JOIN USRealty in a reboot mode
The real estate sector has experienced a sea change in its tax, regulatory and business environment recently. The implementation of demonetisation, Real Estate and Regulation Act (RERA) and Goods and Services Tax (GST), within a short span of each other, has created short-term problems in the economy. However, in the long term, the amalgamation of these reforms will lead to more credibility and transparency that will boost the investor’s confidence.
Key reforms
To begin with, demonetisation posed a challenge to developers, especially in upcoming Tier II & III cities, where cash transactions were the norm, thereby causing a dip in sales. While this exercise shook up the older ways of working, it did not strike self-governing developers with the right products targeted at the working masses, where transactions were broadly financed through legal channels of banks and housing finance institutions providing home loans to buyers.
While the economy was trying to pull itself out of the high currency crunch induced by demonetisation, confusion over implementation of RERA and the GST caused widespread disruption again. While for the buyers, RERA safeguards their interests through accountability, security, and transparency through a time-bound redressal mechanism, it does not address the concerns of the developers, thereby not providing a level playing field for all the stakeholders. Also, in an attempt to protect consumers, it has come down heavily on developers by including criminal penalties.
Another forward-looking tax reform GST intends to bring uniformity in tax structure. However it is unlikely that it would have any impact on property prices.
Here are some trends, which have evolved recently and will shape the Indian real estate sector this year:
Global capital inflow
Apart from this ongoing transformation, Indian real estate is witnessing a robust rise in investment inflow from both foreign and domestic institutional investors. According to syndicated reports, the Indian property market has received $3.15 billion from various investors in the first half of the current year. Increased consolidation and transparency along with the launch of REITs (Real Estate Investment Trusts) will act as the perfect catalyst for attracting more investments in the future.
Consolidation on the cards
Additionally for the real estate sector, the above policies will lead to consolidation over the next few years. Larger players will peak in strength and smaller players will be forced to exit due to increase in compliance cost. There will also be a surge in joint developments as many players will find it difficult to comply with the recent stringent rules of RERA and will merge with more established developers. Only credible developers who conduct their business with transparency will survive in the future. Hence, the overcrowded real estate sector is going to become a lot leaner and meaner.
Business model revamp
For the first time since 2008, the number of residential apartments sold in the recent past were more than the new units launched, as the developers were adjusting to the new regulatory changes. However, decrease in unsold inventory is a good sign, and indicates that developers are concentrating on speedy execution of projects.
With traditional cash flows during a project’s life cycle undergoing change because of compliance and evolved policy framework, developers will need to alter their business models too. Consumer activism, which has already been making news in recent times, will increase in distressed ongoing projects. As the new paradigm emerges, it is clear that developers need to be highly compliant, transparent and extremely well capitalised.
Title insurance
A form of indemnity insurance, which insures against financial loss from claims in title to real property, title insurance is definitely a concept that needs to be implemented. Under the regulations of RERA, the developer has to provide a written affidavit to the buyer stating that the legal title to the land, on which the construction is planned, contains legitimate documents of ownership.
This ensures that the land on which the project is proposed will not be faced with delays in construction and delivery due to title disputes. This will lead to renewed confidence among buyers and will definitely impact the real estate market favourably. The availability of title insurance products will also boost private equity investment in Indian real estate since most of the institutions are very particular about clear titles.
However, we must remember that deregulation will be the key to the success of various government initiatives. The approval process remains a major impediment to real estate development in India. We are ranked at 185 out of 187 countries by the World Band for Ease of obtaining Construction Permits. This effectively means that we are in the same club as war-torn countries, where institutions have collapsed and offices which accord approval have been bombed. The government must look at addressing the shortcomings plaguing the real estate sector at the earliest.
For instance, all land titles in India are presumptive and with the present pace of reform, it will take 20 to 30 years to make land title insurance possible in India. This needs to be done on a priority basis if the government wants to ensure success of its housing policies.
With the implementation of several policy reforms, the fundamentals for the country remain strong. For now, all the landmark developments unleashed by the Government might wreak momentary upheaval owing to teething issues on its implementation, and prove to be a hurdle till our economy gets accustomed to it. However, these reforms will surely be the game changer and we see the next few years as the most defining ones for Indian Real Estate.
(The author is chairman & MD, House of Hiranandani.)