Archives for August 2019

Hyderabad Property market in the country which is defying all barriers of realty segment, it’s none other than Hyderabad. The property market across other major cities like Chennai, Pune, Delhi, Kolkata, Mumbai, and Bengaluru remains dull, but the Telangana capital, however, is getting better and better. Also, the return on investment it renders is perhaps the best, when compared to elsewhere in India. This is the only city among the seven major cities to have hit the positive note when it comes to property sale, recording a 32% improvement by the end of 2017, versus the average during 2012-2013. Additionally, there was a sharp decline in unsold inventory percentage (21%) as well. 

Hyderabad Property Market is really pushing the city’s realty growth?

Hyderabad Property Market in the real estate fortunes of the city fluctuated hugely after the restoration of political stability in 2014 – following the deceleration of Telangana as an individual state and Hyderabad as its capital. The government has also been valiant in promoting the infrastructure standards. Thoughtfully executed road plans, Hyderabad Metro Rail, and overhead corridors are incorporating a positive impact on the real estate segment.

Impressed by the efforts put in by the government, several IT majors are laying focus once again on setting up bases here. Areas under the purview of HMDA, such as Gachibowli, Nanakramguda, and Balaji Chilkur temple surroundings are witnessing major infrastructural developments to support the smooth functioning of upcoming IT companies. Additionally, the formation of new districts like Vikarabad, Shamshabad, and Yadadari Bhuvanagiri is yielding strong benefits as well.

Robust supply of properties

Lately, the city has seen a steady supply of residential and commercial spaces, thanks to the presence of prominent builders. And if at all the metropolis maintains the ongoing stability of property supply in forthcoming three years, it may then well absorb a major share of office leasing market of its neighbour Bangalore – which now is the most successful office market in India. Hyderabad’s relatively less rental prices, seamless supply pipeline, and holder-friendly government policies promise to be a great alternative, as Bangalore’s market is hard hit by increasing rents, scarce in supply, unplanned urbanization, and few more. In 2017, Hyderabad’s office space absorption stood close to 5.8 million sq ft, thus even outperforming India’s financial capital – Mumbai.

Investing in Commercial Real Estate there are some common mistakes you can avoid, to make the best of your investment in commercial property. Here’s our top 5.

Investing in Commercial Real Estate is more of a science than an art and requires careful planning and assessment of various factors. All the more care is needed if you are investing in commercial real estate since the ticket size of investment is usually high and there are lot of factors that determine the returns and price appreciation in such type of property. The commercial real estate market is dynamic and various aspects that determine the rent earning potential and even property price rise, change from time to time. Change of government or change of policies can also have a huge impact on the potential of the property to earn for you. Environmental impact in a particular area and consequently new laws relating to the protection of Mother Earth in a particular locality or zone, can also affect the earning potential of a building.

1. Investing in Commercial Real Estate we should use the word Proforma

Sellers or brokers usually offer documents and reports of the earning potential and income-generating capacity of the property. There are times when the word ‘Proforma’ is attached alongside the earning projections. This is a Latin phrase and it means ‘for the sake of form or appearance’. The reports and documents elaborating future income generation capability of the property is based on imaginary factors. Be very realistic in assessment of the income earning potential of the property. This can be done by looking at the neighboring properties and overall real estate market scenario in the area.

2. Investing in Commercial Real Estate we should survey the property completely

Most sellers and brokers will take you to only the best parts of the building when you visit the property before making the investment. These parts will either be free of damages or renovated after an event like a fire. You must insist on looking at the whole building and every corner of it. If the property is used for industrial purpose, look at all the warehouses that store raw material. The stores, where raw material is kept are usually the worst parts of the property and may require huge renovation soon after you purchase the property. You must also carefully look at a recently renovated part of the building, if any, and see if the repair work has been done with due diligence or will cause a problem soon after you have purchased the property.

3. Environmental laws and limitations

Be very careful about the environmental laws are applicable in the locality or zone where you are contemplating investment. Usually, the seller or the broker will not even talk about it. It is for the buyer to know the kind of activities that are allowed in the locality and the zone. Blocking your money in a property to carry out a certain type of business and then finding out that the activity is not even allowed in the locality, can be really unfortunate. Hiring an expert for this purpose and cross-checking with a neutral broker in the locality, will be a good idea.

