Developers may have to pay 11.2 per cent interest to buyers for delay

The new draft of the rules of the Real Estate Development and Regulation Act 2016, formulated by the housing and urban poverty alleviation ministry has the following

  1. Developers to pay 11.2 per cent interest to buyers for delay in handing over apartments and homes.
  2. Projects without completion certificate will have to register with the RE Regulatory Authority in their respective states within three months of the rules being notified.
  3. Builders have to give completion date of a project, size of flats, promised facilities.
  4. Any changes in layout and construction, size of the apartment, additions in towers and delays should have consent from 70 per cent of the allottees.
  5. The RE Act states that in the absence of the consent, the authority can take a decision of get the project completed by an external agency with the buyers’ consent.

The draft rules will seek public comments till July 8.

The interest rate compensation has been proposed to be 2 percentage points over and above the prime lending rate (PLR) of State Bank of India. Normally, a home loan from SBI is pegged at 0.20 percentage points to 0.80 percentage points over and above the MCLR (marginal cost of fund based lending rate) at 9.15 per cent, which is the PLR for a retail loan. That means, rates for compensation would be 11.2 per cent as against the home loan rate of 9.35 per cent to 9.95 per cent.

The draft rules provided a “compounding” fine that builders can pay to escape imprisonment if they violate a ruling by the regulator. Developers said if the rules are applied on ongoing projects the sector will be hit severely and there could be further delay. President of the Confederation of Real Estate Developers’ Associations of India said all unfinished projects, which were launched before 2012, can be termed as defaulters and under the draft rules, if buyers demand their money back, developers will have to return at over 11 per cent rate of interest.

As real estate is a state subject, each state has to frame its own rules on the basis of the regulation approved in their respective assemblies. The state governments will have to frame their own rules within six months of May 1, when the Act was notified. The rules will come as a great relief to home buyers as this would be a step towards forcing developers to complete projects as soon as possible.

Funding land purchase may be risky for banks…

The recent comments by Mr. Deepak Parekh, requesting RBI and NBFC to fund land deals is met with skepticism. While the current practice of foreign PEs and NBFCs funding these transactions have resulted in home price increase, allowing banks to fund land deals may not be the right suggestion at this point, as this would leave the promoter with little options in the game. Land purchases should ideally be funded by the developer and this is his contribution in the project.

The unaffordable prices are due to the developers looking at earning big margins.  The other reason is that in bigger cities the shortage of land pushes up land prices making housing costly.  There are issues that the Government needs to address, on approval costs, and land costs. The developer would also factor in his interest costs to be paid to the customers if there is a delay in approvals, resulting in a project delay.

The foreign PE investors look at returns on investment and the builders are bound to give in to these demands, and hold on to their high prices. Lowering prices may also put off clients who have paid a higher value for their homes earlier in the project.

The core of the problem is that most developers are over-leveraged, and it is the banks and other lenders who are in trouble. The government bailed out real estate companies after the financial crisis in late-2008 by allowing banks to restructure their loans. That was a big mistake because, even today, some of these firms have large amounts of debt on their balance-sheets. Outstanding loans to commercial real estate stood at Rs 1.77 lakh crore on April 16, 2016, up 6.7% over April 2015. That may be less than 3% of outstanding loans, but some of it may never be returned to the lenders. Allowing banks to fund land deals will be another trouble in the making, at this point in time.

The best option is to wait for the RE Act to prove its worth, bringing in discipline in the sector. The Government must be made accountable for providing clearances and builders need to be accountable to customers. The Act also ensures that the specific project funds are not diverted by developers to purchase land, thus ensuring fund availability to complete projects.

The Act will make it difficult for unorganized developers and brokers to operate and eventually they will be weeded out. Perhaps, after some years, when it is proven that the Real Estate Regulator is able to discipline builders and the approvers, bank loans for land could be considered. At this point, it is simply too risky.

Allow Banks to fund land transactions – requests HDFC’s Parekh

Merely reducing interest rates may not be sufficient to bring down housing prices, unless banks and housing finance companies are permitted to fund land transactions – said industry leader and chairman of HDFC Ltd, Deepak Parekh. The price of land influences housing prices and hence needs to be brought down and currently this funding requirement is met by NBFCs and foreign private equity players who fund these transactions at exorbitant rates.

