Scam Hit Indian Real Estate Sector in Acute Need of Regulation

The year 2010 will probably go down in India’s history as the year of scams. As always, the authorities swing into action after the event. Regulations and compliances notwithstanding, scamsters continue to devise and leverage the loopholes. Unregulated sectors, such as real estate, which is in acute need of regulation, probably demonstrate best the investors’ predicament. The real estate sector probably has the highest rate and volume of investments and the largest number of investors. Contrasted with the various SEBI regulations which aim to protect the capital market investors, real estate development regulation has been sadly neglected, though there is a draft Bill on the anvil.

Currently, the Indian promoter-developer buys the land from villagers and “obtains” clearances from the competent authorities for the building and layout plans. The predevelopment clearances required range from non-agricultural orders by way of Government permissions for the proper use, as for example conversion of land earmarked for agricultural purposes only. Building and Floor plans are approved by local municipal or state urban development authorities, depending on location. In addition, a no-objection certificates are to be obtained notably from the state pollution boards, water supply and sewerage authorities, properties and respective state and central authorities such as the Archaeological and Airport bodies in order to rule out attendant risks the development may pose to the existing structures and operations.

In practice, these approvals are taken at a much later point of time. Because of the tight demand and supply situation, booking and collection of a large chunk of consideration from prospective buyers are concluded well before these clearances are obtained. The buyers have no choice but to sign on the standard contract formats, without the right to negotiate, leaving customers and investors to the mercy of unscrupulous promoters and subjected to various unfair trade practices, with cavalier disregard for compliances. The contracts which the buyer is induced to execute have clauses which are onerous and one-sided, with loopholes for the developer to get away with delays, random cost escalations, exorbitant penal interest, to name a few. The Developers ensure that they are fully insulated from all future liabilities, which are passed on to the buyers at a later point of time, when they become aware that their rights to ownership, super areas, common areas and facilities are very different from what was represented.

The buyers’ recourse so far has been to the Consumer Courts. The National Commission in 2007 dismissed DLF”s appeal from the complaint filed by one Kamal Sood to hold that the builders’ practice of collecting money from prospective buyers without obtaining the required permissions amounted to an unfair trade practice, and the builder is dutybound to obtain the requisite permissions in the first instance, and thereafter, recover from the buyer. It further held that if there is any express promise that the premises would be delivered within a stipulated time-frame, the builder has to bear the escalation costs. Even then the developer’s deep pockets, and rounds of appeals are often a deterent for mostinvestors.

A case in point is that of DLF Park Place in Gurgaon, which was represented to be constructed in 22 million square feet in 13 blocks of one floor, to be completed by fiscal 2010. The delay was caused by DLF departing from the original project, in getting approvals for 29 floors with the plot area being substantially reduced, in breach of the Haryana Urban Development Act the Haryana Apartment Ownership Act, 1983. Additional charges were taken for stilted parking spaces, which the Supreme Court in its Judgment of August 2010 in the matter of Nahalchand Laloochand (P) Ltd. vs. Panchali Co-op Housing Society has held to be illegal.

With the change in law bringing such cases in the ambit of the Competition Act, the Apartment owners Association, in this case approached the Competition Commission (CCI) for abuse of dominant market position, after certain allotments were priced much higher than initially projected. The Competition Commission has restrained DLF from cancellation of the allotments and also creating third party rights. The CCI has also referred the matter to the Director General – Investigations for further investigation.

If the CCI can deliver fast, and with the appeal lying only to the Supreme Court, the process should be quicker. In the meanwhile, the builder lobby is trying its best to scuttle the Bill, which requires preregistration with the Regulator before the property can be marketed. The Regulator is to scrutinise all advertisements, which are mandatorily displayed on the developers’ website. Unilateral cancellations are subjected to stringent conditions, permitting withdrawal by the investor with full refund and interest thereon. Given the above, this Bill needs someone like Aruna Roy to fast forward it.

Real Estate Firm 3C Launches Mega Project ‘Delhi One’ in Noida

Real estate firm The 3C Company, which is leading the green revolution in Delhi-NCR region, has launched a mega mixed-use project christened ‘Delhi One’ at Sector, 16-B, Noida. This mega project incorporating residential, commercial, retail and hospitality zones is spread across 12.5 acres. The company along with private equity firm Red Fort Capital will develop this project which has an estimated sales value of Rs 5,000 crore.

Speaking about the launch of ‘Delhi One’ project, Vidur Bharadwaj, director, The 3C Company said, ‘Delhi One’ is the epitome of The 3C Company’s architectural excellence. The exceptional design leads to the seamless integration of the various verticals like residential, commercial, hospitality and retail into one stunning visual treat which is bound to change the way NCR has perceived. The architecture of ‘Delhi One’, does not only marks the grand emergence of Indian developments but also symbolises India’s transformation from third world country to a developed nation.”

