Real estate sector is considered as one of the mainstays of the Indian economy and correctly so; as it contributes at an average of 6 percent to the nation’s Gross Domestic Product (GDP) each year, and employs over 50 million people making it as the second biggest employer in the country, after the agriculture sector. Being an end user for over 30 allied industries and sectors, a lot is always expected from it. Over the past few decades, this sector has developed leaps and bounds, and has attracted a hefty amount of Foreign Direct Investment (FDI) as well. In the year 2015 itself, the sector brought an inflow close to $35 billion in FDI. Lakhs of crores of Rupees has been already spent on the infrastructure front as well that serves as the backbone for the realty sector, with much more announced and to be allocated. Therefore, this sector being extremely significant for the country’s growth requires a strong support through the government’s initiatives and decisions and hence, this year’s Union Budget, which is to be declared on 29th February, 2016 will play the most vital role in shaping up the upcoming years for the real estate sector.
2015 saw a very different behaviour in the real estate sector with end users becoming much prominent than the investors, who were looking for other opportunities to invest into. With interest rates coming down due to reduced repo rates, falling property prices, stabilizing cost of raw materials attached with economic revival and controlled inflation rate had pulled the buyers back in the market. All eyes will be on Mr. Jaitley to see what he has in store for the sector this budget session, as this will be the second comprehensive budget by this government who has been featuring infrastructure and real estate as the core behind this country’s unprecedented growth.[gt_heading id=”gt-heading-989″ tag=”h1″ type=”double-separator” text_align=”center” icon=”” separator_color=”” font_size=”21″ font_color=”” font_weight=”900″ css=””]WHAT THIS SECTOR CRAVES FOR?[/gt_heading]
- Status of being an Industry – This has been the demand of this sector for over several years now. How does the attainment of industry status help? Amongst various other reasons, it’ll give developers an access to funds at much reduced interest rates and diminished insurance thereby creating housing more affordable which will support this government’s current motto of Housing for all.
- Removal of multiple taxes – Presently, home buyers need to pay taxes indirectly in the form of service tax and VAT. Apart from this, stamp duty is also paid while registering the flats. Government needs to ensure the quick passage of Goods and Service Tax (GST) that went for rounds and rounds in the last two sessions of the parliament and never made out on a positive note. GST will help in substituting numerous taxes with a single tax that will also help in bringing transparency.
- Governing body for the sector – This is the real need of the hour as otherwise end users in this sector will become dried out of the market, because of rising fraudulent cases and delay in delivery of units. This sector is currently valued at over $50 billion and is projected to grow to over $200 billion by 2020. There is a big need for an apex body which will address the concerns of the customers and look into issues of this sector in order to enhance the much needed limpidity.
- Encourage FII participation in infrastructure – India is still an infrastructure lacking country and requires huge investments to help bridge this gap. This Union Budget should make more provisions to enhance foreign investors’ contribution in this sector.
- Fully functional REITs and REMF – Presence of REITs will allow a low entry level and are expected to provide a safe and diversified investment option at much reduced risk; all under proficient management that will ensure the highest return on investment. This new investment vehicle is categorized by its investment in real estate assets as well as limited liability for the unit holders. On the other hand, REMF will help in fulfilment of three major purposes; raising of funds for the expansion of retail businesses, to provide required capital for the development of retail infrastructure and to enhance the quality of housing projects.
- Reduction in interest rates – Even with 125 basis points reduction and repeated nods by the RBI last year, banks have not passed on the complete benefit to the customers. This has led to higher EMIs than expected which is keeping back the actual demand.
- Correction in cost of registration – Stamp duty and Registration costs amount to around 6 percent in most places, which is still quite high. Decreasing the registration cost by a few basis points would greatly reduce the burden over the end customers. Alternative approach would be to adopt a slab based approach towards the registration fee. However, stamp duty mainly comes under the jurisdiction of the State Government; an instruction from the centre to reduce the cost would definitely help.
- The right to know – In this sector, customers often complain about not knowing the development progress on their units or if there are any changes made, they aren’t notified, and in certain cases, even worse; builders making exit with the hard earned money of the customers. This transparency has become extremely significant which can only be addressed through the passage of RERA.
- Decrease the lending rates – Raising capital is a mammoth task for developers. The interest rate for builders from a bank can go as tall as 24 percent and on an average is about 22 percent and in fact; raising capital from other sources is more expensive than this. Reducing this rate of interest for builders will help in decreasing the cost of construction and in turn, bring down the cost of a unit for the customers.
- Prolonged approval system – Developers need to get over 30 approvals from various Government officials to get a project rolling. Delay in getting those clearances is one of the prime reasons for delays in projects. Any effort towards reducing this, increasing transparency and rationalizing the process of getting clearances will positively impact the industry.
- Regulating the cost of raw materials – A sudden rise in the cost of construction of raw materials has enforced many builders to pause their projects in many parts of South India and gaining momentum in the Northern parts as well. Although, the cost of cement and steel has decreased by almost 30 percent over the past few years, but prices of few other materials have doubled over the last few years. The Government must regulate these prices for at least key raw materials like cement, iron, concrete, etc. by putting upper caps on their prices.