The real estate and construction sectors are crucial for the economic growth of India as they are the third highest contributor to the Indian economy and the third largest employer. The total market size of the Indian real estate sector is estimated to have doubled since 2008 and reached about Rs.7 lakh crore. India has the largest housing market in the world. But the sector has its share of challenges. One of the major problems that the sector is facing is related to scarcity of land. India is witnessing high urban population growth but the per capita urban infrastructure is very low, which is restricting the growth in the real estate sector.
There is high demand for housing and commercial projects but due to non-availability of land within city limits and rising cost of land and construction, the real estate sector is facing increased costs. According to a report published in Business Line, the buyers are concerned about real estate companies’ usual practice of having payment schedules that allow them to collect over 90-95% of the cost of the apartments before the actual delivery due to market trends.
Real estate financing
Real estate sector contributes nearly 6.3% of the country’s GDP. So far, it has attracted $32 billion in private equity and the global capital flow into Indian real estate in 2016 stood at $5.7 billion. While the big ticket realtors and developers get easy access to loans and advances for new constructions, small developers most often don’t get such funding. This often leads to stalled projects, stressed developers, and harassed buyers. A developer from Kolkata told BE, “Past projects, track record, and professional proficiency are also checked while considering the builder for providing loans.”
He added, “We need to have an experience of at least three years in this field and must have completed two to three projects before availing the finance. The last audited balance sheet should show a satisfactory financial position of the promoters. We have to prepare a project report before approaching the financial institutions for loans and include information like project detail and cost, profitability statement, annual cash budget for the duration of the loan showing monthly or quarterly cash inflows of the specific project along with the repayment schedule. Documents like non-encumbrance certificate, certified copy of renewed municipal receipts, lawyer’s opinion on ownership, and marketable title and a sanctioned plan should also be included.”
Ravindra Pai, MD, Century Real Estate told BE, “Banks have been cautious because of their own issues like NPA but they are financing collectively depending upon the centre of the balance sheet and reputation of the builders. But large part of the capital also came from NDFTs like India Bulls and the new ones who are getting in and providing subtle finance. However, rates for this have also come down.
Securities include financial status, repaying capacity, tenure of the loan, building under construction and the land on which the building is likely to be constructed, equitable or registered mortgage of other land. Construction sites should be fully insured against fire, riots and other damages, according to the bank’s clause.
Farook, World President, FIABCI (an International Real Estate Federation), told BE “Financing depends upon the individual strength of the developers, their collaterals, and a healthy balance sheet. If these factors prevail, there are not issues in financing the developers.”
Commenting on financing of banks, Narasimha Swami N., Head of Sales, Marketing & Customer service, VBHC, Value and Budget Housing Corporation Pvt. Ltd., told BE, some of the lenders are seeking additional collateral on loans disbursed to real estate developers. In some cases, they are insisting on personal properties of promoters as guarantees. And few are lending smooth loans with the track record of the builder and the promoters.”
“Dr. Samantak Das, Chief Economist and National Director, Research, Knight Frank India, said, “The global economy has started recuperating with improving job prospects, decline in unemployment rates and rising rate of inflation in the developed economies. Investors in these countries are expecting diminishing inflation adjusted returns. With the strengthening of the domestic currency, they are finding assets in emerging markets (EMs) cheaper from an investment perspective. India, among all other EMs has attracted the highest interest of global investors on account of a stable government and implementation of reforms such as the Goods and Services Tax (GST). Real estate being one of the most important investment assets has witnessed a surge in flow of foreign investments. With the sector undergoing a complete transformation at the back of the Real Estate (Regulation and Development) RERA Act 2016, focus on affordable housing and the real estate investment trust, the domestic investors have also joined the bandwagon.”