Brijesh Bhanote, senior vice president, The 3C Company, added, “Along the skin of Delhi, right next to the DND Toll Plaza, ‘Delhi One’ is destined to change the way Noida has been looked upon. The perfect amalgamation of unmatched location, design and product mix is bound to make it the most sought-after destination. ‘Delhi One’ marks the beginning of a golden era not only for The 3C Company but also for the entire real estate.”

According to the company, ‘Delhi One’ is envisaged as “the destination” for the privileged few. Contemporary chic design and intimate interiors will be elemental to this refreshing retreat. It would feature terrace gardens, underground parking and helipad besides many other ultra-modern facilities. “Defined as compact, mixed use, urban and a green development, ‘Delhi One’ is segregated into Domicile, Entertainment, Leisure, Hospitality and Business sections,” it added.

Meanwhile, in its bid to provide healthier living condition and creating greener planet, The 3C Company, over the span of one year, launched four green residential projects — Lotus Boulevard, Lotus Boulevard Espacia, Lotus Panache and Lotus Zing — in Noida alone, the company said.

“Furthermore, The 3C Company is progressing at a fast pace by developing sustainable buildings. Three Platinum and Two Gold rated LEED certified Green Buildings by the Indian Green building Council (IGBC) under the umbrella of United States Green Building Council ((USGBC) testify the impeccable architectural excellence of The 3C Company. The company has excelled and achieved milestones by having already delivered more than 12 million square feet of niche developments in Delhi-NCR region.”

Tata Housing Subsidiary Announces Launch of Hill Township at Thane

Smart Value Homes, a 100 per cent subsidiary of Tata Housing Development Company, has announced the launch of New Haven — a hill township at Vasind in Thane district, Maharashtra. Spread across 33-acres, the new project would offer 1,252 apartments, including 2 BHK and 3 BHK homes starting from Rs 15-30 lakh, according to a company press release.

“With a shortfall of around 26-million dwelling units, there is a lot of untapped demand for quality affordable housing projects across India. The launch of New Haven is in line with our expansion plans in the affordable housing space,” Tata Housing managing director and chief executive officer Brotin Banerjee said.
New Haven is strategically located in Mumbai’s new growth corridor and combines international design fitted with latest facilities, he added.
The project is located at 1.5 km from the Vasind railway station on the central line and is in close proximity to Shahapur and Kalyan-Bhiwandi junction, the press release said.

Bangalore Based RMZ Corp Purchases 25 Acres of Land from Adarsh Developers

Bangalore-based real estate developer RMZ Corp has bought around 25 acres of land in the outer ring road area of the city from another city-based developer, Adarsh Developers, in a bid to increase its footprint in the city. The land deal was clinched with an approximate value of Rs 4-5 crore per acre, Business Standard reported, citing sources.

“RMZ was looking for land in the recent past in the Bangalore market. They had also floated advertisements for the same. The present land parcel, which is in the outer ring road area of the city, is likely to be developed as a Special Economic Zone (SEZs) in the near future,” an industry source was quoted as saying.

He also said that Adarsh Developers had around 300 acres of land in the outer ring road area, of which the company had monetised this land parcel. While calls to Adarsh Developers remained unanswered, company officials from RMZ Corp refused to comment on this matter.
The company, which has less land parcel in comparison to its peers in the Bangalore market, is also looking at scaling up its land bank in the near future, he added. Earlier, the developer had bought back its 50 per cent stake from AIG Global Real Estate Fund for its mall project in the city.

RMZ Corp, which has its presence in cities like Chennai, Hyderabad, Kolkata and Pune, has acquired and developed over 13 million sq ft as of now and manages a property portfolio over $3 billion across India.
The company plans to develop around 64 million sq ft in verticals like office spaces, retail and homes in next five years, the report added.

Pragnya Fund Invests In Chennai's VGN Developers' Project

Pragnya, which has deployed its first fund in seven realty investments, is on road to raise its second fund.

Pragnya Fund, a Mauritius based private equity fund with target investments in Indian real estate, has made a project-level (SPV) investment in Chennai-based VGN Developers Ltd, which is developing a 6 lakh square feet residential complex. Sources close to the development told VCCircle that the investment has been in the range of Rs 25-Rs 30 crore.

The project located at Paruthipattu on the Poonamalli Avadi High Road (State Highway 55), Chennai will cater to the growing segment of affordable housing. The approvals for the project are in progress and the launch is scheduled for mid-2011.

