34981779 Indian Real Estate an Overview

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A Perspective

March 2010


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Contents

Indian Real Estate The Story So Far...

Asset Classes Trends & O ortunities

Key Concepts

Transaction Parameters

Indian tax laws


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Indian Real Estate

...The Story For Far


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Indian Real Estate The Story So Far

Traditionally;

- has been un-organized, non-transparent and run as family business

- financing options were restricted to construction finance and private debtrom oca s

Sector Opened up in 2005 for Foreign Direct Investment (FDI), triggering:

- trans arenc and institutionalization

- News avenues of Capital Raise - Overseas and Domestic Private Equity,Overseas Developers, Mezz Funds, Public Markets (domestic and

overseas) and Construction Debt

FDI till December 2009 - $7.8 billion

Private Equity Deals in 1H09 - $ 355.20 million ($ 2.3 billion in 1H08)

Qualified Institutional Placements - $ 2.6 billion (another $2.4 billion in the pipeline)

As on March 09 , Credit to Real Estate Sector by Indian banks stood at $ 19.7billion


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Size of Indian Real Estate market is currently USD 48 bnThe sector contributed ~ 5% to the countrys GDP

As of Sept 09, Investment Grade Real Estate in India is valued at $ 768.23billion 63% of Indias total equity market capitalisation during 3Q09. CAGR of27% from 2007 - 2008

Second largest employer, only after agriculture

Regulations for Domestic Real Estate Mutual Funds and REITs introduced

Key Asset Classes

Residential

Commercial

Retail Hospitality


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Challenges Issues

Title High percentage of lands do not have clear titles Complex and numerous land regulations make title clearance

Land transaction have high component of off balance sheet

consideration making it difficult to capture the correct cost in thefinancials

Legislations Has numerous legislations governing the sector Tenancy laws are archaic in most of the States and favor tenants

Lack of Corporatization Land are typically held in individual hands Largely family run business

ransact on ost g s amp u es on rea es a e ransac ons

Liquidity RBI has negative view to real estate financing ; has stringentconditions for bank finance to the sector

External debt permitted only in integrated townships

Miscellaneous Accounting of revenues in real estate projects Exits options Lack of institutional market for sale of incoming yielding assets


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Asset Classes

- Trends & Opportunity


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Asset Classes Trends and Opportunity

Asset Class Comments

Has hu e demand for housin due to demo ra hic rofile of India- 300 million middle class, high earning high spending population

- 23 million urban families do not own homes (aspire for one)- Average age of Indian home buyer is 28 years down 10 years since the lastdecade

Affordable housing is the next big thing; estimated to be worth $110 billion by 2013- could be almost 80% of Indias total housing demand.- Indian Planning Commission estimated 80 to 90 million units for lower incomegroup- incentives for lower budget houses are being implemented

Prices have stabilized in major cities. Some cities like Mumbai are seeing price overthe 2008 levels.

Has taken a sever beating since the Credit Crisis Total absorption in major cities stood at 26.3 million sq ft in 2009 as compared to

Commercialm on sq n . e supp y was approx . m on sq

60% of the space is accounted for by IT/ ITES Companies Most micro markets in India have seen a correction of 15%-20% of rentals in 2009

over last year. However, rentals have started stabilizing Exit yield continue to be in the range of 11% to 13% range .


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Asset Classes Trends and Opportunity

Asset Class Comments

There are about 120 malls totaling 3.9 million sq ft as on March 2009. Presently the country is seeing a state of oversupply; due to retailers cutting back on

their expansion plans due to the Credit Crisis, with key retailers renegotiating rents

Retail

However, there is still latent demand

- Indian retail 5th

largest retail destination in the world.- Overall retail sector is expected to rise to $ 813 billion by 2013 & $ 1.3 trillion by2018. Organized retail only forms 5% of the total retail sector and is expected towitness a maximum number of large retail formal malls in South India, followed by

or , es an as . ource : earney esearc According to a research by RNCOS number of shopping malls is expected to

increase at CAGR of 18.9 % from 2007 to 2015. However, liquidity/ construction finance is a biggest challenge for mall developments,

as banks are reluctant to lend to this asset class.

