The company’s Woodview Residences project in Gurgaon, Haryana.
Photo: www.lotusgreens.in
P. Sahel
Vice Chairman
Lotus Greens Developers Pvt. Ltd

A series of positive policy pronouncements could finally lead to an upswing in the real estate sector this year, writes P. Sahel, Vice Chairman, Lotus Greens Developers Pvt. Ltd, which has delivered 14 million sq. ft of real estate spaces, with a current land bank of 925 acres. The Noida-based real estate company has targeted delivery of homes to 12,000 families in the next three years.

The year 2015 has opened on an optimistic note for Indian industry, including the real estate sector. The feeling of buoyancy has been prevalent ever since the Narendra Modi-led government assumed power in May 2014. Over the next few months, a series of macro announcements and policy promulgations stoked expectations that the promised ‘Achche Din’ would be finally unfolding.

The announcements include providing affordable homes for all citizens by 2022, building 100 Smart Cities and ensuring infrastructure development throughout the country. The policy pronouncements include relaxation of FDI (foreign direct investment) norms, dropping of stringent provisions in the Land Acquisition Act, eased CRZ (coastal regulation zone) rules and tweaked tax norms for REITs (Real Estate Investment Trusts), among a slew of other beneficial measures meant to boost real estate development.

While the July 10, 2014, Union Budget lacked big bang measures of any kind, this was largely due to the fact that Finance Minister Arun Jaitley had barely 45 days to prepare the budget. But there is all-round anticipation that the 2015-16 Budget due to be presented this month will tap into the latest opportunity.

Reforms agenda
To begin with, there are robust indications the government may tweak tax regulations so that REITs are a more attractive proposition for stock exchange listing, which will boost investments in realty. For instance, the three-year lock-in period for REITs investments to avail capital gains tax exemptions may be revised to put them on par with listed securities, which are presently exempt from capital gains tax after a year. As per official sources, such a revision will permit retail and large investors to invest in realty projects ensuring a definite revenue stream through REITs.

Additionally, there is the possibility that the finance minister may make REITs fully exempt from MAT (minimum alternate tax), which is applicable to all companies. Analysts estimate that if REITs have minimal tax liabilities they possess the potential to attract about $20 billion investments in a few years.

The government’s determination to push through its reforms agenda is clear from the fact it used the Ordinance route to clear reforms stalled in the Rajya Sabha. This is how changes were made in the Land Acquisition Act, whereby cumbersome clauses on rehabilitation, resettlement and consent were amended or scrapped. Till these norms were in force, it was virtually impossible to purchase land speedily and land acquisitions by industry had almost ground to a halt. Changes in the Land Acquisition Act are bound to spur development across Indian industry in general and real estate in particular because land is the core component for development of any kind.

Another boost for the realty industry is the relaxation of FDI norms in construction, which is expected not only to give impetus to the development of affordable homes but also the Smart Cities’ drive of the government. Customers stand to benefit immensely because the availability of FDI for developers is bound to greatly reduce the cost of funds due to the cheaper capital. Many end-users may finally be in a position to purchase their dream homes due to lower property prices.

The other relaxed FDI norms include the minimum built-up area being reduced to 20,000 square metres from 50,000 sq. m, while capital requirements have been lowered to $5 million from the earlier $10 million. The minimum 10-hectare rule for serviced-housing plots also stands suspended.

The three-year lock-in clause applicable for FDI in real estate has been relaxed for investment in low-cost affordable housing projects. Removal of the lock-in cap will ensure faster turnaround times and spur smaller projects too backed by better liquidity. Joint ventures between Indian and overseas entities for development of various projects will also increase, boosting transparency and leading to better project management via the adoption of best-in-class practices. Along with reduced delays, these benefits will trigger lower prices and improved quality standards.

Additional measures
In coastal cities such as Mumbai, relaxation in CRZ rules will be a big boost for further development. For a landlocked city with horizontal growth being precluded, the reduction in restrictions from 500 metres of the bay area to 100 metres can ensure additional development in many areas. Apart from more land being available for development, developers will be permitted to avail of additional FSI (floor space index). In a city where property rates have reached stratospheric proportions, the extra land supply should lead to some stability in prices, if not a reduction in rates.

While the above factors sum up the impact of measures with specific regard to the realty sector, there is the overarching economic scenario poised to boost sentiment across industries, including real estate. With India’s economy emerging from a few years’ stagnation, GDP growth for the current fiscal is estimated to be 5.5 per cent, compared to 4.7 per cent in the preceding financial year. Higher GDP growth denotes more jobs across industries. In such a scenario, there is bound to be more hiring across sectors, which means brighter job prospects and better incomes for salaried persons. When industries and employees do well, this translates into better sales across all segments, real estate included.

The other factor that could truly spur sales in real estate is lower interest rates. With RBI Governor Raghuram Rajan focussed on combating inflation, calls for lower interest rates were put aside the whole of last year. But in the past six months, inflation has fallen to record lows of recent years. In fact, inflation has moderated to lower than the targets set by RBI. This apart, manufacturing growth has been decelerating in recent months, leading to a chorus of calls from various stakeholders for an interest rate cut in order to spur manufacturing and growth. At this juncture, there is every indication the RBI may cut interest rates in the first quarter of 2015.

Should this happen finally, coupled with the previous positive policy pronouncements and an industry-friendly 2015-16 Budget, the real estate sector may begin an up cycle that could continue for some years to come. The first quarter of 2015 should make the situation clear.

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