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Realty sector: Getting the foundation right

realty sector in india

The Union Cabinet approved its flagship ‘Housing for All’ scheme this week, with a 2022 target and a renewed emphasis on the low-income group categories by way of relaxed income limits and higher interest subvention. While the government seems to have struck the right chord and is looking to move towards greater social inclusion, experts feel that its success will depend on the clarity and implementation of the scheme, which remains an indelible aspect of any policy decision in India.

Industry insiders lauded the move and said that the interest subvention scheme will generate demand as it will improve the affordability of home buyers who were on the backfoot because of high equated monthly installments (EMIs).

“One of the major hurdles faced by the economically weaker sections (EWS) and the low-income group (LIG) is access to credit. This combination of an interest subsidy and Central assistance to build housing/for enhancement of existing households would go a long way in addressing this hurdle. While the focus is primarily on the urban areas and the 500 class-I cities, constraints particularly with respect to how the existing infrastructure would need to be reinforced need to be given equal thought,” said Sanjay Dutt, executive managing director, Cushman & Wakefield, South Asia.

While the sector continues to suffer from low demand and oversupply, a report prepared by JLL called, ‘Rebooting Indian Real Estate’ points that the residential real estate market is currently undergoing a realignment in terms of the market prices and expectations.

If on the one hand it has resulted into moderation in prices, on the other hand it has also forced developers to train their energies towards developing units in the mid-to-affordable range.

The report analyses various steps taken by the government in its first year for the real estate sector:

The Land Acquisition, Rehabilitation & Resettlement (LARR) Act

The Bill, cleared by UPA II, witnessed several amendments by the new government as it was thought to be discouraging private participation in land acquisition due to the stringent consent clause. The NDA government has proposed several amendments relating to consent of affected families, definition of affected families and categories of projects that can be classified as of national importance.

The government looked to dilute the consent clause as it felt that a few politically motivated people can exploit the clause and create difficulty in acquiring land in India.

Current status: The Bill faces stiff opposition in the Upper House of Parliament, where the ruling party lacks a majority. The primary opposition is from the allies of the previous ruling party — the Indian National Congress — who were instrumental in getting the current version enacted. The Bill is currently referred to a select committee, which will come out with its suggestions in the first week of the monsoon session that starts in August.

Real Estate Regulatory Act (RERA)

An important aspect that lacks in the real estate sector is the absence of a regulator to create rules, enforce them and protect the rights of consumers.

The Bill that has stringent clauses to curb the siphoning-off of a particular project’s funds, rampant construction delays, failed to address the issue of delays from the approving authorities.

The Bill, prepared by the Housing and Poverty Alleviation (HUPA) Ministry in 2013, faced opposition from the developer community and could not be passed. The NDA government made several changes to the Bill including revising the minimum amount of money paid by the consumer that should be kept in escrow account.

Current status: The Bill has been revised to relax some of the developers’ concerns. Once enacted, this Bill has the potential to radically enhance the transparency of the real estate sector, thereby helping attract more foreign funds and domestic institutional investments.

Challenge: Approval authorities are still outside the ambit of the Bill, which is not a positive sign. Many times, delays in construction or cost escalations are directly associated with the delay of approval authorities in sanctioning intimation of disapproval permissions. The Bill is currently referred to a select committee, which will come out with its suggestions in the first week of the monsoon session.

REITs and Infrastructure Investment Trusts (InvIT)

The Real Estate Investment Trusts (REITs) and InvITs invest funds, pooled from various investors, in specific projects and they offer an alternate source of funding, which is also cheaper, for real estate and infra projects.

It is expected to result in greater institutional participation to enhance professionalism and transparency in these sectors and provide long-term funding for debt burdened companies in the real estate and infrastructure space. It also provides an exit opportunity for many cash-strapped developers/investors.

Current status: The government announced the commencement of REITs in India in its first Budget in July 2014. Debates over issues such as tax treatment are also going on.

Challenges: While Dividend Distribution Tax is one of the key challenges, current rent yields are not very attractive compared to risk-free investment options such as G-Sec bonds.

Outlook: Since majority of the hurdles have been cleared, JLL expects the launch of the first REIT in India by the first half of 2016. If the progress takes place at the expected pace, over the next three years, the REIT market has the potential to grow to $15 billion.

Goods And Services Tax

Unlike in the current set-up, where indirect taxes on manufacturing and selling activity is applied at multiple levels — excise duty, services tax, sale / value-added tax, customs duty — GST will subsume all existing indirect taxes into one uniform rate that will be applicable across all parts of India. Not only will this make the process of taxation more simplified, but it will also have a favourable impact on economic activity.

Current status: GST is expected to become a reality in April 2016. As of this date, the most delicate issue of revenue sharing between the states and the Centre is being worked out.

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