4. Not looking at tenants and their earnings

If you are investing in a building that already has tenants, then have a close look at the tenancy. What are the kind of stores there and what is their sales on a monthly and annual basis. Knowing the rent to sales ratio will also give you an idea whether there is a good possibility of the tenants to stay on for long periods or not. A rent to sales ratio of under 5 per cent is considered good. This means that the rent should not be more than 5 per cent or so of the sales. If the rent to sales ratio is more than this threshold, you could avoid investing in the building since the tenants may move out sooner than later. A closer look at the lease durations and lease deeds of each tenant will also help. If most tenants in the commercial building have signed short term deeds, then there are greater chances of you sitting with vacant showrooms and office spaces in the building in a few years or months down the line, which means lower income for you. Usually it takes a while to find a new tenant for an outgoing one and the space sits vacant for the intervening period.

5. Investing in Commercial Real Estate check the Hidden charges

There are a lot of fees and charges that are sometimes hidden in the property documents and the sale terms by the seller of the property and by the broker. These can be statutory and local taxes that the seller is responsible for paying. There can also be impending repairs but the seller is trying to pass off the repair burden to you. There can be insurance of the building that is still continuing and the seller may be billing you for the premium. There is usually no harm in buying a building that is under insurance by the previous owner but the insurance policy would have been taken according to the needs of the previous owner and may not be fruitful to you and for the kind of use you will put the property to. For example, the previous owner might have stored some kind of raw material in the building and taken insurance for that particular substance or raw material. You may not be storing such raw material at all and hence, that policy may not be meaningful to you.

Registration of Properties and the documents of sale and purchase of immovable property is mandatory and ensures conservation of evidence, prevention of fraud and assurance of title

The law of registration of documents is contained in the Indian Registration Act. This legislation provides for the registration of various documents, to ensure conservation of evidence, prevention of fraud and assurance of title.

Registration of Properties Documents are mandatory

As per Section 17 of the Registration Act, 1908, all transactions that involve the sale of an immovable property for a value exceeding Rs 100, should be registered. This effectively means that all the transactions of sale of immovable property have to be registered, as no immovable property can be purchased for merely Rs 100. Additionally, all transactions of gift of an immovable property, as well as lease for a period exceeding 12 months, are also mandatory required to be registered.

In special cases, when a party to the transaction cannot come to the sub-registrar’s office, the sub-registrar may depute any of its officers to accept the documents for registration, at the residence of such person. The term ‘immovable property’ includes land, buildings and any rights attached to these properties.

Registration of Properties procedure and documents required

The property documents that need to be registered, should be submitted to the office of the Sub-Registrar of Assurances within whose jurisdiction the property, which is the subject matter of transfer, is situated. The authorised signatories for the seller and the purchaser, have to be present along with two witnesses, for registration of the documents.

The signatories should carry their proof of identity. The documents that are accepted for this purpose, include Aadhaar Card, PAN Card, or any other proof of identity issued by a government authority. The signatories also have to furnish the power of authority, if they are representing someone else.  In case a company is party to the agreement, the person representing the company has to carry adequate documents, like power of attorney/letter of authority, along with a copy of the resolution of the company’s board, authorising him to carry out the registration.

You need to present the property card to the sub-registrar, along with the original documents and proof of payment of stamp duty. Before registering the documents, the sub-registrar will verify whether adequate stamp duty has been paid for the property, as per the stamp duty ready reckoner. In case there is any deficit in the stamp duty, the registrar will refuse to register the documents.

Time limit and fees payable for registration of property

Documents that have to be mandatorily registered, should be presented within four months from the date of their execution, along with the requisite fee. In case the time limit has expired, you can make an application to the sub-registrar for condonation of the delay, within the next four months and the registrar may agree to register such documents, on payment of a fine that may be up to ten times the original registration fee. The registration fee for property documents is 1% of the value of the property, subject to a maximum of Rs 30,000.

Earlier, the documents that were presented for registration, would be returned to you after a period of six months. However, with computerisation of the offices of the sub-registrar, the documents (bearing the registration number and proof that the documents have been registered by the registrar) are scanned and returned to you on the same day.

