‘Affordable Housing to Get Better Returns Now’
The recent reforms in real estate sector through Real Estate Regulatory Act (RERA), demonetisation and the Budget proposal to accord infrastructure status to affordable housing are expected to bring the much-needed discipline in the sector, which is undergoing a metamorphosis and this would auger well for all the stakeholders, including long-term institutional investors such as private equity firms, S Sriniwasan, MD, Kotak Investment Advisors, told Kailash Babar in an interview. Edited excerpts:
How will the government’s thrust on affordable housing impact long-term institutional investors’ interest? Institutional investors have always been interested in any large addressable opportunity and affordable housing is an obvious one. While the government’s thrust is welcome, the challenge of earning risk-adjusted returns remain and these are in the domain of high land cost, lack of infrastructure connectivity where land is available and, most importantly, timely approvals for development. Some of these are in the domain of local planning authorities and the Centre can do little about it. But one of the biggest changes that this Budget has introduced is the limit on tax deduction on second homes at ₹ 2 lakh. With this, the Budget has dealt a blow to investor demand, particularly in high value properties. Second, by changing the indexation base to 2001 and reducing the holding period for long-term gains, it encourages such holders of property to sell as it is no longer tax-friendly. This will create further supply of high value properties and will keep prices in check.
Infrastructure status for affordable housing would mean access to cheaper financing and better terms for developers. Will this affect private equity investors’ expected returns? Cheaper sources of funding can result in better equity returns; it is therefore, positive for developers and their equity financing partners. What remains is to have the definition of affordable housing incorporated in RBI’s definition of infrastructure and harmonising this for capital flows to start. Does Kotak Realty have any plan to raise funds to invest in residential or affordable housing projects? We have raised commitments of $250 million for equity investments in residential projects, which includes affordable housing. We are separately discussing the possibility of focusing only on affordable housing with some impact investors with a focus on the non-metro markets. These discussions are at an early stage and we do not have any size target yet.
What would be the impact of demonetisation on real estate market? Will this lead to change in financing of real estate? Demonetisation has obviously had an adverse impact on the high value/luxury residential market. Channel checks reveal that in the mass and affordable segment, customer visits to sites are returning to pre-demonetisation levels. While conversion of customers to sales is slow, this segment will pick up soon enough. The other impact of note ban will be in land deals, which will probably result in a better proposition for developers and hence, will reduce prices.