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
New Benami Act
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.
So far, so good!
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.
Shishir Baijal is Chairman and Managing Director, Knight Frank India