I. Twelve (12) commandments for commercial real estate (Source: The Hindu)
Due diligence is crucial to keep your investments safe.
The growing investment sentiment for India is catalyzing business activity, making real estate investment, commercial real estate investment to be more precise, the best investment decision. Industry experts estimate that NRI investments alone in the sector are about to touch $11.5 billion.
But the process of due diligence is not any less of a daunting task, and is more so for commercial real estate properties, where making a single erroneous move can turn an opportunity into a catastrophe. So, let us shed light on 12 indispensable steps that will keep your investments safe.
(1) Title, Survey, and Zoning
Title diligence is very important to make sure that the property is clear of any claims and encumbrances. Select the company’s title and receive and review the seller’s title commitment along with other essential documents. Further, review existing surveys on the property and order a new survey. This will demarcate the boundaries of the property and ensure that the property is not built on an agricultural or industrial land. Verify that entitlements, leases, and other possessions are in the seller’s name or that suitable assignment documents exist for the property.
(2) Acquisition actions / documents
The process of purchasing or transacting in commercial real estate begins with ensuring all the relevant documents are in place. Prepare and sign the Letter of Intent and request and obtain all of the material required for due diligence. Choose a legal counsel and obtain and review all the successive drafts of the purchase contract.
(3) Tenant / Lease matters
Obtain the current rent roll. Receive and review the lease, amendments, and all of the relevant documents required to prepare lease summaries. Engage legal advisory to review leases and get the lease summaries drafted. Compare internal lease summaries with the legal advisory’s version, and then both of them with the rent roll and proforma.
(4) Financial matters
Receive and review copies of historical and proforma financial information along with utility bills (electricity, water, gas supply, etc.) and the most recent tax statements in conjunction with related information. Check that all expenses relating to operation of the property have been reflected in the financial information provided by the seller. Analyse expenses with relevant building data to eliminate any scope of misinformation. Also, assess the past and budgeted capital appreciation of the property.
(5) Service contracts
Receive and review service contracts and confirm that all service contracts are terminable without any penalty. Verify the ability to assign service contracts and approve contracts that are needed to be transferred and notify the seller.
(6) Litigation
Conduct a litigation search to make sure that there are no pending litigations. Determine if there is any existing contingent liability or open claims made against the property.
(7) Insurance
Review the third-party Property Management Agreement for adequacy of insurance coverage. Obtain an insurance quote from relevant vendor(s) and provide all the pertinent information to the Risk Management officer for the final Certificate of Insurance.
(8) Physical property inspection and review
Receive and review as built plans, construction contracts, sub-contracts, and specifications of the building such as electrical, mechanical, and structural plans as well as building warranties and guarantees. Review existing inspection reports for roofing, HVAC, seismic activity, and soil and order current engineering report for property condition assessment. You will need to review various NOCs such as Fire Safety NOC, Airport Authority’s clearance on height, etc.
(9) Personal property inventory
It is essential to review the list of personal property to confirm that no material personal property is omitted from the list. Check if all of the personal properties are in good operating condition.
(10) Governmental review
Review licenses and permits and check that there has been no breach of them, all conditions are satisfied, and they are in the current owner’s name and whether or not a transfer is required.
(11) Property operations and management
Choose a property management company and finalise the property management agreement. Validate that the financial terms of property management agreement are reflected in the proforma. Now, select a leasing company and verify that the service contracts are available. Ensure that there are no disputes.
(12) Closing and miscellaneous actions
If there is any breach or misrepresentation, notify the seller immediately. Then, initiate any necessary changes to forms of closing documents and draft and approve the authority documents. Ask for current financial information from seller for prorations.
II. Fifteen (15) states still don’t have a RERA website (Source: mint)
Two (2) Years after the RERA act was enacted, 15 states still do not have a separate website for a real Estate authority that each state was mandated to set up
Almost two years after the Real Estate (Regulation and Development) Act, 2016, was enacted, 15 states still do not have a separate website for a Real Estate Regulatory Authority (RERA) that each state was mandated to set up. Aimed at giving information to home buyers about under-construction projects, the website is a key piece of the new regulation.
Assam, Bihar, Chhattisgarh, Haryana, Manipur, Meghalaya, Mizoram, Nagaland, NCT of Delhi, Orissa, Sikkim, Telangana, Tripura, Uttarakhand and West Bengal did not have separate websites.
The mandate
The Act was enacted on 1 May 2016, and all states were mandated to formulate and notify rules for the functioning of the regulator in their respective jurisdictions within six months and set up RERA by 1 May 2017. However, many states failed to meet both these deadlines. In January 2017, taking cognizance of the fact that some states had missed the deadline, and a few others had diluted some of the provisions of the Act.
Political as well as administrative reasons can be attributed to delay in implementation.
Each state also had to make a website within a year of establishing RERA. These websites had to give information to home buyers of names of under-construction projects and details like names of developers and promoters, approvals, number of apartments and sizes, possession date, registered real estate agents, and so on. The website must also enable home buyers to file complaints online.
An aggrieved person can approach the high court of the state government and seek redressal under the Act. In the absence of clear defined rules, the court can consider rules notified by central or other state governments, while pronouncing its judgement.