Accounting for more than 40% of the investments, American companies held the largest share of foreign investors followed by Canada (18%) and Singapore (17%) in 2016. Mumbai attracted the biggest pie of foreign investments in 2016, accounting for at least 39% of capital flow in the Indian realty followed by the rest of India, which accounted for a share of 32%. The share is significant primarily because the hot investment hubs of Gurugram and Noida were included in this segment. Bengaluru (11%) topped the chart among other metros followed by Chennai (10%) and Delhi (4%).The sector-wise analysis for investments in 2016 showed that foreign investors were mostly lured by office spaces and the retail sector.
Single window clearance
Slow clearances are one of the major problems faced by the real estate sector. Developers have opined that if the sector has to perform efficiently, regulatory issues must be addressed and approvals need to be streamlined. They have to take nearly 50 Non-Objection Certificates (NOCs) for one project and each NOC takes around 4-6 months. M. Venkaiah Naidu, Former Minister for Housing and Urban Development, has recognised the issue and stated that the central government is working on putting in place a single window time-bound clearance system for layout approvals and building permissions. This will enhance transparency in the sector. This system will streamline these tedious and time-consuming processes and residential prices could actually come down by 30 to 35%. Developers will be able to increase supply, which will not only help to address the country’s massive housing shortage, but also increase the government’s revenue collections through increased stamp duty and registrations. The system will not only benefit developers but also home buyers. There have been many complaints against developers for delayed project deliveries which can be redressed with this system is in place.
According to a KPMG report, the construction sector’s share in the Indian GDP has stayed constant between 7- 8% over the past five years. Due to the impact of demonetisation and construction delays, the sector remained sluggish during 2016 and is expected to decline from 3.9% in 2015–16 to 2.9% in 2016-17. The Indian real estate sector suffered a revenue loss of around Rs.22,600 crore because of decreasing residential sales in the fourth quarter of last year on account of demonetisation. The Mumbai market was the worst hit with a notional loss of Rs.9,100 crore followed by Bengaluru (Rs.4,800 crore) and NCR (Rs.3,700 crore). The notional loss to the various state governments on stamp duty collection has been in excess of Rs.1,200 crore during the last quarter of 2016.
The monthly average housing sales fell 40% during November-December period in the top nine cities including Gurugram, Noida, Mumbai, Pune, Bengaluru, Hyderabad, Chennai, Kolkata, and Ahmedabad as customers deferred their decision to buy homes, according to realty portal PropTiger.com.
PropTiger said in its latest report titled ‘Realty Decoded Q3 FY17’, “Before demonetisation, the monthly average residential sales and launches during July-October months were at around 19,000 units and 18,000 units, respectively, which were affected drastically on account of currency demonetisation. The monthly average sales and launches were reduced drastically during November-December months by 40% and 49% respectively.”
The third quarter started on a strong note with October showing a strong performance but November and December were deeply impacted by the demonetisation drive. October contributed about 50% of the sales in the quarter. Among cities, Gurugram, Noida and Ahmedabad showed a 30 to 40% decline in sales in the third quarter of 2016-17 over the previous quarter. Mumbai, Hyderabad, Bengaluru and Chennai witnessed around 20% fall in sales during the same period while Kolkata and Pune recorded the lowest levels of fall at 8% and 12% respectively.
Knight Frank sources informed BE, “After grappling with the short-term shocks of demonetisation, the already sluggish residential market had begun showing signs of normalcy around March. However, strong undercurrents in the runup to RERA crippled the market yet again. As a result developers’ focus veered from rolling out new projects to becoming RERA compliant. The impact was evident as new supply entering the market in the first half of 2017 dwindled by a staggering 41%. However, a healthy influx of ready-to-move-in houses ensured that the sales were not hit by the same extent. Although residential sales dropped by 11% as compared to the first half of 2016, it improved by the same margin over the demonetisation-induced subsequent half.”
The government’s thrust towards affordable housing seems to have rung well for developers. According to Knight Frank’s India Real Estate report mentioned earlier, the share of new houses in the less than `25 lakh price segment has been rising steadily. From accounting for just about 17% until the first half of 2016, it rose to 20% in the subsequent half. And for the January to June period the houses in this price bracket accounted for more than one-third (36%) of the launches. Similarly, the share of houses below `50 lakh has jumped from 52% to 71% during the same period.
