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Looking into the Crystal Ball: How RERA and GST will affect the Destiny of Real Estate Developers

Looking Into The Crystal Ball: How RERA And GST Will Affect The Destiny Of Real Estate Developers

India’s real estate sector has rarely been out of the news lately, and for good reason. Demonetisation, RERA, Infrastructure Status and now GST have all left their mark. These regulatory changes are transforming the way we buy and sell our homes, leaving developers and homebuyers alike uncertain how best to navigate this changed business environment.

The proliferation of initiatives we have seen this year reflect the fact that the affordable housing challenge we face is finally receiving the attention it deserves from politicians and policymakers. Currently, there is a shortage of nearly 20 million homes across India. By 2030, 590 million Indians will live in cities, necessitating a further $2.1 trillion of capital investment in urban infrastructure. Without addressing this unprecedented urban housing shortage, growth will stifle, inequality will rise and social cohesion will suffer.

Encapsulated in Prime Minister Narendra Modi’s initiative to achieve Housing for All by 2022, this new regulatory framework represents an attempt to combat India’s affordable housing crisis. While this new regulatory framework has been positioned as a consumer-friendly set of policies, the changes will inevitably impact upon real estate developers. Deciding whether the rise of housing up the country’s development agenda is positive or negative for real estate developers, however, remains the subject of much debate.

Let’s start with demonetisation, which sent shockwaves through the Indian economy back in November 2016. As a sector, traditionally reliant on cash transactions, the real estate industry was particularly affected by the sudden withdrawal of certain bank notes. However, although consumers and investors held off transactions during the initial economic turbulence caused by demonetisation, the policy may yet provide a boost to the affordable housing sector in the long-term. This is because, prior to demonetisation, large developers were more focused on offering solutions in the premium segment of the market, since high demand was expected in this area.

However, the luxury and high-end segments of residential real estate have been hit the hardest by the recent change, as legal financing channels have accounted for only a small part of all transactions in this space. Instead, it is expected that there will be a decrease in demand from big ticket purchases mostly led by investors, to purchases of affordable homes by end-use customers through official channels, who now constitute almost 90% of aspiring home buyers. As a result of this, construction is increasingly shifting to the affordable housing segment.

Turning to RERA, rewarding transparency appears to be a theme running through the government’s recent policy changes. RERA’s primary goal is to address issues that have tarnished the industry with a bad name, including delays, price and construction quality. For example, the Act obliges the developer to keep 70% of project funds in a dedicated bank account to ensure that developers are not able to invest in numerous new projects with the proceeds of the booking money from the first project, thus delaying completion and handover to consumers. Concurrently, if the project is delayed, the developer is liable to pay the consumer interest at the same rate as that which the consumer is paying the bank.

For trustworthy developers that already deliver projects responsibility, safely and on time, these measures are nothing to fear. In fact, by curbing the actions of the minority of developers that currently do not sign up to responsible business practice, the act simply promises to level the playing field.

Such increase transparency will not only increase the demand from homebuyers who will be able to put greater trust in developers, but will also open up newer, and cheaper, avenues of finance as the industry’s credibility returns. In a market that has seen housing sales fall by 1% across eight major cities over the last quarter, such increased accountability should be welcomed by developers.

Like all new legislation, however, the act is not perfect. Many developers have raised the issue that government bodies are not made accountable for delays they may cause bynot issuing clearances on time, for instance, which then may impact upon thedeveloper’s ability to deliver a project on schedule. Provisions need to be in place to bring accountability to all stakeholders in the construction process, not just developers, if the industry is to transform its reputation fully.

RERA represents a positive step in restoring accountability, transparency and credibility to India’s real estate sector. For the majority of developers that have always conducted business in a responsible manner, it simply means business-as-usual.

Additionally, after a long wait, the government finally awarded infrastructure status to the long-neglected sector of affordable housing. By ensuring easier access to institutional credit, this decision has helped to reduce developers’ cost of borrowing for affordable projects, savings that in turn have been passed on to homeowners.

Alongside this supply-side incentive, the government’s PMAY scheme, which provides a credit linked subsidy to home buyers purchasing residences below 60sqm, has significantly reduced the costs of buying a house and expanded the possibility of homeownership to a greater number of families. With demand for affordable housing now set to increase by a further 25% in the coming years, PMAY has decisively contributed to the growth of this market segment.

Finally, the latest addition to the regulatory landscape, the Good and Service Tax (GST), promises to shock the real estate sector yet again. Described by the Economic Times as “the most revolutionary tax related reform to be seen in India”, the GST aims to simplify the current system of taxation.

Replacing the current complicated multi-staged tax structure, in which different taxes are levied by state and union governments separately, with a federal tax system that will create a single market in India; the benefits of this policy change for the economy as a whole are evident. Indeed, it is predicted that, over time, the new system will add between 2-2.5% to annual GDP. Lower priced goods, increased exports and an overall thriving economy will undoubtedly increase demand into the domestic housing market, as more families are able to save up to own their own home.

While the benefits to the economy as a whole will inevitably have favourable impacts on the real estate sector, the direct impact of the GST on the industry are less certain at this time. The final tax rate has not yet been confirmed and the effects of any change will only be felt in 2-3 years time. While many predict that GST will not increase the overall tax burden on the sector, the exclusion of stamp duty and other relative duties under GST has disappointed many industry analysts. It is simply too early to draw conclusions either way.

What is certain, however, is that the residential real estate market cannot be reduced to tax rates. Consumer sentiment is affected by a range of issues, of which the recent policies designed to restore a relationship of trust between developers and homebuyers should not be underestimated.

In this time of uncertainty, what is clear is that the new world of real estate we find ourselves in is increasingly transparent. The future of real estate is one in which the virtues of legitimacy and trustworthiness will finally pay off.

By: Mr. Rahul Nahar, Founder, Xrbia Developers Ltd.

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