This was a year of reform for the real estate sector
Apart from introduction of RERA and Benami Act, the real estate sector also braved GST and demonetization—all positives for the long term, but it hit the segment hard in the near term
Most stakeholders in the real estate sector stayed muted during 2017. Very few homebuyers made the buy decision and developers, on the whole, restrained from launching new projects.
Though the real estate regulator came into existence this year, it has moved at snail’s pace in making its impact felt on the ground. The regulators’ website is recognised as one of the major tools that would bring transparency in the sector and help homebuyers immensely in their search for a house of their choice. While the Act has been promulgated, only the Maharashtra regulator has a fully functional website that the homebuyers can use.
While affordable housing was in the news because of all the incentives that the government announced to promote it, this segment did not witness any appreciable rise in supply or increase of activity from the developers. And the way things have gone this year for the real estate sector, it does not seem that 2018 will be very different from 2017 in this regard.
What happened in 2017
The year started on the back of many policy changes that happened in 2016. Some of these are: passing of Benami Transactions (Prohibition) Amendment Act, 2016, Real Estate (regulation and development) Act (RERA), 2016 and demonetization.
All these policies had an impact on the real estate sector in 2017. “(It) was the year of policy disruptions, starting from demonetization to RERA and Goods and Services Tax (GST),” said Amit Oberoi, national director, knowledge systems, Colliers International India, a real estate services organization.
Sales transactions were at a standstill in the early part of the year due to demonetization. This was followed by introduction of RERA, which is good for the market in the long run but in its immediate aftermath, the real estate developers ended up launching very few new projects as they were trying to come to terms with the new regulations, Oberoi added.
Just as the realty sector was coming to terms with last year’s policy changes, the new tax regime of GST kicked in from 1 July 2017. This too had a dampening impact on real estate transactions.
The new tax regime imposed 12% tax on all under-construction properties. Its impact on the cost of houses was seen to be higher than the taxes that were in force during the pre-GST regime.
“The advent of GST has not helped the cause of reducing real estate prices. A flat 12% GST only increased the burden on buyers’ pockets. In the absence of clarity about GST calculations, developers have not been passing on any input credit to purchasers,” said Tejas Patil, head of real estate services, Sanctum Wealth Management Pvt. Ltd.
RERA was designed to give buyers more security and the confidence to operate in the real estate market by making the developers and builders more accountable. Mandatory registration of under-construction and new projects with RERA and the application of GST on under-construction houses was a step in this direction. Many stakeholders believe that while this was a good step, its immediate impact was that the transactions almost dried out in new and under-construction projects.
Though RERA is expected to improve homebuyer sentiment and confidence in the sector, this is not likely to happen in the near future. “Homebuyers are buoyed by the introduction of RERA. It now gives them a viable redressal platform, and their interests are well represented in terms of engagements between buyers and sellers. The onus is now on state governments to implement the regulations. It is not right to expect a turn-around in market sentiment based on a regulatory framework. The market sentiment will turn positive as we see improvement in the economy. The real estate demand is intrinsically linked to the economy,” said Oberoi.
What to expect in 2018
Most developers will focus on completing their existing projects. New projects launches, especially in mid-level and luxury segment, are expected to remain subdued during 2018.
The regulatory framework for real estate is no longer a matter of speculation. All developers now know what is expected of them and what the new rules of the game are. Developers who find it difficult to adhere to these regulatory requirements, or are facing financial problems because of low sales, may have to look at other solutions like consolidation of projects of their business. “Local companies, in the current fragmented market situation, will opt for consolidation with large developers,” said Patil.
Agreed Oberoi: “In 2018, we will likely see takeover of projects stuck in insolvency proceedings.”
However, consolidation could be the last attempt of businesses trying to restructure their functioning. There are several other options for developers, such as a deeper foray into affordable housing. Considering that the government has offered several incentives to the realty sector and the developers to promote affordable housing—along with the substantial pent-up demand for houses in this category—we may see more developers trying to profit from this opportunity.
“It is a clear trend that is seen emerging with many developers announcing new launches in the low-income affordable housing segment. More developers will look to cash-in on the government support as well as the under-penetrated economically weaker sections of the society,” said Patil. Though most real estate experts are of the view that both demand and transactions are picking up, they do not expect any immediate rise in property prices. “For select projects in specific micro markets, and with respectable developers, prices are expected to be steady with an upward bias,” said Patil. Besides that, experts believe that demand will be driven by end users, and they do not see a return of investors in the sector. “Retail investors will still stay away from the sector till prices start climbing up and (one can) expect prices to remain subdued in the first half of the year,” said Oberoi.
If you are planning to buy a property, consider completed projects. In many locations you can find properties even in completed projects. If you are still house-hunting, make a list of projects that are complete in your preferred locality. Shortlist a few based on your requirement such as amenities or quality of construction. If you have access to financing for buying a house, this is a good time to buy because in many completed projects, the developers are looking to get rid of their inventory. This could also be because, according to media reports, the government is planning to tax unsold apartments that are lying with developers for more than 1 year.
WHAT WILL BE THE GST IF YOU BUY HOUSE
18%: Goods and Services Tax (GST) rate on purchase of real estate (both residential and commercial)
12%: The effective rate of GST that you will have to pay if you buy an under-construction property since only two-third of the property value is considered for GST; one third is considered cost of land
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