10 September 2018

1. Framing policy on waste management SC stays construction in some states

The Supreme Court pulled up the states of Maharashtra, Madhya Pradesh, Uttarakhand and Union territory of Chandigarh for not framing a policy on solid waste management and stayed further construction in these places.

(Source: The Indian Express, 01 September, 2018)

Research View

The Supreme Court of India has imposed a stay on construction activity in Maharashtra, Uttarakhand and Madhya Pradesh and UT of Chandigarh for not complying with Solid Waste Management rules. This stay includes realty projects as well as infrastructure projects such as roads, bridges, metro rail and sea links. Regarding real estate, the most significant impact of this ban is likely to be on Maharashtra, being home to the high-value property markets of Mumbai and Pune. In our opinion, the ban on construction activity may impact the delivery timelines and collections of real estate projects in the short-term. A prolonged stay on construction activity could affect projects likely to be completed over the next 12 months. As per media sources, a total of 178 million sf (16.5 million sq m) of residential projects is expected to be delivered in 2018-19 in Mumbai. The developers’ cash flow will be affected adversely as payments are linked to the construction schedule. The slowdown in the construction activity will also lead to lower demand for steel, cement and other building materials. We believe state governments should work towards a solution to commence construction activity. Given the magnitude of the impact of this stay order on construction of buildings and infrastructure projects, we expect states to move towards finding an interim (stay against the order) of a permanent solution of the issue. For instance, Maharashtra Government has indicated that SWM policy is already formed and expects the ban to be lifted before the next hearing.

2. Courts foresee deluge of suits for two-way GST in real estate

Uncertainty about the applicability of the goods and services tax on joint development agreements, an increasingly popular form of property construction in West Bengal, is expected to result in a large number of cases being filed in the Calcutta High Court.

(Source: Economic Times, 29 August, 2018)

Research View

In a joint venture development Agreement, the landowner transfers the right of construction of the land parcel to the developer. In exchange for the development rights, the landowner gets some share in the sales proceeds or the developed area in the project. In the previous tax regime, landowners had no issues as only stamp duty was payable unless a separate consideration was reached for the transfer of development rights. However, now under GST both landowners and developers has to pay taxes. Accordingly, landowners will have to obtain GST registration, file returns, pay tax and maintain books of accounts even though they may not be willing to undertake additional compliances. Besides, the notification has also brought up issues concerning valuation of supply of development rights as the consideration is in kind.  The ambiguity surrounding the exact time of tax liability that decides which party is liable to pay taxes increases the perplexity to the scenario. The High court suspects that this confusion may lead to a conflict situation between the JV partners and hence would result in two-way law-suits. As such Joint Venture Development Agreements are widely popular across the country. We expect such loopholes in the law to get reformed over time as GST is still at its nascent stages of implementation in the country. However, in our opinion there should better synergy between the real estate professional bodies and the authorities to weed out such teething troubles.

3. Global funds vie for B’luru office park

Marquee global investors GIC of Singapore, Temasek-owned Mapletree and Blackstone Group, among others, are vying to to acquire one of the oldest technology office zones located in Bengaluru.

(Source: Mint, 31 August, 2018)

Research View

The technology and office leasing capital of India, Bengaluru recorded an office space absorption of 8.2 million sq ft (0.76 million sq m) in H1 2018 and the demand is expected to remain stable in the coming years due to the ample availability of talent pool and high long-term economic potential. Global investors such as GIC of Singapore, Temasek-owned Mapletree, Blackstone Group, Xander Group and Ascendas are vying for already leased office properties in Bengaluru. The IBC Knowledge Park sprawling over 2.2 million sq ft (0.2 million sq m) located in the Secondary Business District (SBD) of Bengaluru, is up for sale. The 90% leased property holds tenants such as Ingersoll Rand, Byjus, Calsoft and Ather with ticket size of more than 70,00 sq ft (6,505 sq m) and is estimated to fetch at least INR 2,300 crores (USD 328 million) as per media sources. Recently, in a similar transaction Xander Group purchased Embassy Golf Links, fully leased Pinehurst building for INR 350 crore (USD 50million) in Bengaluru. In our opinion, these transactions confirms  the global investment firm’s plans to expand its commercial office portfolio in the country which is doing well in past couple of years.

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