The enactment of the Real Estate (Regulation and Development) Act 2016 is a breakthrough and will bring in the much needed consumer protection. The move towards implementing a digital platform for approvals is a significant game changer bringing in standardization, allowing developers to complete projects on time. The sector will improve with more discipline, less delays and even lesser dependence on speed money. While developers are not responsible for the delay in delivery due to delay of approvals, the Ministry of Urban Development has committed to shifting towards online approvals. Timely implementation is now critical to ensure approvals are granted on time.

The anti-corruption measures by the Government have to percolate further to the local authority levels. Mr. Parekh expressed optimism in the growth of the sector since there is immense support and focus that the government has placed on housing, real estate markets and urbanization. The RE regulator will not have any price determining powers.

On land cost, Parekh said if RBI permits housing finance companies and banks to fund land transactions, at least land that is being used for residential purposes, it could substantially bring down overall costs for the end consumer. Further, with more cross border players and banks funding land transactions within the checks and balances, the government’s objective of affordable housing can be full filled.

Brexit impact on investors & developers

Britain’s decision to exit from the European Union may make it difficult for Indian developers Lodha Group and Indiabulls Real Estate Ltd who have their multi-million-dollar bets in the country. Lodha group has struck back to back deals in 2013 and 2014 . The recent project Lincoln Square has had revenue of $2.5 billion. Individual property buyers who decide to buy now will benefit as the pound weakens and the prices fall.

Indiabulls had earlier struck a deal worth $264 million in mid-2014, which is being developed as a luxury residential project. Developers may also find it difficult to access the capital market of the nearby Europe. Another developer that took to London market for expansion was Shobha Developers.

From the buyer’s perspective, London thrived from the investments in real estate from across the EU. The Brexit will reduce mobility of people within the region, affecting capital movement. While prices run down, developers will pay the price for their debts that are quite large.


Investors may now think of the risk of holding assets represented by the pound. Indian investors have an advantage here and London has been a favorite destination. India may also benefit from this as the investors in UK may now look at India as an investment destination which is risk free compared to EU nations.


Restrictions in CRZ

There are restrictions on development activities in different categories of CRZ areas. They shall be regulated in accordance with the following norms:

CRZ-I – No new construction shall be permitted in CRZ- I areas except (a) projects relating to the Department of Atomic Energy, and (b) pipelines, conveying systems including transmission lines, (c) exploration and extraction of oil and natural gas

CRZ-II – Buildings shall be permitted only on the landward side of the existing road or on the landward side of existing authorised structures. These buildings will be subject to the existing local town and country planning regulations including the existing norms of floor space index (FSI)/floor area ratio (FAR).

CRZ-III – (i) Areas up to 200 metres from the HTL have to be earmarked as a ‘No Development Zone’. The following uses, however, may be permissible in this zone: Agriculture, horticulture, gardens, pastures, parks, play fields, forestry, and salt manufacturing from sea water.

(ii) Vacant plots between 200 and 500 metres of the HTL in designated areas of CRZ-III can be developed with prior approval from the Ministry of Environment and Forests (MEF).

(iii) The construction/reconstruction of dwelling units between 200 and 500 metres of the HTL permitted if they are within the ambit of traditional rights and customary uses such as existing fishing villages. Building permissions for such construction/reconstruction will be subject to the conditions that the total number of dwelling units shall not be more than twice the number of existing units, the total covered area on all floors shall not exceed 33 per cent of the plot size, the overall height of construction shall not exceed 9 metres, and the construction shall not be more than 2 floors (ground plus one). Construction is allowed for permissible activities under the notification including facilities essential for such activities.

(iv). Reconstruction/alterations of an existing authorised building permitted subject to (i) to (iii) above.

CRZ-IV  – Andaman & Nicobar Islands:

(i) No new construction shall be permitted within 200 metres of the HTL.