All in all the residential market could take at least two more quarters to re-orient itself with the reforms and the newly rolled out Goods and Services Act. But these policy changes are likely to bear rich returns for the sector in the long run.
Under the revised government order, under-construction properties are taxed at 18%, which includes 9% SGST plus 9% CGST. The government has also allowed deduction of land value equivalent to one-third of the total amount charged by a developer thus making the effective tax rate as 12%.
Mayank Jalan, Managing Director, Urbana, said, “In the earlier tax system, there were a lot of different taxes. GST will subsume all these taxes into it. The construction of a complex building, civil structure, or a part thereof, intended for sale to a buyer, wholly or partly, is subject to 12 % tax with full input tax credit (ITC), subject to no refund in case of overflow of ITC. With the introduction of the GST, the total incidence of tax will increase from 5.5% to 12%. However, developers will be able to avail input credit on all the goods and services purchased and spent in the construction of the property. In the case of premium properties, while the basic construction cost may come down a little, the input tax credit being limited to 12% will not be sufficient to bring down the fresh tax liability.”
According to a report by Edelweiss Securities, the GST is expected to revive buyer and investor interest by bringing more transparency in taxation. Yashaswi Shroff, Director, Alcove Realty, said, “In the GST regime, the restrictions on credit utilisation have been eliminated, thus strengthening the credit chain in the system. As a result, the procurement chain will have increased credit availability. It is widely expected that GST would reduce the construction cost in the hands of the developers. The benefit of excess Input tax Credit (ITC) shall be passed on to the home buyers, which could lead to marginal changes in property prices.”
Shroff added, “Developers will be able to avail input tax credit, on all the goods and services purchased and spent in the construction of the property. As a result, the benefit will also be passed on to customers, reducing property cost and positively impacting customers. Apart from the Credit Linked Subsidy Scheme under the Pradhan Mantri Awas Yojana (PMAY), reduced home loan rates and the introduction of RERA will positively impact home buyers.”
Vikram Goel, CEO, HDFC Realty, said, “GST is broadly organising the market. Earlier the real estate market was fragmented. Previously anybody could think of becoming a developer. But with RERA and GST, it makes much more sense for them to align with a larger brand.”
With the Real Estate Regulatory Authority (RERA) in place, the real estate sector in India is recovering from its past problems of the lack of transparency and poor regulatory framework.
The Act has brought about a significant improvement in the sector by regulating the sector and protecting the buyers’ interest. Under the RERA rules, it is mandatory for the states and the Union Territories (UTs) to set up the authority, but so far, only 13 states and UTs have notified the rules, which include Uttar Pradesh, Gujarat, Odisha, Andhra Pradesh, Maharashtra, Madhya Pradesh, and Bihar. The implementation of the Real Estate (Regulation and Development) Act has provided stability with a completion certificate awarded to the developer at the end of the project and has also enabled buyers to enforce their rights and seek redressal of grievances.
According to M.Venkaiah Naidu, Former Minister for Housing and Urban Development, “The Real Estate Act coming into force after a nine year wait marks the beginning of a new era making buyer the king while developers benefit from the confidence of the king in the regulated environment.”
Talking about RERA Farook said, “RERA will have a very positive impact. Investors are looking at this act very positively. The sector is relevant for all orgainsed players, be it big or small. The significance of this Act is the imprisonment of a developer or a broker if he gives any misleading information and this changes the entire scenario of the game. This Act has been awaited for a very
As per industry data, real estate projects numbering around 2,349 to 4,488 were launched every year between 2011 and 2015 amounting to a total of 17,526 projects with investments of `13.70 lakh crore in 27 cities, including 15 state capitals. About ten lakh buyers invest every year in a house. Many of them get harassed financially and mentally by realtors, who delay in delivering the units and do not provide the promised amenities. RERA will protect these buyers. Officials from Knight Frank, told BE that the main objective of the RERA is to bring in transparency in the system and provide more information to the buyers.
