De­cod­ing In­dia’s Real Es­tate Regime

How the new pol­icy will im­pact buy­ers, devel­op­ers and the over­all econ­omy

Business Today - - CONTENTS - COL­UMN/Shishir Bai­jal

How the new pol­icy will im­pact buy­ers, devel­op­ers and econ­omy

Real es­tate in In­dia is prob­a­bly on the cusp of wit­ness­ing a mytho­log­i­cal churn­ing. The fruits of mul­ti­ple pol­icy changes aimed at cleans­ing the in­dus­try will ben­e­fit home buy­ers, devel­op­ers as well as the whole econ­omy


The Benami Trans­ac­tions ( Pro­hi­bi­tion) Amend­ment Act, de­scribed by many as a sec­ond salvo against black money af­ter de­mon­eti­sa­tion, is ex­pected to bring a few sub­stan­tial changes in the sec­tor. But it is too early to ex­pect a fairy-tale cli­max.

The strin­gent approach to­wards ex­pos­ing shady in­vestors park­ing un­ac­counted cash in prop­er­ties bought un­der dummy names will, at least, stop land deals from gath­er­ing dust. It is known that many land parcels take ages to change hands, of­ten be­cause the ti­tles are not clear. The crack­down will hope­fully make land deals less cum­ber­some. It will be healthy for res­i­den­tial mar­kets if devel­op­ers have seam­less ac­cess to land parcels. It is also ex­pected to give con­fi­dence to lenders. To­day banks and other lend­ing in­sti­tu­tions are forced to spend time and re­sources snoop­ing on prop­er­ties, cour­tesy a cul­ture of dis­trust re­gard­ing own­er­ship. The new reg­u­la­tion can be handy in writ­ing off that tradition.

But it will not be re­al­is­tic to ex­pect a surge in the sup­ply of homes or a fall in prices yet. The benami prop­er­ties seized will be ei­ther auc­tioned or used by the gov­ern­ment. There­fore, their po­ten­tial con­tri­bu­tion to the in­ven­tory will be mea­gre. How­ever, con­fis­cated land parcels may give a fil­lip to the gov­ern­ment’s af­ford­able hous­ing scheme.

Some op­ti­mistic home buy­ers may have felt that the move will flush out cash-rich in­vestors and ra­tio­nalise prices. But re­search in­di­cates that a large sec­tion has al­ready left the mar­ket. So, ex­pect­ing cheaper homes is far-fetched for now.


Tra­di­tion­ally laced with lay­ers of trust deficits, the In­dian real es­tate sec­tor badly needed a glass door. The Real Es­tate Reg­u­la­tory Au­thor­ity Act ( RERA), passed last year, will bring a breath of clean air in the sec­tor if state gov­ern­ments im­ple­ment the Cen­tre’s pol­icy as it is. Nearly a year af­ter Par­lia­ment cleared the law, some states’ ver­sions have drawn flak for os­ten­si­bly help­ing devel­op­ers. But devel­op­ers’ lobby groups feel oth­er­wise.

On paper, it is a path-break­ing reg­u­la­tion that will take care of home buy­ers’ in­ter­ests like never be­fore. For in­stance, buy­ers of­ten have a web of ques­tions when it comes to buy­ing dream homes. RERA prom­ises to end that anx­i­ety. All rel­e­vant in­for­ma­tion will be parked with the reg­u­la­tor and, hope­fully, made avail­able to po­ten­tial buy­ers. It will also set time­lines for projects, which means that


the end­less wait be­fore mov­ing in will soon be passé.

But a large sec­tion of devel­op­ers feels, and rightly so, that projects are not al­ways de­layed at their end. The red-tapism in gov­ern­ment of­fices also af­fects de­liv­ery time. But the move will ul­ti­mately boost buy­ers’ con­fi­dence and bring buoy­ancy back in the sec­tor. In fact, the re­cently re­leased FICCI- Knight Frank Real Es­tate Sen­ti­ment In­dex showed that devel­op­ers and fi­nan­cial in­sti­tu­tions were up­beat for the near fu­ture de­spite the de­mon­eti­sa­tion-in­duced slump in the last quar­ter of 2016. Nearly six out of 10 stake­hold­ers par­tic­i­pat­ing in the sur­vey were op­ti­mistic about a surge in sales. Sim­i­larly, more than two-third re­spon­dents ex­pect a bet­ter fund­ing sce­nario over the next six months.


The in­fra­struc­ture sta­tus for af­ford­able hous­ing is a Mi­das touch in dis­guise. The move will change the for­tunes of scores of bud­get buy­ers and also en­cour­age devel­op­ers to go for such ven­tures.