A tangled web...
Of the 15 states that do not have exclusive RERA websites yet, NCT of Delhi, Bihar, Uttarakhand and Orissa have only temporary websites. The Act does not apply to Jammu and Kashmir.
A few states, such as Andhra Pradesh, Jharkhand and Kerala, have set up exclusive RERA websites, but not much information is available on them.
In comparision, Uttar Pradesh’s RERA website has 2,386 projects, 1,286 promoters and 1,443 agents registered. Maharashtra, which was the first state to set up a regulator and a website, has been given the additional charge of being the regulator for two Union territories (UTs)—Dadra and Nagar Haveli and Daman and Diu.
Similarly, Tamil Nadu has been given the charge of Andaman and Nicobar Islands (tnrera.in).
...RERA can help untangle
The real estate sector has been struggling to attract home buyers, and RERA can provide requisite confidence and transparency. RERA is key to a stronger, more sustainable recovery in the Indian real estate market.
In addition to the issues related to affordability and overall muted macroeconomic environment, the sentiments of the buyers were impacted because of inordinate delays in project deliveries and high imbalance in builder-buyer agreement. RERA, while addressing these issues, is expected to have a positive impact on buyer’s confidence.
While developers and other stakeholders made a hue and cry earlier saying the RERA Act was too stringent, it is much simpler compared to real estate Acts of other countries.
The Act was expected to boost home buyer’s confidence, but lack of seriousness in its implementation can prove to be a dampener.
III. Property prices drop by 7% in 9 cities in January-March 2018 report (Source: mint)
There is good news for homebuyers. Property prices witnessed a significant drop in the first quarter of the calendar year 2018 in nine cities: Gurgaon, Noida, Mumbai, Kolkata, Pune, Hyderabad, Bengaluru, Thane and Chennai. According to a report by Propequity research, a Gurgaon-based real estate data, research and analytics firm, “Weighted average prices in the quarter fell 7% from Rs6,762 per sq. ft to Rs6,260 per sq. ft, suggesting aggressive pricing (price reduction) by the developers to ignite homebuyers demand.”
The decline in prices, which were stagnant for over a year, has come as a welcome change for homebuyers. Not surprisingly, demand increased, and real estate inventory saw a marginal decline between the last quarter of calendar 2017 and the first quarter of calendar 2018
Price decline
While many developers have reduced their base prices, a few have waived off additional charges.There is a visible price correction of up to 3-5% in base price across the country. In addition, developers are offering club membership, car parking, modular kitchen and other amenities at no additional cost. So, the net price correction is about 10-15%.
Piling inventory and low sales are the main reasons behind falling property prices.
Though the report shows there has been a nominal decline of 2% in the overall inventory of unsold houses during the first quarter, it is still very high. According to the report, the current unsold inventory of apartments in the nine cities is about 595,000 units. At the present sales volume, it may take years before the current level of inventory is cleared.
At the same time, decrease in prices during the quarter has led to a slight increase in the number of units sold. According to the report, 40,694 units were sold in the first quarter of 2018 compared to 37,555 units sold in the previous quarter, which means a rise of about 8%.
What is in demand?
A major reason behind low sales was demand-supply mismatch. Out of the total unsold inventory, a lot of units are in the highend and luxury housing segment, which is not in line with the demand from homebuyers. It seems developers have now realised that.
During the quarter, though the number of project launches increased, most of these were in the mid or affordable segments, which are in demand. Developers are trying to cash in on the advantage of Pradhan Mantri Awas Yojana and are launching projects that qualify for subsidies under the scheme.
Most homebuyers are also looking for projects that are ready to move-in or are nearing completion. Though the Real Estate (Regulation and Development) Act, 2016 has been implemented, it is yet to make an impact on buyer’s confidence, and they are still skeptical about the timely completion of under-construction projects.
Demand and supply
The lack of demand in this period when prices remained stagnant perhaps held a lesson for developers. Even as they kept insisting that there was no room for further reduction as they had reached the bottom and were touching the cost price, demand remained low.
The recent price decline yet again validates the fact that the price of a product, including that of a real estate unit, depends on market dynamics of demand and supply and does not factor in the cost.
In fact, if homebuyers are reluctant to buy even at this price point, developers might have to reduce prices further to clear inventory.
IV. For people residing within BBMP limits, please note that the last date for property tax payments for AY 2018-19 to avail rebate is 30th April 2018 (likely to be extended).
Please refer website https://bbmptax.karnataka.gov.in to understand procedure to effect payment and obtain property tax receipt.
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The views of the authors/publishers should not be construed as advice. Investors must make their own investment decisions based on their specific investment objectives and financial positions and using qualified advisors as may be necessary. Opinions expressed in various articles are not necessarily those of Wealthmax Enterprises Management Private Limited(WEMPL) or any of its directors, officers, employees and personnel. Consequently, WEMPL or any of its directors, officers, employees and personnel do not accept any responsibility for the editorial content or its accuracy, completeness or reliability and hereby disclaim any liability with regard to the same. Stock picks and mutual fund snapshots are not exhaustive and should not be construed as recommendations.