Indian is world s 5th most popular tourist destination. Occupancy rates of hotels inIndia are among the highest in the world. However, since the credit crisis the hotelhave been seeing low occupancy. Signs of stability and recovery are visible in largemetros

- ,

Singapore, and Hong Kong Between 24000-25000 new upscale hotel rooms are expected in major Indian cities

by 2011, as compared to 18000 in mid-scale and budget segment Total stock of hotel rooms are likely to continue to lag behind demand by 2011. Debt financin to hotel is no lon er classified as commercial asset fundin , and

hence cost of borrowing is significantly come down. Tax incentives have been announced for 2 Star Category and above Hotels


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Residential- Key Indian Concepts

Land is either acquired by the developer on ownership basis or jointdevelopment agreement (JDAs); wherein there is either revenue share or built-upshare with the landowner JDAs are becoming more popular and prevalent

Apartment are general sold to end-users/ investors. The concept of residentialrentals buildings does not exist.

Sales are lar el re-sales. No s ecific uidelines that re-sales de osits shouldbe used for construction only

Apart from base price, generally a separate price is charged for parking and

amenities space - Collections are either time period based or construction linked

Generally, apartments sold on salable area basis i.e. Carpet plus loading (forcommon area) Loading can range from 25% to 40%

State level Flat Apartment Ownership Acts (most of the Indian States have it)


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Commercial lease Key Indian Concepts

IT/ ITES are the largest drivers of commercial lease

Typical leases are not triple net property taxes, and insurance is on thean owner oug t ere s ncreas ng v s ty o essor pus ng or any

increase in property taxes to be borne by the lessee

Typical the lease agreements are either leave and licence/ lease deed, with a

Long leases are rare typical lease period 6, 9 and 15 years, with a minimum 3 to5 year lock-in

Rent escalation are typically 15%/ 12% every three years, with 3 to 6 monthssecurity deposit. A separate fee is charged for common area maintenance

The lessor typically holds on to the lease agreement and do lease discounting,

properties to investors at a pre-determined yield

Lack of institutional market for sale of leased properties


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Retail Key Indian Concepts

Mall are still concentrated in metros and tier II cities

, ,a Mall in India

Typical lease structures:

Minimum Guarantee and/ or Revenue Share (% of sales of the retailer)

Increasingly the anchor tenants are pushing for fit-outs to be done by thedeveloper

Increasing trend of Anchor tenants requesting for long tenure lease 15 to20 years, against the conventional 9 years.

Property tax and insurance is to the landlord

Lack of visibility of Mall exits by developers


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Exchange Control

Restrictions


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Real Estate FDI guidelines: Press Note 2 (2005)

Investment-related guidelines

Foreigninvestor Subsidiary (WOS)USD 10 million; for a joint venture

(JV) with an Indian partnerUSD 5 million

Funds to be brought into India within 6 months

Indian

company(JV / WOS)

Indian JV

partner(Optional)

Lock in period of 3 years from completion of minimumcapitalization. Early exit possible with prior government

approval

Project-related guidelines

Pro ect

Minimum area requirements: 10 hectares for servicedhousing plots and 50,000 sq. meters for construction

development projects

date of obtaining all statutory clearances

Investor cannot sell undeveloped plots or TDRs

Project to conform to norms and standards laid down byPress Note 2 (2005) does not apply to

Industrial Parks (including Informationec no ogy par s , osp a s,

Hotels, and Special Economic Zones

(SEZs)


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Asset class - FDI framework (Non NRIs)

Automatic

ptfromPN2

underPN2

100

Exe

Estate

not permitted. Investmentpossibleonly in shares andI

Falls

Hotels &

SEZs Officesconvertible instrumentsof the Company owning /developing

Real Estate

vestmentin

pro

jects

Hospitals

Service

Malls

Foreign Currency debt

reenfieldpr

assets

inGreenfield

Apts.