Impact of non-registration of property

Failure to register the purchase agreement of a property, could put you at a huge risk. Any document that is mandatory required to be registered but is not registered, cannot be admitted as evidence in any court of law.

Auction property is a slightly riskier investment and as such, needs to be diligently investigated before the purchase is done. Here is what you should keep in mind

In the event where a home owner defaults on the loan taken, the lender is entitled to legally repossess the property. Such repossessed properties are ultimately sold through physical or electronic versions of auctions. Before you decide to buy such an auctioned property, here are the precautions you need to take.

Auction property Outstanding municipal tax and society dues

Generally, default in payments of EMIs for a home loan, is a person’s last resort. So, it is very likely that the home owner must have defaulted in paying local taxes and society charges. Since the properties are sold under ‘as it is where it is basis’, it is the responsibility of the prospective buyer to discharge such outstanding dues. Always ascertain outstanding amounts in respect of society charges and municipal taxes in case these payments are to be made by the property owner itself. Bidding for a property without knowing the liability of such dues may enhance your cost.

Auctioned property Legal due diligence

In the case of a property auctioned by a bank, the legal titles are not with the bank. Also, the bank does not take responsibility for the title as it does not become the owner of the property simply because it has taken over possession of the property. So, when buying a property, under auction or otherwise, it is always advisable to get the ownership of the title to the property duly investigated by a lawyer. This may increase your cost a little, but it is better to spend more early on, than go through hassles later.

Arrangement of funds

In case of an under-construction property or even for a ready flat, the payment schedule is generally convenient or is decided on the basis of mutual discussion. However, in the event of an auction, if your bid for the property is successful, you have to pay the balance amount at a relatively shorter notice. Should you default, you may lose your earnest money deposit. Hence, it is very important to plan the funding of such purchases well in advance, with adequate provision for contingency.

You can also get a home loan for such property, but you have to arrange for the full auction amount first from your own sources and then the home loan lender can issue the cheque. In case you intend to take a home loan for such a property, you should acquire an in-principle approval for the loan amount based on your income.

Auction property TDS on purchase consideration

As per the provisions of income tax laws, the home buyer has to deduct tax at source at 1%  from the purchase consideration, in case the value of the property exceeds Rs 50 lakhs. This applies to properties purchased through auction as well. Though you are buying the property from the bank (which is not the owner of the property), the TDS has to be deducted and credited to the account of the original owner. So, you need to obtain the PAN details/copy  of the original owner of the property as you need to credit the TDS to PAN . In case you do not get the PAN details of the owner, you will have to deduct the tax at 20% instead of the stipulated rate of 1%.

Moreover, you need to arrive at an agreement with the bank about the amount of the TDS to be treated as part of the purchase consideration. In case the auctioning bank does not agree, your cost of purchase  will go up by this 1% TDS which you are supposed to deduct as it will be almost impossible for you to recover the amount of TDS from the original owner of the property.

With such small precautions, you may be able to purchase property under auction successfully and sometimes cheaper as well.

Rental Income if you are planning to invest in property to earn returns, which type of property should you choose – residential or commercial? We analyze the benefits and drawbacks of each

Rental income is an important consideration, for people who want to invest in the real estate sector. Property buyers are often confused over which would provide better income option – an investment in a residential property or a commercial one and looking for information

Rental Income : Risk versus rewards between commercial and residential properties

• Tax benefits: Commercial and residential properties that are let out, attract tax on income from house property. However, a house property that is taken on a home loan, qualifies for tax breaks under Section 24 and Section 80C of Income-Tax Act.
• Risk and volatility: This is perceived to be higher in a residential property, due to frequent change in tenants, higher maintenance and upkeep costs and lower returns. Commercial properties offer stable, long-term rentals, with predictable income streams.
• Entering and exiting an investment: Both are illiquid assets. However, with Real Estate Investment Trust (REIT) regulations, it would be easier to create a portfolio of commercial properties than residential properties. Also, since the supply of Grade A pre-leased assets is low, the demand is much higher, making it more liquid than residential properties.

