Published on: Jan 30, 2017 @ 20:21
For the Indian real estate sector, the year 2016 has been the year of strategic policy initiatives which has laid the foundation for a strong future of the sector. The recent policy initiatives undertaken by the government at regulating the economy are expected to bring transparency into the sector and enhance consumer and investor confidence. We will see the Indian real estate sector to be more transparent, credible and attractive in the year 2017 with only organized, reputed and established developers with good track record.
The real estate sector in India is the second largest employer after agriculture. The growth of this sector is well complemented by the growth of the Indian economy. However, the real estate market, till recently, was governed with little transparency.
The Modi Government at the centre has brought a series of radical and transformational policies like Real Estate (Regulation and Development) Bill 2016 (RERA), FDI relaxations, Housing for all by 2022, Goods and Services Tax (GST), Benami Transactions (Prohibition) Amendment Act 2016, Amendments in Real Estate Investment Trusts (REITs) regulations, Smart City Project, Demonetisation and some other policies to sanitise the real estate sector. These majors are as following:
GST – An important and game-changing reform that merits special mention is Goods and Services Tax or GST, expected to be rolled out in 2017. GST is expected to transform India into a single market, boost revenues through better compliance and simpler procedure. When implemented, GST will subsume a host of indirect taxes levied by the Centre and states, including excise duty, VAT, service tax entry, luxury and entertainment levies. This could benefit the nation in the long term, by way of a wider tax base and greater participation in the formal economy.
But, the target for its rollout from 1st April 2017 has become more difficult. The stalemate over distribution of powers between the Centre and States’s administration of GST continued, with some states adamant on their demand to control tax payers with up to Rs 1.5 crore turnover. Finance Minister Arun Jaitley said that the roll out of the GST has been deferred to July 1 after a GST Gouncil meeting.
FDI: Since Foreign Direct Investment (FDI) can now be brought into the construction sector in any amount and for any size, it will have a huge positive impact on the housing sector. Foreign Investors feared entry into the system because of the issue of lack of transparency and absence of a regulatory body. Also, there were unnecessary delay in the completion of projects because the regulatory approvals used to take a lot of time.
REITs: The Securities and Exchange Board of India (SEBI) has notified final regulations for real estate investment trusts (REITs) and infrastructure investment trusts (Inv Its). The move will help in raising the cap of investment of REITs’ assets in under-construction projects from 10 per cent to 20 per cent, in order to attract the interest of developers. The move will also create a new investment avenues by planning to relax the rules for foreign fund managers to relocate to India. This will enable easier access to funds for cash-strapped developers.
RERA: The passage of Real Estate ( Regulation and Development) Act, 2016 (RERA) by Parliament in March 2016 aims to improve accountability of real estate developers, protect consumer interest and increase transparency in the real estate sector of India.
RERA will ensure to protect the interests of investors as all the real estate transaction will come under one central law and state level regulators will enforce the central government law. A developer would have to furnish all project-related disclosures within 90 days from the commencement of the Act.
According to RERA, about 70 per cent of the money collected from the buyers of under-construction properties should be deposited in the escrow account and which can only be used towards the development and construction of the same properties. Therefore, such rules will help in preventing siphoning of funds for some other projects.
RERA will benefit both consumers as well as builders as it will bring transparency in the industry and confidence amongst home buyers.
Benami Transactions Act: The passing of the Benami Transactions (Prohibition) Amendment Act 2016 is another positive step in fight against black money, tax evasion and those with ‘benami’ assets. It is expected to bring unaccounted money into the system as well as lead to seizure of benami property. Therefore, the present law is expected to bring improved transparency into the realty sector.
The Benami Act provides that the benamidar, the beneficial owner and any other person who abets or induces the Benami transaction, shall be punishable with rigorous jail term for a maximum period of 7 years and also attracts heavy penalty.
The Income Tax department has started stringent action against black money holders and those with ‘benami’ assests post demonetization and issued 87 notices and attached bank accounts deposits worth crores in 42 cases nationwide under the newly enforced Benami Transactions Act.
