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This article is written by Tejas Geetey pursuing Diploma in Business Laws for In-House Counsels from LawSikho.

Introduction

The real estate business is one of the most rewarding businesses if incorporated and executed in the correct way. Real-estate business deals with the purchase, sales, and development of real estate properties. These properties include land, buildings, the air above it, and the underground rights below it. Real estate is one of the largest employment generators in India as all the other secondary industries such as building, mortar, and construction are dependent primarily on real estate investment.

But despite this, real-estate investments are one of the most neglected by investors or buyers because of the high cost involved in the transaction. Considering the daunting regulatory procedures and the appreciable change in the value of assets over time, not everyone prefers real-estate investments. This article aims to describe why a budding investor or businessman should invest in real estate properties and how to set up a real-estate business in India.    

Why is an investment in the real estate sector important?

The real estate industry is a wide sector having its linkages with many other segments including construction and rental undertakings. Any entrepreneur while setting up the real-estate business should first identify the relevant market it wants to invest in. In general, real-estate investment can be classified into four sub-categories which include housing and rental, commercial investments, retail sector, and hospitality undertakings.   

Considering India’s locational advantages and low cost of production, it is considered as one of the most favourable demographics for real-estate & property investments. India’s real-estate sector is expected that by 2040, the real estate market will grow to Rs. 65,000 crores (9.30 billion dollars) from Rs. 12,000 crores (1.72 billion dollars) in 2019.   

Steps for incorporating a real estate business

While incorporating a real-estate business there are several factors that have to be considered including the valuation of the property, the related land regulations, geographical area, development of the property, its management, and the subsequent marketing. The steps involved in setting up a real-estate business are as follows.

1. Identifying the nature of real-estate business

While incorporating the real-estate business, it is important to identify the type of real estate business. Real-estate projects are executed by the promoter, who as per Section 2(zk) of the Real Estate (Regulation and Development) Act, 2016 means one who develops the real estate properties into apartments or promotes the real estate properties for the selling and purchase of the real estate property. 

It is important to identify whether one wants to act as a developer in a real estate project or incorporate a service-based firm for the promotion of real estate projects. After identifying which form of real-estate investment one wants to indulge in, it is important to identify the segment in which one wants to specialize. Real-estate business as said before includes housing, commercial, hospitality, and retail sectors. Extensive research and relevant market analysis are needed to identify the specialty of the business. 

2. Valuation of the real-estate property(Criteria for applying) 

Before applying for registration, the promoter should do valuation of the real estate properties. Valuation of the property includes its physical characteristics, geographical location, local laws applicable to it, and any other related documentation to give a true and realistic value of the property. 

Pursuant to the provision of the Real Estate (Regulation and Development) Act, the registration of the properties shall only be applicable if the area of land exceeds 500 sq. meters and that the minimum apartments are more than eight. Moreover, the registration shall not be applicable if the registration project is initiated for the purpose of renovation or repair which does not involve marketing, advertising, selling, or new allotment of any apartment, plot, or building.  

3. Registration and incorporation

The registration of real estate projects shall be applied in accordance with Sections 4 and 5 of the Real Estate (Regulation and Development) Act, 2016. The step-by-step process for registration is given below:   

  • Application for the registration of real estate project

The promoter or the developer shall make an application to the authority for registration of the real estate project in the prescribed form and prescribed fees which change according to the state.

  • Documentation

The promoters have to provide documentation pertaining to an overview of the business which includes its name, registered address, and relevant personal information of the promoter and other key managerial persons. The documents shall also include the development plan and the services to be provided by the enterprise. For example; the application, the relevant real estate property shall be registered in accordance with Delhi’s land law and regulations. Additionally, a declaration, supported by an affidavit, shall be provided by the promoter which states that the property is legal and free of all encumbrances, and the time period of the project and that 70% of the amount generated from the project shall be put in a separate escrow account.

  • Approval of application

Pursuant to the application received under Section 4, the prescribed state authority shall approve the application within a period of thirty (30) working days. After acceptance, a registration number and login id shall be provided to the applicant for accessing the website of the Authority and to create his web page and filling in the details of the proposed project. If the application is rejected, sufficient time shall be provided to the promoter upon which the final ratification shall be given.  

4. Development plan

After the registration and necessary RERA filling, the developer shall make a layout plan for the effective implementation of the project. This development plan, outline, or layout presents an overview of the project, the roles, and obligations to be performed by the promoters and agent, the estimated time period to complete the project.  

The development is not only considered with the completion of the project but the subsequent marketing strategies which shall be adopted by the enterprise.  It is important to execute the plan properly as it shall be made so as to generate finances from major financial institutions and QIBs. An effective layout plan gives the prime impression of the projects and their standing in the real estate market.  

Applicability of other legislations

Registration of the land is the first step in starting a real estate project. Aside from the RERA Act, there are many relevant central and state legislations that have to be followed. This includes the stamping act, Transfer of property act, ICA, and related land laws.

  • Contractual agreements

Any agreement or deed formed in pursuance of the real estate project shall be governed by the provisions of the Indian Contracts Act, 1872. The most common agreements prevalent in the world of real estate are; Joint Development Agreement, Tripartite agreements, construction loan agreements, etc.

  • Transfer of property

Transfer of property is governed by the Transfer of Property Act, 1882 which governs the sales and purchase of movable and immovable real estate properties including the lease of the property. 

  • Stamping of duties

The stamping of any documents implies the payment of stamp duty used in the process of real estate projects. Stamping of documents is governed by the Indian Stamp Act, 1899.  The rates of stamp duty and registration charges differ in different states. For example, the rate of the stamp duty in Andhra Pradesh is 5% but in Tamil Nadu, it is 7 %.

Role of real estate agents

The developer shall also appoint a real estate agent to oversee the purchase or sales of the real estate project. Registration of real estate projects shall be done through application in accordance with section 9 of the Real Estate (Regulation and Development) Act, 2016. 

In the process of execution of the real estate project, the real estate agent shall provide all the information and timely activities of the project allotment, execution, and completion of the project to the allottees and discharge any other functions as prescribed. Also, the real estate agent while performing his duties shall not indulge in any unfair trade practices which will affect the long-term interests of the real estate project. 

Conclusion

Any entrepreneur or enterprise while treading towards real estate business shall keep the above points in check. As a developer of the project, it is your responsibility to fulfil the obligations and give quality results. Any consumer not satisfied with the project shall have the right to complain as per the provisions of the RERA Act. 

The real estate sector is one of the most regulated sectors in India. As land is the subject matter of both central and state laws, it is important for the developer to be updated with any new circulars or notifications issued by the authorities regarding the real estate properties. It is therefore important for the developers and promoters to set up a dynamic mechanism for the effective implementation of the real estate project. It is recommended that the enterprise should consult an expert in the field of the real estate industry while taking any important/crucial decision for the project.

References


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