(ii) Buildings between 200 and 500 metres from the HTL shall not have more than 2 floors (ground and first floor), the total covered area on all floors shall not be more than 50 per cent of the plot size, and the total height of construction shall not exceed 9 metres.

Lakshadweep and small islands:

(i) For permitting construction, the distance from the HTL shall be decided depending on the size of the islands. This shall be decided in consultation with the experts and with approval of the Ministry of Environment & Forests, keeping in view the land use requirements for specific purposes vis-à-vis local conditions including hydrological aspects.

(ii) Buildings within 500 metres from the HTL shall not have more than 2 floors, the total covered area shall not be more than 50 per cent of the plot, and the total height shall not exceed 9 metres.


Classification of CR Zones

Classifications of CRZ areas

Coastal stretches within 500 metres of the High Tide Line on the landward side are classified into four categories, namely:

Category I (CRZ-I)

  1. a) Areas that are ecologically sensitive and important, such as national parks/marine parks, sanctuaries, reserve forests, wildlife habitats, mangroves, corals/coral reefs, areas close to breeding and spawning grounds of fish and other marine life, areas of outstanding natural beauty/historically/heritage areas, areas rich in genetic diversity, areas likely to be inundated due to rise in sea level consequent upon global warming, and such other areas as may be declared by the central government or the concerned authorities at the state/union territory level from time to time.
  2. b) Areas between the Low Tide Line and High Tide Line.

Category-II (CRZ-II)

This category includes areas that have already been developed up to or close to the shoreline. For this purpose, the term ‘developed area’ is used for areas within municipal limits or in other legally designated urban areas that are already substantially built up and have been provided with drainage, approach roads, and other infrastructural facilities.

Category-III (CRZ-III)

Areas that are relatively undisturbed and do not belong to the first two categories. These will include coastal zones in rural areas (developed and undeveloped), areas within municipal limits, or in legally designated urban areas that are not substantially built up.

Category-IV (CRZ-IV)

Coastal stretches in the Andaman & Nicobar, Lakshadweep and small islands, except those designated as CRZ-I,II or III.


Rajan – The Central Banker of the year..Here are the reasons

Reserve Bank of India (RBI) Governor Raghuram Rajan was named The Banker magazine’s Global and Asia-Pacific Central Bank Governor of the Year 2015, for stabilising the Indian rupee, initiating key reforms to attract much needed foreign capital in the country and reining in a runaway price appreciation. The RBI governor has been named central bank governor of the year several times by other international magazines. In October 2014, Euromoney and in January 2015, Central Banking awarded him the best central banker award for his contribution in stabilising the Indian economy.
Rajan in his paper, has warned about the adverse spillover effects on other countries, if India resorts to unconventional monetary policies to tackle inflation and unemployment issues. The constant intervention in exchange rates and financial markets can cause other countries to resort to aggressive policies to gain, embarking on a sub-optimal path. Mr. Rajan says that countries should collectively agree to guidelines on responsible behavior on policies to improve collective incomes.

India has weathered the storms pertaining to capital outflow and currency in the emerging markets fuelled by US Federal Reserve interest rate hike in 2015.

The third quarter of 2015 saw a stable rupee, growing GDP@ 7.4% more FDIs and sophistication in the financial markets.
Mr. Rajan feels that policies have to be based on analytical inputs and discussion and classified as the ones that need to be adopted, temporarily adopted, avoided at all cost etc. which is currently missing.

For example he states that easy monetary policies in advanced economies can lead to capital inflows, exchange rate appreciation, rapid credit growth and asset price bubbles in emerging markets. Normalization on the other hand can lead to rise in interest rates, capital outflows and exchange rate depreciation.

The bottom line is that monetary policies should be beneficial to the world, and what matters is the relative magnitude of demand creating versus demand switching effects and the net financial sector spillovers, which need to be favorable.

Rajan has been instrumental in stabilizing the rupee, curbing inflation and reinforcing the foreign investor’s confidence in rupee denominated assets. The other defining achievements were guiding banks to clean their balance sheets, teaching them to handle bad debts and introducing new banks.

He feels that India needs an efficient bankruptcy or corporate resolution system.

