Real estate is probably one of the oldest and most recognised sectors in the world. This business has successfully led to the overall development of various countries, including India, and has a significant role in the GDP of a country. In India, real estate is said to reach a large market size of $1 trillion by 2030. It is also projected to add a whopping 13 per cent to the country's growing economy and GDP by 2025 (source: India Brand Equity Foundation).
Further, the opening up of FDI in the real estate sector has certainly revived the overall development troposphere. This has played a significant role, especially, in the development of commercial assets. The FDI inflow to the sector in the calendar year 2017-18 stood at $1.2 billion. Despite an upward trend, homelessness poses to be a big threat to a majority of Indian citizens. The factors contributing to this dilemma are many, however, it is essential to dissect different aspects of the Indian real estate sector before reaching a conclusion.
Out of the four corner stones -- housing, commercial spaces, hospitality and retail -- housing sector has been on a roller coaster ride for nearly a decade now. Various reasons such as huge land acquisition costs, lack of clear title, high lending interest rate, liquidity crisis, absence of a matured market, fly-by-night developers, red-tapism, etc. are seen to be the major contributing factors. While one cannot expect a sea change within a short span of time, however, there is a lot to expect from the 2nd term of a stable government in the Centre. New reforms can be expected from this government in the upcoming budget to give a fresh lease of life to the Indian reality ecosystem.
It has been observed that there has been a steady decline in the demand of residential sales from 2014-15 onwards. While office space development and leasing have witnessed steady and fast upward growth, the residential segment has recorded below moderate growth. Major metros like Mumbai, Delhi, Bangalore, etc. noticed only a marginal increase in prices of residential sales, that ranged between 5% to 7%.
The capital-intensive real estate industry was already grappling with the issues of land acquisition, cost escalations, delay in getting approvals, delivery pressure from RERA and IBC etc. The recent NBFC crisis has further added chaos to the liquidity strapped sector. The proactiveness and policing of Real Estate Regulatory Authority (RERA) is also mounting pressure on the developers to shape up their act.
The current challenges will invariably delay the completion of the projects and thus result in a huge cost overrun, giving rise to countless litigations against the projects.
Low-Interest Rate Loans: In developed countries, the interest rate on home loans are significantly low. For example, in countries like Japan and Switzerland, it is as low as 2.5 % to 3%. An initiative from the central government to reduce the home loan interest rate will provide the much-needed relief to the residential real estate sector.
Currently, the allottees money is protected by way of channelising through specified bank accounts. A similar provision can be introduced for repayment of the lenders from 30% of the revenue collected from the homebuyers.
Pradhan Mantri Awas Yojana: The biggest landlords of this country are the Central Government and the State Governments. Majority of these land parcels are abutting to the State Highways or National Highways since they were originally acquired for various developmental projects. The extant Pradhan Mantri Awas Yojana (PMAY) policy is stitched up by recognising this factum.
Additional tax soaps on REITS: REITs is expected to be a game-changer in this sector. While majority of the income received by the investors is exempted from taxation, the interest income and the rental income received from the units are still taxable. Additionally, capital gains tax is also applicable on the transfer of the units.
Expectations: Reduction of tax rates should be considered so that it will encourage more investors to subscribe to this investment vehicle.
Smart City Development: This is indeed a smart initiative by the Ministry of Housing and Urban Affairs. This will certainly result in upliftment of the face of the qualified cities. These projects should not be made to suffer due to lack of funds.
Expectations: Special investments schemes should be rolled out to attract FDI/domestic investment for this transforming initiative.
Expectations: The private land pooling should be encouraged across the country. This will aid in standardisation of the real estate developments and attract more players to participate in the development. It will also trigger more job opportunities and add to the surge of our GDP.
Stamp duty reductions/ exemptions: "Apna ghar to apna hi hota hai" (one's own home is one's own)! Everyone dreams of their own house. However, the dreaded high rate of 'stamp duty on immovable property' is one of the constraints which a homebuyer often encounters in a real estate purchase transaction, paving way for rental housing.
Long-term game and gain
Undoubtedly, the introduction and implementation of following four key legislations such as Real Estate (Regulation and Development) Act, 2016; Benami Properties Transactions (Prohibition) Amendment Act, 2016; Insolvency and Bankruptcy Code, 2016; Goods and Services Tax Act, 2016 have enhanced the confidence of both domestic and international investors.
Additionally, the pet initiatives of the Central Government such as Smart City Mission; Housing For All By 2022 (PMAY); and Make In India have encouraged the jump in the 'Ease of Doing Business' rank. These are certain bold and reformist credentials that this Government can claim to fame.
The real estate sector is expected to encounter and pass the strict litmus tests posed by these legislations and initiatives, and gain considerably from them in the long term.
(Abhilash Pillai and Mridul Kumbalath are Partners at Cyril Amarchand Mangaldas and based out of the Delhi and Bangalore offices, respectively)