This will be the second investment by Pragnya Fund in Chennai. The first investment of the Fund was in an 87-acre integrated township at Siruseri, off Old Mahaballipuram Road (OMR).

VGN Developers, which has been in operation since 1942, have developed major residential layouts and apartments across Chennai with a total built space of over 20 million sq. ft. Some of the major projects include VGN Zodiac Ville, VGN La Parisien, VGN Minerva, VGN Platina, VGN Ferndale, VGN Pinnacle and VGN Brixton.

Pragnya Fund has been sponsored by Subba Rao Dukkipati and Gopal Menon, two professionals with a background in the global financial services industry. It has till date invested in seven realty projects in India and Sri Lanka to deliver a total built up space of about 12 million square feet.
The fund’s current investments include L&T Eden Park, an 87-acre integrated township being developed in partnership with Larsen & Toubro in Chennai, L&T Tech Park - an IT SEZ project in Kochi, a mixed-use project in Colombo and two residential projects at Asansol and Barrackpore in West Bengal.  It is also investing in a project in Bangalore which is currently in the pipeline.

With these investments, Pragnya has completely deployed its first fund and is currently in the process of raising its second fund – Pragnya Fund II. While availing opportunities in various cities, the fund tends to have a focus on Indian cities in south and West Bengal where it seeks first-mover advantage and also ensures that risks are neutralised by non-speculative land acquisition costs.

A few private equity deals that were struck this year include Evolvence Capital India, New York Life Investment Management India Fund II investing in Emaar MGF Land Ltd; IL&FS Milestone Fund II putting $122.7 million into HCC Real Estate Ltd; GIC Special Investments Pte Ltd. , Temasek Holdings Advisors India Pvt. Ltd, HDFC Venture Capital Ltd, Abu Dhabi Investment Council infusing $107 million into Lodha Group; TPG Capital putting $100 million into Shriram Properties among others.

NRIs Taking Keen Interest in Indian Realty Expo 2010

The Maharashtra Chamber of Housing Industry’s (MCHI) 14th India Realty Expo 2010 saw non-resident Indians (NRIs) making a beeline for residential properties from 25 exhibitors yesterday. Friday, despite being a holiday, had the show see a large number of walk-ins, with NRI couples eagerly looking up and evaluating options. Participating developers and banks have reported receiving “solid enquiries” and many expect deals to be closed. “We have always had a very good response from prospective home-buyers in Dubai,” MCHI CEO Zubin Mehta said. “This is our 14th Show in Dubai in the context of our real estate exhibitions, and Dubai is a key NRI market for Indian realty,” he said. 

MCHI, he emphasised, has pioneered the concept of official representative real estate shows, and other associations have followed the path that we have opened up. Over the years, NRIs have considered Indian real estate market a thriving investment destination with good returns on investment. Considering this scenario, one of India’s most prominent body of real estate builders and developers had organised the 14th India Realty Expo 2010 at the Renaissance Hotel in Dubai to cater to the ever-increasing demand for Indian real estate from NRIs.

MCHI’s 14th India Realty Expo 2010 was a one-stop shop for potential buyers of Indian real estate. Over 25 developers and four banks and HFIs offered good buying and financial options. “We offered the MCHI ‘Seal of Approval’ during our property show, so that NRIs are assured of the fact that all properties on offer are legally clear, and MCHI stands with the NRI buyer as regards any promises made by the developer. In the unlikely event of such promises not being honoured, the MCHI will take up the matter on behalf of the NRI buyer,” MCHI President Sunil Mantri said on the show’s success.

“This MCHI ‘Seal of Approval’ makes all the difference to an NRI looking at making the ‘buy’ decision at MCHI’s 14th India Realty Expo 2010. It makes a difference, given that the returns on investment potential of Indian real estate is far better as compared to other similar options available to global citizens of Indian origin or an Indian expatriate in the UAE.”

“At MCHI’s 14th India Realty Expo 2010, the offerings will include all categories of Indian residential real estate — including the newest, affordable luxury homes. These product offerings have been welcomed by resident Indian buyers. To put it in the proper perspective, the investors found an opportunity to explore the abundant options that India’s real estate has to offer at the exhibition. In keeping with the ‘realistic offerings’ set-up, the exhibition also focused on ready-to-possess homes, valued in the Rs70 lakh to one crore range,”MCHI Hon. Secretary Deepak Goradia said.

“Prices have corrected to reasonable levels over the last year and half, this makes it a win-win scenario for those who enter the Indian real estate market now onwards, as they will get good returns. Even those who had invested during the boom times will see a steady recovery and growth in their investments — albeit over the next few years. New and developing locations on Mumbai’s periphery like Thane, Navi Mumbai, Mira-Bhayandar and Vasai-Virar-Boisar as also Kalyan-Badlapur-Karjat should see better returns for investors,” MCHI Exhibition Committee Chairman Boman Irani said. Visitors who had registered at the expo were eligible to get a unique discount code, which is valid on Jet Airways tickets to India, subject to conditions. This is a step further in terms of “customer delight,” Mehta said.