Ravindra Pai, MD, also said that, “As of now, there is no real impact in that sense. Customers have been waiting to see what would be the outcome. It has mostly been on compliance perspective, getting the project registered, and clarifying things. Buyers will benefit tremendously going forward because of the transparency. All approvals and documents and everything are available online. Other issues were that a lot of developers would do re-launches even before approval, which was quite uncertain as how much time it would take for the approval and the buyers would suffer. Money divergent perspective was also there. At present, the market is being subdued but there is lot of things happening. Lot of small players will eventually disappear.”
Aniruddha De, who had booked a flat in Kolkata nearly three years ago, told BE, “We had booked a flat with one of the known developers of our locality. While booking we had made him an advance of one lakh rupees and he promised to hand over the flat within a year. But he delayed the project. Later on, we found out that the project got stalled due to severe land issues. We did not get our money back. Finally the project has got its approval but is still under construction. We hope that the RERA will protect buyers like us.” There are buyers who despite paying up-front for their properties have found projects getting delayed by five to ten years even, especially when these projects are part of township projects. A doctor who had bought a flat in one such project told BE, “Even when the company handed our flat after a delay of seven years, they did not provide a basic grocery store or medical store let alone the school, hospital, shopping mall, and hotel promised in the brochure. This place is situated at a distance from the city and transport is difficult. The road to the township is in a state of disrepair. Now they are charging a high rate of CAM (common maintenance area). Buyers need to be protected.”
Narasimha Swamy N., informed BE, “ The RERA would bring in mandatory disclosure of project details, including those of the promoter, project, land status, and clearances. This would increase the credibility of developers and would protect consumer rights as well. The next issue to resolve is the land reforms which would include ensuring clean land title are available. Another rule that homebuyers cheer is the escrow account provision. The RERA’s rule of depositing around 70% of funds from home buyers in a separate account will ensure sufficient funds for the projects to speed up. This would leave them with only 30% of the sales proceeds to
“I believe this Act is going to change the whole dynamics of real estate in coming future. It will give competitive advantage to builders who are efficient in planning and execution; their development cost won’t increase much and they can continue to sell at same price by taking a negligible hit on margin. Prima facie, it is evident that the sector will be more competitive, value offering, hassle-free and definitely consumer-focused. But execution is what will define the actual course of these changes,” Narasimha Swamy added.
However, as outlined in Knight Frank’s India Real Estate report (January-June, 2017), the Kolkata residential market is almost at a standstill, owing to the decrease in new launches, sales and due to the uncertainty regarding RERA. According to a report from PropEquity, a real estate data, research and analytics firm, housing sales stood at 28,472 units during October-December quarter in Gurugram, Noida, Mumbai, Kolkata, Hyderabad, Bengaluru, Pune and Chennai. However, the report added that the housing supply would pick up in coming quarters.
Revival of the sector
The government should decentralise the decision-making process and empower urban local bodies. The approval process should be streamlined by introducing single window clearance mechanism backed by technology. In order to reduce the cost of borrowing and to help clear the unsold inventory and support future demand, cuts in interest rates should be announced. The government should reconsider the building development norms such as low FAR/FSI, density norms etc. More funds should be allocated for the growth of the real estate and the Public Private Partnership (PPP) framework should be adopted. More and more states must be brought into the domain of revising their respective land acquisition laws by diluting some strict provisions and borrowing business-friendly covenants. Lately, states like Gujarat and Uttar Pradesh have amended their acts. Also digitisation of records and grading of developers would further improve transparency and accountability.
The government has come up with “Housing for all by 2022” mission or the Pradhan Mantri Awas Yojana (PMAY) in 2015 with the aim to provide housing to the people of India by 2022. The Ministry of Housing and Urban Poverty Alleviation has identified 2508 cities across 26 states for the implementation of the scheme. As of November 2016, the ministry has granted approval for the construction of 1.1 million houses with an outlay of Rs.620 billion.
The revival of this sector will help the economy as a whole. This sector needs to be prioritised.