For buy­ers, the move means bigger homes at value for money. Pi­geon-hole-sized units, cou­pled with shoddy finish, at most gov­ern­ment-pro­moted projects were a put-off for a large sec­tion of mid­dle-class buy­ers. That is set to change with des­ig­nated unit size of 60 sq. m. for projects in met­ros and 30 sq. m. in smaller cities, in­clud­ing sub­urbs. Some buy­ers may also earn sops un­der the Prad­han Mantri Awas Yo­jana ( PMAY). The scheme is equally tempt­ing for devel­op­ers.

The rise in take-home pay for the salaried class earn­ing up to `5 lakh, cour­tesy the 5 per cent de­duc­tion in in­come tax, is set to fire up the de­mand for these prop­er­ties. The scheme is equally tempt­ing for devel­op­ers as it qual­i­fies them to raise funds at sin­gle-digit in­ter­est rates and of­fer com­pet­i­tive prices. Devel­op­ers are likely to pass on the ben­e­fits of lower bor­row­ing costs to con­sumers. In re­turn, they need not pay taxes on prof­its made from these projects.

Our ex­pert panel’s reflections on the pol­icy indicate that the largest pie of new launches will be in af­ford­able hous­ing. While price cuts are un­likely, buy­ers are likely to be swamped with more price op­tions as a wave of new devel­op­ers are ex­pected to en­ter the fray. These may also include the top brands. Also, some states give their own in­cen­tives such as ex­emp­tions from ex­ter­nal/in­ter­nal de­vel­op­ment charges, land use charges and stamp duty.


The over­all sec­tor and end users have great hopes from the Goods and Ser­vices Tax ( GST). The sweet­ness of the fruit, how­ever, will be clear only af­ter the Cen­tre and states are on the same page over what goes in whose kitty. The move to­wards GST has trig­gered a pos­i­tive sen­ti­ment as it pro­poses to re­place a web of taxes with one tax. Ir­re­spec­tive of its ben­e­fits to devel­op­ers’ bal­ance sheets and buy­ers’ bank bal­ances, it will at least make prop­erty pur­chases sim­pler.

Re­search in­di­cates that the ex­ist­ing tax sys­tem of­ten leaves buy­ers per­plexed about their ac­tual spends on prop­er­ties. Since bulk sales are driven by home loans, buy­ers sel­dom get the math­e­mat­ics be­yond the book price of a prop­erty. But bud­gets run hay­wire when ad­di­tional taxes such as value-added tax ( VAT) are added to the bill. Even if the GST makes prop­erty prices marginally higher, it can still be a good trade-off con­sid­er­ing the prob­lems with pur­chases made with­out clar­ity on taxes.

Devel­op­ers also ex­pect con­struc­tion costs to come down un­der GST.


A sooth­ing treat­ment for the de­mon­eti­sa­tion-hurt real es­tate busi­ness seems to be un­der way, cour­tesy a slew of feel-good mea­sures in­tro­duced in the Union Bud­get. Re­search in­di­cates that prop­erty sales are likely to be­come nor­mal as soon as flu­id­ity re­turns to the sec­tor. Sales vol­umes hit a his­tor­i­cal low in the last quar­ter of 2016 af­ter the gov­ern­ment banned high-value cur­rency. The first as­sault against black money hit sales by 40 per cent and held up al­most six out of 10 new launches, ac­cord­ing to Knight Frank’s De­mon­eti­sa­tion Im­pact on Real Es­tate re­port re­leased this month. The no­tional rev­enue losses across eight cities amounted to more than a whop­ping `22,600 crore. The as­sumed losses to the gov­ern­ment ex­che­quer for the same pe­riod were `1,200 crore.

But lower home loan in­ter­est rates, fis­cal take­aways for tax­pay­ers and new re­forms such as RERA and GST are ex­pected to wash down the mo­men­tary shock felt late last year. The first half of 2017 is likely to be a quiet pe­riod with a ma­jor­ity of con­sumers in a ‘wait-and-watch’ mode. The in­dus­try will see a slug­gish resur­gence as con­sumers will tread cau­tiously.


The bou­quet of re­forms over the past two years was able to win peo­ple’s faith in the gov­ern­ment’s in­ten­tions. A holis­tic view of the ef­forts re­flects a strong po­lit­i­cal will to en­sure ease of do­ing busi­ness. The en­vi­ron­ment is con­ducive to en­tice in­sti­tu­tional in­vestors. The ini­tia­tives will also make devel­op­ers fall in line, which in re­turn may boost con­sumers’ con­fi­dence in the sec­tor.~


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