Demonetisation: Realty sector, considered a black money safe haven, seems to have taken a big hit as sales dropped considerably post demonetisation. This slowdown in property sales has mostly affected the resale residential market, luxury housing and land sales where a lot of transactions happen in cash.
The move of Demonetisation has made it difficult to do cash-driven property transactions. The impact of demonetization is being felt in both the primary and secondary markets as consumers are holding back their purchasing plans until clarity emerges on demonetisation. However, affordable housing has not been significantly affected by the move of demonetisation, since the cash component in this segment is very insignificant and transactions are primarily done through financial institutions and banks borrowings.
It’s difficult to predict the exact impact of demonetization on real estate sector at this stage as the actual manifestation of it will probably come in six to eight months. For now, low availability of cash and uncertainty about price trends is likely to keep the real estate market subdued. As of now, it is expected that this move will clean out black money from the sector and bring price correction across all the segment. But, there are no clear indications yet on how quickly and how much prices will fall by.
Some buyers are adopting a ‘wait and watch’ approach, we might witness a temporary slowdown in the sector till the economy gets back to normal. However, we will see a significant long-term gains, as most of the future transactions will happen through banking channels.
Although it’s difficult to predict the real estate market in 2017, we can expect some positive impact of all the policy initiatives undertaken by the government and hope that overall property markets should come on the edge of recovery soon. These reforms will have very positive implications for the home buyers and the demand for quality housing with attractive price will sustain.
Obviously, the year 2017 will witness the real estate markets across India emerging as stronger, healthier and end user driven. Fence sitters who had deferred their decision expecting further fall in prices will start coming back at least in the case of established long term players of good brand value.
In 2017, the primary market across larger cities is expected to improve faster than the secondary markets as the transactions take place through financial institutions and banks in the former. Besides, sales in the primary market may improve as banks are lowering interest rates on home loans. However, the secondary market may take some time for revival where buyers have to readjust their investment strategy as the transactions mostly take place in cash in this segment.
Affordable Housing: Affordable housing is expected to receive offers by the government for both developers and buyers as well.
It will continue to grow as 100 per cent deduction in profits for construction of affordable housing up to 30 sq. mtr. in the four Indian metros and 60 sq. mtr. in other cities and interest subsidy for first-time homebuyers, are introduced to improve supply and construction activity in this segment.
The Commercial real estate market has been doing well for the last two consecutive years and prospects are bright for the year 2017 as well. Commercial sector remained un-impacted from all the changes and has done remarkably well. This is evident in the record absorption level in 2015 and 2016. According to a report, there is an all-time high annual absorption of a little over 43 million sq ft of office space in 2016 .
Technology industry driven markets like Hyderabad, Bengaluru and Pune have done extremely well and attracted major IT giants. Demand-supply gap has resulted in an increase in office rents in most of the micro markets of these areas. Good connectivity, social infrastructure in the area and the availability of high quality office spaces will enhance the demand, rents and capital values of the properties. Sectors such as IT and ITES, retail, consulting and e-commerce have registered high demand for office space in recent times.
Housing Loans: For home buyers, the new year has already started on a positive note, with some banks have started lowering their lending rates. Due to demonetization, banks are flushed with funds in the banking system. With surplus liquidity and lower cost of funds for the banks, many banks are offering home loans at lower interest rates which will further benefit real estate sector.
The current oversupply in the market is expected to be mitigated in the coming quarters. Very few new projects are being launched in most of the cities due to the large number of unsold inventory and liquidity crunch. Developers will have to re calibrate their businesses methods to the new environment and buyers are expected to respond to these various reforms and take the maximum benefit and fulfill their dream buying a home.
According to a report, Bengaluru is expected to be the most favoured property investment destination followed by Hyderabad, Mumbai, Ahmedabad, Pune and Chennai in the year 2017.
Demonetisation, along with the new real estate regulatory Act and the Benami Properties Act, would help in eradicating the practice of parking black money in real estate to a great extent and bring transparency in the industry. Besides these, the announcements made to digitize land records and all other policy initiatives are perceived to be the game changers for the industry in coming years.
Ajay Verma, founder and writer of TheHousingWorld, a real estate and mortgage news website. He has over fifteen years of rich experience in the above mentioned industries.