Rajan also has to his credit the launch of offshore rupee bonds nicknamed Masala Bonds and the green bonds. Foreign investors were ready to pay a record 88 basis points to reserve their rights to invest in government bonds.

One has to be aware that the prevalent economic model is complicated with multiple sectors, regions, parameters and not country specific and depends on assumptions for predictions – the reason why Rajan feels that a new global model with IMF involvement is required.

There can be no other more important issues than to understand and discuss the international spillover of domestic policies and the Government should certainly and most importantly look for a person who has impeccable vision and the knowledge, if they decide to replace Mr. Rajan.





SEBI to relax REIT rules

The Securities and Exchange Board of India (SEBI) has proposed to allow Real Estate Investment Trusts (REITs) to invest in under-construction assets to make it more attractive to investors. The regulator is proposing to ease norms for offshore fund managers keen to shift to India by amending SEBI (Portfolio Managers) Regulations, 1993. The SEBI is open public comments on this.

The earlier rules put in place for REITs were incapable of generating interest from investors. The Government tried announcing tax sops to generate interest and the above come as additional incentives – the decision to allow REITs to invest up to 20% in under construction assets and increasing the number of investors from the current 3. The other reform planned is to remove restrictions on SPVs which are holding companies to invest in other SPVs that own assets, allowing REITs to invest in holding companies owning a stake in SPVs. Currently, an SPV is required to hold at least 80% of its assets directly and cannot invest in other SPVs.

The proposed amendments include adding a separate section on ‘Eligible Fund Managers’ to specify conditions that will apply to their activities as portfolio managers. The new rules will also specify the procedure to be followed by a SEBI-registered Portfolio Manager to function as an Eligible Fund Manager. SEBI said it will lay out the procedure for registration of existing foreign fund managers looking to shift to India or a fresh applicant to function as an Eligible Fund Manager. It will also list the obligations and responsibilities of fund managers and specify other rules.


RE getting into stabilisation mode

The real estate market is getting into a stabilization mode. The H1 FY 2016 had only 1% fall in sale, which was the lowest rate of fall since H2 FY ‘14. The prices have remained range bound, with a nominal price increase of around 1% during the same period. The possible risks from these levels were limited in the financial Year 2017.

The houses in the affordable segment within price range of Rs 50 lakh segment continued to be in demand in line with the Governments ‘Housing for All 2022’ plan. This segment saw the major share of launches with over 50 per cent in launches and 52 per cent in sales in FY 2016. Affordable housing demand could surge in FY17 with several incentives announced in Union Budget FY17 for both developers and first-time buyers.


Portfolio analysis of Prime minister and his top ministers

Real estate investors are developing a taste and Dalal Street is content with retail investors. Prime Minister Narendr Modi and his top 9 minsters have given a miss to the equity market. Ironically the Government is trying to bring in more money into the stock market.

Asset classes, when analysed revealed that Modi and his ministers had a major chunk of assets in RE followed by bank deposits, insurance policies and gold. While the total assets of Modi and his ministers amounted to a staggering Rs 3200 crore, only .06% was allocated to equities.

The Prime Minister, in his portfolio, has allocated 79 per cent of his assets to real estate and 15 per cent to bank deposits, 1 per cent to gold and a big fat zero per cent to equities. This decision is maybe because of the returns Sensex has been giving, which is 5 per cent during the past 2 years.

Rahul Gandhi, the PM’s political opponent, has allocated 14 per cent to real estate, 9 per cent to bonds and only 1 per cent to bank deposits. His short-duration mutual fund investment, has given him an absolute return of 17 per cent in the past five years.

Manohar Parrikar, the defence minister, is the only saving grace for the equity market, with close to 12 per cent allocation to stocks, followed by Ravi Shankar Prasad, who has 6 per cent of his assets in equities.

Within real estate, though, most ministers have fixed assets such as agricultural land or residential property.
Market experts who keep drumming about how equity market always outperforms other asset classes in the long run, could do well to share that wisdom with our Cabinet ministers and the Prime Minister. Although the BJP has come to power as the representative of a new India, the investor in it still belongs to the old school.