Shyamal Banerjee/Mint
Shyamal Banerjee/Mint

Time for real estate sector to aim for speedy execution

The government has initiated measures essential to revive demand and sales

The first hundred days of any government in power might be too short a time frame to judge success or failure, but it is long enough to assess the direction of policies the government is rooting for. From this point of view, the real estate industry has reasons to be optimistic. The annual budget itself was an indicator that the government wants to drive growth by investing in infrastructure and housing, and that these sectors are a part of its core game plan to boost economic growth. In the past decade, real estate has not found as much mention in a budget speech as it did this year. Issues of processes, funding and demand remain, but the budget has been able to ring in a sentiment of hope and optimism.

The government’s fiscal deficit target for financial years 2015 and 2016 in itself should provide confidence to all stakeholders. The finance minister also mentioned bringing in the Goods and Services Tax later this year, which has been a long pending reform, to rationalize taxes on products and services. Although no specific timeline was set, such reforms will reinvigorate the economy.

Specifically for the real estate sector, the government has initiated measures to boost both capital inflow and household savings, which are essential to revive demand and sales. Reduction in the area and minimum capitalization norms for foreign direct investment (FDI), introduction of real estate investment trusts (REITs) and corresponding tax benefits and increasing tax benefits for consumers and home loan owners were the three main stimuli. Measures such as raising tax exemption limit from 2 lakh to 2.5 lakh help increase household savings. Additionally, the limit on home loan interest has been increased from 1.5 lakh to 2 lakh. Increased savings coupled with an increased tax benefit will go a long way in motivating homebuyers who have been sitting on the fence for a few years.

On the supply side, taxation of REIT investments has been clarified. Products such as REITs will open channels for commercial as well as infrastructure sectors.

While tacking capital inflow avenues, the government also addressed the affordable housing sector. If a project commits 30% to affordable housing, the minimum capitalization and minimum area criteria (of FDI) will not be applicable. This will provide a serious boost to affordable housing as it opens up funding to developers, who typically find affordable housing projects unviable. Additionally, an allocation of 4,000 crore has also been made to the National Housing Bank to build affordable homes.

The finance minister also mentioned his commitment to revive special economic zones and announced plans for the development of 20 new industrial clusters; the role of such initiatives can play a pivotal role in energizing the export sector.

The government promised 100 new smart cities and it has committed 7,060 crore initially to meet its target. Formation of such cities will mobilize employment, development and create new real estate markets. The first step towards this was perhaps the prime minister inking a memorandum of understanding with Japan to assist in the transformation of Varanasi into a smart heritage city on the lines of Kyoto. Besides this, Japan has committed to invest $33.6 billion in infrastructure projects in India over a period of five years.

Moreover, after six years in-the-making (the first draft of the guidelines were released in 2008), finally, there was positive regulations for REITs. Organized retail participation in real estate is an exciting prospect, especially at a time when retail investors are looking at new opportunities to invest which is away from the stock markets.

What the government has successfully projected in its first few days of functioning is that it is committed to inclusive growth through structural adjustments in the economy that involve both capacity creation and investments. The focus seems to be clearing bottlenecks and expediting decision making. So far, the government has not brought in watershed policies. For instance, the discussions in Japan regarding the Mumbai-Delhi and Chennai-Bangalore industrial corridors date back to 2010. However, the Prime Minister’s visit has injected the hope that such projects will now see the light of day.

This strategy of speedy execution is what India needs. The real estate industry especially bears the stigma of behind-schedule execution. With the government’s tonal push to expedite permissions and lean governance, the time has come for developers to build efficiencies so that projects are completed on time. Through its dialogue and stated positions on development and execution, the government has successfully lifted business sentiment and confidence; for fundamental policies and numbers to increase, there will be a laggard impact and just hundred days are not enough.

Sanjay Dutt is executive managing director, Cushman & Wakefield.

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