd are better options from an investor’s perspective.

To sum up, the strong rally on the back of regulatory changes mirrors investor confidence. But then, these changes could delay recovery in the property market as developers will be forced to put their house in order. Banks and mutual funds too would look for a revival in demand before participating in the property market, be it through lending or through new instruments like REITs.

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