IndustrialTownshi s

perm e on y orintegrated townships

jectsandexi

Investmen

t

ar ssting


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Real Estate FDI Guidelines Non Resident Indians

NRI / PIO are permitted to directly acquire immovable properties in India Norestriction of the number of properties that can be acquired Acquisition ofagricultural land not permitted

Property can be rented, and rent can be remitted overseas net of taxes

The property so acquired can be mortgaged to Indian banks

NRI/ PIO can sell his immovable property to an NRI/ PIO or Person resident inIndia

If property is acquired out of foreign exchange, amount that can be repatriated backcannot exceed the original investment, and maximum restricted to two residentialproperties; capital gains if any need to be credited to NRO account from whererepatriation up to $ 1 million is permitted per financial year

If property acquired through rupee source, the proceeds need to be credited to NROaccount, where remittance up to $ 1 million is permitted every financial year

NRIs direct equity investment in Indian real estate company does not attractrestrictions imposed under Press Note 2


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Transaction

Parameters


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Key Transaction Parameters

Deal Structuring

Commercials

Structuring

Transaction tax

Type of instruments

E uit / Preference shares/ Convertibles

FDI issues

Tax optimization

Exit Options

Sale of shares / Assets

ROFR/ ROFO/ Put Option

Mechanics of profits distribution

Overseas taxes

Lack of developed capital markets

Corporate Governance

Board representation

General day-to-day governance structure


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Exit Mechanisms and Strategies

Exit Options

SPV LevelEnterprise Level

Exit throughstake sale to domestic

Investor / JV Partner

Exit through anInitial PublicOffer listing

Exit throughtransfer of

SPV sharesto domestic

Investor / JV Partner

Exit throughSale to aStrategic Investor

Exit throughSale to a REMF / REIT *

* ,

Draft Real Estate Investment Trust Regulations issued Pending implementation


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Indian Taxes Indian Tax Year 2009-2010

Corporate Income TaxRate %

Income Tax 33.99%/30.90%Direct

ong erm ap ta a ns tax . .

Short term capital gain tax 33.99%/ 20.60%Minimum Alternate Tax (MAT) 16.99%/ 15.45%Dividend Distribution Tax (DDT) 16.99%

Taxes

Central Government General Rate

Customs duty Imports 24.42%

CENVAT/Excise Manufacturing 8.24%Indirect

Central Sales Tax Inter-state sale 2% / 12.50%

Service Tax Notified services 10.30%

R & D Cess Import of technology 5.00%

axes

a e overnmen

State-VAT* Intra-state sale 1%

Entry Tax Goods entering state 0% - 12.50%

Local Municipality

22

Octroi Goods entering municipal limits 0% - 12.50%

* Sales tax is also applicable on lease transactionsNote: Lower rate applies where total income is less than or equal to INR 10 million


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Indian Taxes Indian Tax Year 2010 -11 (Proposed)

Corporate Income TaxRate %

Income Tax 33.21%30.90%Direct

ong erm ap a a ns ax . .

Short term capital gain tax 33.21%/ 20.90%

Minimum Alternate Tax (MAT) 19.93%/ 18.54%Dividend Distribution Tax (DDT) 16.61%

Taxes

Central Government General Rate

Customs duty Imports 24.42%

CENVAT/Excise Manufacturing 10%Indirect

Central Sales Tax Inter-state sale 2% / 12.50%

Service Tax Notified services 10.30%

R & D Cess Import of technology 5.00%

axes

a e overnmen

State-VAT* Intra-state sale 1%

Entry Tax Goods entering state 0% - 12.50%

Local Municipality

23

Octroi Goods entering municipal limits 0% - 12.50%

* Sales tax is also applicable on lease transactionsNote: Lower rate applies where total income is less than or equal to INR 10 million


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Key Tax Incentives

Tax incentives available for development of housing project on less than 1 acreland, subject to fulfillment of prescribed conditions

SEZ Developers are entitled to Tax incentives subject to fulfillment of prescribed

conditions

Developer of Industrial Parks are entitled to Tax incentives subject to fulfillmentof prescribed conditions

2 Star and above Hotels set-up after 1st April 2010 entitled to 100% deduction of

Capital Expenditure incurred on hotel (excluding land and goodwill cost), subjectto fulfillment of prescribed conditions.


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Tax Triggers

Sale of Apartments to Buyers Acquisition of land/ property

Stamp duty

VAT Service Tax

Income tax

Engaging of Contractors

VAT

Lease of property

Stamp duty

Procurement of ConstructionMaterial

Service tax

Income-tax

Sale of shares of SPV

Customs duty in case ofimported material

VAT Octroi

Stamp duty

Income-tax


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Mustafa Hussain

For Further Information Please Contact

DirectorUrban Link Consulting Ltd

[email protected]

Visit us at www.ulc.co.in

34981779 Indian Real Estate an Overview

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