Prime Minister Narendra Modi is not called a risk taker for nothing. Apart from the game changing demonetisation and a slew of other moves which have unearthed more than Rs 1.25 lakh crore of black money, and still counting, if there is one sector that has undergone a radical transformation, it is real estate.
A recent Confederation of Real Estate Developers’ Associations of India (Credai)-Cbre report highlighted how the Real Estate (Regulation and Development) Act (RERA), the Goods and Services Tax (GST) and the Real Estate Investment Trusts (REITs), will enhance transparency; improve investor sentiment; increase the share of organised sector; regulate unorganised sector; encourage competition and consumer confidence; improve ease of doing business; enhance operating fabric; make affordable housing the growth catalyst in the real estate segment; and last but not the least, give impetus to the Pradhan Mantri Awas Yojana which envisages housing for all by 2022 against the backdrop of a shortage of 20 million affordable homes in urban India alone.
The current BJP-led NDA Government’s commitment is reflected in the smart cities mission which is worth one lakh crore rupees; the Rs 77,000-crore Atal Mission for Rejuvenation; and the urban transformation scheme that provides basic ammenities like water supply, sewerage, transport to households and various other measures like the creation of the Rs 4,000 crore National Investment and Infrastructure Fund.
The real estate market, hitherto marked by opacity and unscrupulous players, is set for transformation for the better, given the regulatory overhaul by the Modi Government. It is estimated that seven billion dollar, or maybe more, from offshore equity investors, large corporates and High Net Worth Individuals, are slated to enter the real estate space this year after $5.7 billion by way of Foreign Direct Investment and $32 billion via private equity funding in 2016.
Speaking of affordable housing, enabling policy initiatives like 100 per cent service tax exemption to affordable housing and according it ‘infrastructure status’, increase in abatement period from three to five years, hiked exemption limit on interest outgo on home loans, Credit Linked Subsidy Scheme under Pradhan Mantri Awaas Yojana, linking home loans to Marginal Cost of Lending Rate to ensure effective monetary transmission of interest rate cuts by banks, Benami Property Act, higher budgetary allocation for rural housing from Rs 15,000 crore to Rs 23,000 crore in 2017-18, allocation of Rs 29,000 crore under the Pradhan Mantri Gramin Awaas Yojna, will go a long way in ensuring the initial target of 10 million homes by 2019. Such initiatives will ensure a ‘living’ reality for a large swathe of India’s 1.3 billion population.
Coming to GST in the real estate sector, what is commendable is that the GST has brought all indirect taxes (service tax, excise duty and value added tax), which applies to procurement of goods and services during the construction stage, under one unified tax. This has lead to a scenario where what remains is only direct taxes like capital gains tax, wealth tax and, of course, stamp duty.
Considering that almost 70 per cent of the real estate market caters to the middle and high income segments, the GST should help shift focus, particularly for smaller developers, towards the Economically Weaker Sections and Lower Income Groups of the society.
Also, the biggest hurdle for developers has been removed by allowing deduction of land value equal to one-third of the total amount charged by developers, thereby ensuring that the developer passes on the input tax benefit to the buyers.
Again, industrial property and warehousing segment will be the primary beneficiary of adoption of the GST system as operating efficiency is expected to increase, according to Colliers Research. Logistics companies will also look to establish large consolidated warehouses located on strategic transit corridors.
Builders have been complaining that property prices post-GST are unlikely to come down substantially as no land abatement is available and neither can input credit be claimed for completed part of the project billed under previous tax regime. However, such claims are unfounded because in the long term, developers stand to benefit for new projects as they can claim input credit under GST and get the tax paid by suppliers, thereby lessening the burden on the buyers.
Apart from RERA and GST, relaxation of norms pertaining to Real Estate Investment Trusts by the Modi Government will also broaden and deepen the property market in India. New guidelines like throwing open Real Estate Investment Trusts to High Net Worth Individuals with a minimum subscription size of two lakh rupees, equal voting rights to all unit holders, compulsory valuation of all Real Estate Investment Trusts assets by a registered valuer, allowing NRIs, Foreign Portfolio Investors to invest either directly in Real Estate Investment Trusts or via Special Purpose Vehicles, provided investment in Special Purpose Vehicles is done by taking a controlling stake of no less than 50 per cent of the equity or 80 per cent of the assets of the Real Estate Investment Trusts, mandatory distribution of 90 per cent of net distributable cash flows as dividend to investors, half yearly, no Dividend Distribution Tax on Special Purpose Vehicles, no capital gains tax for units held beyond three years, are all measures which will help developers monetise their assets and fight funding issues in the commercial segment.
Needless to add, this will in turn have huge positive ramifications on the residential segment too, going forward, though of course, currently Real Estate Investment Trusts are pretty much limited to the commercial property segment where yields are 8-11 per cent versus residential, where yields are merely two per cent to three per cent.
It is estimated that 229 million square feet of commercial space in India is Real Estate Investment Trusts-compliant and if listed, thanks to the game-changing reforms on this front by the Modi dispensation, it will fetch at least Rs 1.25 lakh crore, akin to almost one per cent of India’s gross domestic product!
This can indeed set off a virtuous cycle, encouraging private developers, who have hitherto been reluctant to invest in the affordable housing segment due to paucity of funds and modest yields, to come forward and share in Prime Minister Narendra Modi’s vision of ‘Housing for All’ by 2022.