Current scenario of the industry. Trends and key challenges
The Indian real estate industry has been under stress for over the past year. Real estate development is a highly capital intensive business and for the most part, the residential segment is funded through customer sales proceeds. Developers therefore do their budgeting with this assumption and therefore, for the most part, finance costs on construction of the project are not factored in the proforma profit calculations. As a result, when sales are slow as they have been, developers (who have access to construction finance) are forced to borrow and the interest costs eat into profitability.
This gets further compounded when construction costs rise more than the increases in the sale prices of the apartments. This is the scenario the real estate industry has found itself in over the last year. Costs are up, sales are down. This has led to stress for the real estate developers.
In 2009, in spite of the continuing negative sentiment based on the global meltdown, the UPA re-election led to an instant impact to the stock and real estate markets. This time however, even though the mandate has been far more decisive, the real estate segment has not seen the turn in customer sentiment and purchase. I believe this is because people are waiting to actually see the benefits to their pockets of the “ache din” promise by the government.
Once this happens, the existing need for homes will translate into demand.
Wish list for the real estate industry from Budget 2015:
On the back ground of a negative sentiment, the government must take definitive steps to deliver on its promise of “ache din”. Today’s citizen lives in a world of instant gratification. People do not have the patience to wait for the structural reforms to trickle down to them (which it eventually will). The finance minister therefore needs to take steps to now provide citizens with clear benefits.
The Governor of the RBI has already reduced rates by 25 bps. This however, is not adequate to jumpstart the real estate sector. We need out of the box bold decisive moves – an example of this could be to offer single home buyers an extra 100% deduction of the interest they pay for their homes for a period of 5 years. The effective interest rate for customers works out to 7% and the revenue loss for the exchequer on account of this additional deduction will be more than offset by the revenue gain on account of all other taxes on the home.
Our expectations are therefore very high – the government must take clear and unequivocal steps that affect the pockets of the average citizens.
Budget Wish list:
1. Increase deductions towards rental income to incentivize and boost rental housing in India
2. Disallow long term gains on sale of property if TDS is not done at the time of purchase. Increase compliance
3. Reintroduce the NDAs provision of 80-IB(10) – Tax incentive to develop housing projects with stringent provisions. This will result in more supply and lower prices
4. Modify registration act – deny registration of property if TDS Certificate and Completion Certificate are not produced
5. Permit 5 year 200% interest deduction for single home buyers. Net 7 % interest boost for the industry and revenue
6. Introduce special residential zones like SEZs to boost low cost home supply. Use existing SEZ processes
Impact of policy reforms on the real estate industry
Policy reforms that improve approval time lines, single window clearance, elimination of discretionary powers in the hands of the officials (leading to corruption) will help improve delivery and lower holding costs for the industry.
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