Modi government’s philosophy that beleaguered real estate should grow on the strength of economy and not on largesse or quick fix solutions is reflected in the reform- driven two year-term of the government that has reformed and regulated real estate sector, putting it firmly on the path of long- term sustained growth.
The real estate fraternity had started warming up to Narendra Modi- led BJP in the run up to 2014 general elections, looking up to the saffron party as a saviour in the wake of the policy paralysis of UPA-2. And the party has not belied those expectations after coming to power. The real estate- friendly interim budget, presented by the NDA government within 3 months of gaining power in May, 2014, clearly reflected its concern and priority to stimulate real estate growth. In a landmark policy initiative, the budget addressed the long pending demand of liberalising FDI in real estate and construction sector. The FDI norms were relaxed for built up area and capitalisation, with a view to help developers, especially mid-size and small ones to have better access to FDI, in turn boosting affordable housing.
The relaxation of FDI norms had a salutary effect on the fund flows to the cash strapped real estate sector, with PE investments touching record 4.8 billion dollars in 2015. The government has further enhanced PE capability to tap foreign money by permitting foreign investment in Alternate Investment Funds and doing away with distinction between various kinds of foreign funding. In a far reaching complimentary policy initiative, the government has set the stage for making REITs operational by removing all hurdles like capital gains tax and dividend distribution tax. REITs that are new instruments of investment pooling, may well prove to be a boon for retail investors , ensuring safe and profitable investment and at the same time proving to be a lifeline for fund- starved developers.
Fully realizing that urbanisation significantly contributes to national GDP, with a UN study putting the contribution of existing urban areas to 60 percent of GDP, the government launched the ambitious mission to develop 100 smart cities with investment of Rs 7060 cr. And as infrastructure is key to urbanisation and economy, the government in line with its vision, gave top priority to infrastructure development. In its first full- fledged budget, investment hike of over Rs 70000 cr. for infrastructure and allocation of Rs 22000 cr. for housing and urban development was made. And in this year’s budget, a record allocation of Rs 2.31 lakh cr. was made for roads, highways and railways, besides establishing Rs 4000 cr. National Investment & Infrastructure Fund.
In line with its mission of ‘Housing For All’, the government’s focus has been on affordability. In order to bring prices of homes within the reach of masses, the government has been giving impetus to affordable/low cost housing by way of incentives to developers and home buyers. For this, a provision of Rs 4000 cr. was made to National Housing Bank, besides bringing housing for EWS and slum redevelopment under CSR. To provide fillip to affordable housing, 100 percent service tax exemption was given to developers undertaking affordable housing. Under the IT Act, they have also been allowed deduction from the gross income of an amount equivalent to 100 percent of profits.
Mortgage reforms undertaken by the government are also aimed at giving push to affordable housing. Interest subsidy of 6.5 percent is provided to EWS loans and corporate tax for FY18 for companies with below 5 cr. turnover, has been lowered to boost HFCs focusing on LIG/EWS housing. Besides effecting interest rate cuts amounting to 150 bps, the RBI has introduced Marginal Cost of Funds Based Lending Rate (MCLR) for faster transmission of rate cuts to home buyers. To provide further relief to property buyers , especially home buyers, the government undertook biggest reform through Real Estate Regulation Act (RERA), that ensures fair and transparent property transactions with effective redressal mechanism, thereby protecting the interests of property buyers and boosting the confidence of foreign investors.
The government’s reformist policy initiatives are largely aimed at increasing transparency in real estate transactions, the lack of which has been a major deterrent for foreign investors to invest in Indian real estate. The rampant use of black money, clouding transparency, had also been keeping foreign investors away. To check this menace and to boost investor sentiment, the government passed Benami Transaction Prohibition Bill, along with steps to check influx and circulation of black money. The government has been focusing on creating policy environment that’s predictable, transparent and fair for boosting the confidence of foreign investors.
Notwithstanding all these highs, there have been some lows also. As the government lacks adequate strength in Rajya Sabha, it has been unable to push through key reforms like GST Bill and Land Acquisition Bill. The government could not fix the Land Acquisition Act – LARR 2013 enacted by erstwhile UPA government that has made land acquisition more difficult, time consuming and expensive. Due to the opposition faced by the government, it has now given up on it and left it to the states to adopt their own land acquisition acts. However, with regard to GST Bill that seeks to bring in national value- added tax structure, bringing down prices, pushing up demand and kick starting investment cycle, the government looks determined to get it passed in the upcoming monsoon session of Parliament. The government has also not been fully successful in fast tracking project clearances with a view to ensure ease of doing business. It has however made systems online and transparent to speed up environmental clearances. It is also credited with enacting Bankruptcy Law, a vital piece of reform aimed at ease of doing business by fast tracking resolution of insolvency disputes. However, the government is yet to initiate Single- window mechanism to speed up project sanctions and check project delays- the biggest bane of real estate.
There is also a challenge for the central government to see that states effectively adopt RERA in the stipulated time frame. Real estate is currently passing through the transition phase and while commercial real estate has already recovered from slowdown, residential real estate is well on the path of recovery. And with all the right policy initiatives by the reform- oriented government, real estate is heading for a healthy and sustained growth.