Reformed realty to ride out rough road

The year 2017 could well go down as one of the most painful for the bruised real estate and housing sector, reeling under the short-term disruptive impact of a series of reforms. But then, riding high on these landmark reforms, the regulated and organised realty is set to ride out the rough terrain to emerge as a healthy and sustainable asset class in the medium to long run.

The agony of the real estate sector was particularly reflected in the worst-hit residential real estate. The long delays in completing projects and large-scale delivery defaults badly shattered the confidence and trust of home buyers, who were at war with developers and fighting it out in the courts – which saw a few developers landing in jail.

In the wake of all this, home buyers took a back seat, especially refraining from buying under-construction housing units and thereby badly hitting sales. According to industry statistics, there were about 6,85,000 unsold units across seven major cities till September this year. The high unsold inventory, together with the burden of complying with RERA (Real Estate Regulatory Act) led to a big slump in the launch of new units, though home buyers did pick up ready-to-move dwelling units as they were assured of the safety of their investment.

In view of RERA squeezing funds for residential properties, many developers took to commercial real estate, especially as investors preferred this segment due to better capital appreciation and good returns, particularly in pre-leased properties. Investors also showed keen interest in the retail sector, with national and international brands entering into newer destinations in search of organised mall space. Global PE fund Blackstone invested in a number of malls. Total retail supply, retailers' expansion plans and investments indicate healthy retail growth in emerging cities.

Despite being a year of hardships, 2017 may well be termed as the year of reforms aimed at removing regulatory hurdles and paving the way for the sector's growth. These progressive policies brought in transparency, which was reflected in the substantial improvement in India's rankings in JLL's Global Real Estate Transparency Index. Major structural reforms and changes in FDI norms made Indian real estate much more attractive to domestic and foreign investors, with a 70 per cent increase in FDI in construction as a percentage of the total FDI over last three years.

The landmark RERA reform empowered and protected consumers against cheating by unscrupulous property developers. Several of its stringent provisions are not only deterrent but punitive in nature to ensure a fair deal to consumers in terms of price, quality and timely delivery of property – besides fast-track redressal of their grievances.

Home buyers got a further protective umbrella with the Mumbai High Court ruling that RERA will be applicable to ongoing projects as envisaged in the model Central Act, nullifying the dilution of some provisions by a few states and in turn protecting the interests of home buyers. Besides RERA, another big reform that was undertaken this year was the Goods and Services Tax (GST). Currently applicable to under-construction properties, it is aimed at doing away with multiple taxes and checking double taxation, resulting in the benefit of cost reduction which developers are required to pass on to consumers.

To give full benefit of GST to consumers, the government is now extending it beyond the construction stage to final constructed buildings. The Benami Property Act, aided by demonetisation, together with restrictions on cash transactions, to a large extent rid real estate of black money (responsible for the artificial spurt in prices), making property more affordable. In fact, all the government's policies – such as according infrastructure status to affordable housing and PPPs for affordable housing – were all directed at promoting this mass segment to achieve the aim of "Housing for All".

The Housing and Urban Affairs Ministry approved the construction of 112,000 additional affordable houses for the urban poor over and above the 3,076,000 houses sanctioned earlier. That affordable housing was the flavour of the season was clearly evident from the fact that 62 per cent of all new launches in H1 2017 were in the affordable category (less than Rs 4 million price tag), with the trend of "compact homes" catching up.

This year's budget further provided a booster to the sector. Granting infrastructure status to affordable housing and abolition of the FIPB requirement were significant policy initiatives to help the capital-starved sector.

The other notable measures included provision of additional refinance of Rs 20,000 crore (over $3 billion) for the National Housing Bank (NHB), hike in housing outlay from Rs 15,000 crore to Rs 23,000 crore and allocation of Rs 396,000 crore for infrastructure development.

The pro-consumer budget took several other far-reaching initiatives, including increase in personal income tax limit with additional benefit in tax slabs, long-term capital gains tax benefits on housing, enhancing the scope of the Credit-Linked Subsidy Scheme (CLSS) under the Pradhan Mantri Awas Yojana (PMAY) by extending the loan tenure from 15 to 20 years and replacing built-up area with carpet area as qualifying criteria for benefits of the PMAY scheme. This scheme has now been further extended beyond the EWS/LIG segment to include the MIG segment.

Spurred by the positive sentiment generated by continuous structural reforms, expected improvement in the economic and employment scenario and tapering off of the disruptive impact of RERA and GST, in the months ahead, the real estate and housing sector is headed for consolidation, with a new eco-system marked by transparency and corporate governance.

By: Vinod Behl