PE Will Flow Into Realty But With Caution & Selectiveness

JLLM's Shobhit Agarwal says market volatility and tightening of debt increases possibility of PE play in realty.

India's realty sector, which was the worst-hit in the global economic slowdown, has, in the last year or so, slowly limped back to normalcy given the demand pickup in both residential and office space. But, on the stock market side, the road to recovery is getting longer as over a dozen real estate players including Lavasa Corporation, Kumar Urban Development, Lodha Developers, Neptune Group, BPTP, Ambience and Emaar MGF ( (with a potential to raise close to Rs 10,000 crore) wait for market sentiments to improve. While the realty sector is witnessing some success in attracting funding through the PE route, stock markets may be out of bounds for now. In 2010, there have been 37 private equity deals with disclosed value of $1,182 million in real estate compared to 24 deals worth $606 million last year. International property consultant Jones Lang LaSalle Meghraj joint managing director (capital markets) Shobhit Agarwal predicts a sort of revival in private equity investments in the real estate. Agarwal, who advises on acquisition and structuring real estate investment transactions for real estate investors and development companies, talks to VCCircle on the current realty IPO environment, sub-segments that are ticking and increased possibility of PE play given tighentening of conventional financing options. Excerpts:-

What is your assessment of the realty IPO environment given the recent loan scam? Do you think this could make firms defer their market outing?

The loan scam is largely a bribery issue and the direct effect of it on the real estate and the banking sectors is yet to be established. However, it has certainly dampened market sentiments, especially for real estate stocks, which have seen drop in prices with the highlighting of the loan and land scams. It is very probable that some of the realty players who were prepared to go the IPO route may postpone their plans and await a more conducive time.

Most of the private equity into real estate had gone in at the project rather than the entity level. For these players, the actual volumes, dependent on the economic environment as a whole, matter more than the sentiments which drive the stock exchanges and thereby the stock prices. For those few players who had invested at the entity level of the companies with IPOs as the sole exit route, there might be more waiting in store.

Will the situation be a blessing in disguise for the PE firms? Do developers approach PEs to tide over the liquidity crunch or will they sell space at a discount?

As a result of the loan scam, the debt market may become more restrictive and the screening process will be tightened. In such a scenario, some realty players may feel a liquidity crunch. With the IPO route currently being a doubtful one in terms of meeting their expectations for raising capital, they may turn to private equity. In other words, we may see new PE investments - but these will be defined by great caution and selectiveness in terms of players.

Do you expect a PE revival in realty sector?

A lot of new capital has been raised for real estate and the long-term outlook, keeping in mind the latent demand, is positive for the sector. We are very likely to see considerable capital infusion into real estate projects going forward. However, the source may not only be private equity alone but may involve other institutions such as NBFC, which are also lending to real estate players.

Realty players are liquidating their land assets to deleverage their balance sheet. Is there a lot of stock in the market for sale?

Very few realty players with high leverage on their books are looking to sell land. Those that are doing so constitute only a small subset of the overall corpus. In fact, many players are aggressively buying land, since land is the basis of their future projects. For example, almost all Mumbai-based players are actively scouting for land. 

PE firms turning developers, do you see an uptick in the trend?

Some private equity firms are entering the development arena - or, to be more accurate, are developing their capabilities in this field. They will certainly emerge as new entrants going forward. However, their numbers are small - most funds prefer to remain pure financial players.

Do you think the luxury market is back? What is the PE funding outlook for affordable housing?

There was a momentary revival in the luxury residential market. However, the volumes have reduced again. Affordable housing is always an enticing vertical, taking into consideration the huge demand for it. However, it is a fact that the returns are lower. The dilemma for private equity funds is how to make investments in affordable housing projects and still get higher returns .

While investing in real estate, what kind of geographies do PEs prefer? The investment comes in which sector – residential, office or commercial?

There is always a demand for Tier 1 cities with an exception of Pune. Tier 1 cities have become more affordable now as the prices have come down by 30% from the peak. Most of the funds like to invest in projects in Mumbai, Pune, Delhi with NCR, Chennai, Banglore and Kolkota.

In real estate, 75% of the projects come up in residential sector. There is no exact data available to assess the flow of funding. But most of the funding happens at residential projects. This year we expect over 50 PE transactions in the real estate sector. That is not a big number compared to the size of the country.

Source: VCCircle