Rental Income: Benefits and drawbacks of investing in residential property

Benefits	Drawbacks
Lower entry ticket	Low rental yields / rental incomes
No minimum / lowest size applicable	Investment in interiors, etc., to make it rent-friendly
Loan facilities easily available	Rental agreement usually cannot exceed 36 months
Leasing process is usually easier
Comparatively lower holding period for returns, as against commercial property

Benefits and drawbacks of investing in commercial property

Benefits	Drawbacks
Higher rental yield and returns	The capital values of commercial properties tend to remain stable for longer periods of time
Longer term lease possible, i.e., up to nine years	The property may need to be of a specific minimum size, to be commercially viable
Leasing can be in bare shell or warm shell	Difficult to offload, as there are fewer buyers in the market
Commercial values are not very volatile

Resale Commercial Properties Documents Check List which are preferred by many buyers as compared to under construction ones. Here’s a list of important documents you must check before closing the deal.

Buying a commercial property generally involves a huge amount of money and major care must be taken while conducting such a deal. A resale commercial property has many advantages and is preferred over under-construction projects by many people. However, you must make sure the property has clear ownership titles and all the government permissions are in place. Here is a checklist of all the documents that must be scrutinized by you, while purchasing a commercial property which is up for resale.

Check list for buying Resale Commercial Properties

1. Resale Commercial Properties Sale deed

The sale is the most important document that you must check from the seller of the resale property. The sale deed is the proof of the sale that must have happened between the current owner and the previous owner. It is the sale deed which must have formed the basis of transfer of ownership of the property to the current owner from the previous owner. You must read all the contents of the sale deed thoroughly and you can even ask questions related to some of the aspects of the sale deed from the current owner, if you have any doubts.

2. Resale Commercial Properties Building plan

The building plan is another important document that you must check and make sure whether the property has a sanctioned building plan or not. A building plan is usually approved by the municipality of the area. The plan has the blueprint of the property including the equipment layout and various utilities. Any additional construction to the sanctioned building plan is liable to be pulled down by the local authorities as it would be considered illegal.

3. Completion certificate

A Completion Certificate is very important and will ensure that the building has been constructed in accordance with the local laws and is ready to be occupied by people. This certificate is issued by the municipal authority of the area and is necessary for getting loans from banks or NBFCs. This is also important for getting water and electricity connections in the building.

4. Tax-paid receipts

Any building has to pay various taxes to various government departments. You must check that all taxes have been paid and ask the current owner for the receipts.

5. Encumbrance certificate

This certificate ensures that there are no dues or obligation against the building. This document is also very important and can be obtained from the sub-registrar’s office where the property has been registered.

6. Conversion order

If the land on which the commercial property stands currently was agricultural or residential land, then a conversion of the use of the land must have been filed by the builder. This is called Change Of Land Use. Such a conversion order must also be verified by you to avoid any problem in the future.

7. Possession certificate

The builder must have given a Possession Certificate of the property in question, to the first owner. This document is not re-issued for the purpose of resale but the current owner must hand over the document to you.

An agreement for sale of an immovable property is not the same as a sale deed for the same property. We look at the differences that home buyers and sellers should be aware of, from a legal standpoint

refer The Transfer of Property Act 1882

While buying a property, people enter into an agreement with the seller. The form and format of the agreement may be different. It may either be an agreement for sale or it may be a sale deed. People generally do not understand the difference between these two documents and treat both as synonymous. However, it is not so.

What is an agreement for sale?

An agreement for sale, is an agreement to sell a property in future. This agreement specifies the terms and conditions, under which the property in question will be transferred. The Transfer of Property Act, 1882, which regulates the matters dealing with the sale and transfer of house property, defines the contract for sale or an agreement for sale as under:

A contract for the sale of immovable property, is a contract that a sale of such property shall take place on the terms settled between the parties” – Section 54. Section 54 further provides that “It does not, of itself, create any interest in or charge on such property.

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From the above definition, it becomes amply clear that an agreement for sale contains a promise to transfer a property in question in future, on satisfaction of certain terms and conditions. So, this agreement itself does not create any rights or interest in the property, for the proposed buyer

What the sales agreement creates, is a right for the purchaser to purchase the property in question on satisfaction of certain conditions. Likewise, the seller also gets the right to receive the consideration from the buyer on complying with his part of the terms and conditions.

In case of failure of the seller to sell or hand over possession of the property to the buyer, the buyer gets a right of specific performance, under the provisions of the Specific Relief Act, 1963. A similar right is available to the seller under the agreement, for seeking specific performance from the buyer.