Real Estate industry seeks introduction of REIT in Budget 14-15

Indian real estate sector plays a vital role in the economy and development of countrys infrastructure base. It is one of the major labour-intensive sector after agriculture which contributes about 6.3 percent to Indias Gross Domestic Product (GDP). The sector is going through a phase of metamorphosis, from an unorganized sector towards a more organized one. The growth of real estate industry is attributed mainly to a large population base, rising income level and rapid urbanization. It has emerged as one of the profitable investment alternative for both domestic and foreign investors.

However, the industry is currently not in good shape owing to the slowdown in economy coupled with rise in interest rates and uncertainty in job prospects. The reasons for the generalized slowdown in most Indian cities are not hard to guess inflation, has decreased the purchasing power and financial confidence, while the RBI has also undergone a spate of hikes in interest rates. This obviously led to a steep rise in the EMIs that home loan borrowers had to bear. Property prices remained high in most cities, largely because developers were hit hard by the vastly increased costs of construction and debt.

At the same time, the potential for most salaried people in the country to switch to more lucrative jobs have dropped sharply because of the fallout of the economic crisis in the developed countries. All this combined to bring about a sort of stalemate between developers and property buyers in cities where inventory as well as property rates remained high most notably Mumbai, Bangalore and Delhi.

Budget Expectation:

With the Union Budget 14-15 round the corner, the real estate industrys hopes are building up. While the introduction of real estate investment trusts (REITs) tops their wish-list, builders are also hoping for rest of these measures from the new government in their maiden budget:

Broaden the scope of the interest rate subsidy for loans towards affordable housing:

The industry wants the new government to amplify and broaden the interest rate subsidy for loans towards affordable housing.

Single Window Clearance:

Presently, the approval process is very lengthy and takes around 1.5 years to 2 years. Hence, the industry wants approval processes (single window clearance) to be simplified as the cost of delay in approval, adds further to customers spending by 25% to 40%.

Introduction of real estate investment trusts (REIT):

Real estate industry wants the budget document to support REIT structure, which could be game changer for industry as this is expected to attract global investments and bring transparency into the sector.

Reduce High Cost of Borrowing:

Presently, interest rates charged by the banks to developers and home buyers are at an all-time peak, hence the industry has expressed the need to bring down the cost of borrowing. A reduction in the base rate (rate below which no banks can lend to the corporates or industries) is necessary to help banks lower their lending rates.

Make Provisions For Special Residential Zones:

The industry wants government to seriously consider enacting provisions for Special Residential Zones (SRZs) to incentivise the growth of housing stock at targeted locations.

Increase Infrastructure Allocations:

The industry seeks budget to increase infrastructure spending in urban areas with a view to unlock the value of neglected and hidden land assets in suburban and peripheral districts, which will enable more holistic growth for the real estate markets in over-burdened metros and allow the demand for housing to spread over a larger canvas. The increased demand in peripheral locations in which infrastructure has made the real estate markets there more viable will also help bring down prices in the central areas.

Provide Real Estate With Industry Status:

The countrys real estate industry contributes approximately 5% to the GDP. Moreover, the real estate sector has grown significantly over the past decade, with tangible transformation in quality and business standards. However, due to lack of regulations and effective policies, the sector is experiencing many challenges on its growth path. Hence, the industry wants the government, in this budget, to consider the fact that the Indian real estate sector generates countless jobs across its various verticals. By granting it industry status, the Government would enable the sector to access debt lending at better interest rates and reduced collateral values.

Take Steps To Provide Better Clarity In Land Titles:

This is another policy hurdle, which the industry wants the Government to tackle. Across the country, land needs the benefit of legally documented ownership assigned to the right persons or entities. The lack of clarity on land titles shakes the confidence of investors, and is a serious hindrance to overall growth. Hence, the industry wishes budget to make specific allocations towards regularizing and digitalizing land records.

Provide More Adequate Sources of Finance:

Since the sector is not under the umbrella of any specific regulatory authority, financing has been an issue over a number of years of credit slowdown. Hence, the industry desperately seeks liberalisation of finance for the real estate sector.

Among other things:

The industry also is seeking liberalized FDI in real estate so the smaller private equities can play a major role.

Further, with most of corporate India pushing for the introduction of goods and services tax, real estate firms are no exception.

After showing a sluggish growth in last couple of years, Indian realty sector is showing signs of recovery and will be a favoured destination for global investors on expectation of a strong revival for the industry, after the formation of a stable government. Earlier in FY13, the real estate sector growth remained fragile as the industry was facing headwinds such as slow rate of approvals, regulatory changes in key micro markets such as Mumbai (pertaining to development control rules), inflation impacting cost structure, declining demand due to increasing prices, etc. However, the trend seems to have bottomed out and economy is now improving, showing signs of growth with fiscal deficit in check and on course of further fall. Increasing migration to cities and urbanization along with interest from buyers to invest in real estate market will continue to be the prime demand drivers for realty sector.

Further, budget 2014-15 will hold the key for the sector amidst expectations that the government will take steps towards providing the long awaited industry status to the real estate sector and provide boost to low cost housing in the final Union Budget 2014-15 to be unveiled on 10 July 2014. Additionally, the realty players are also looking at budget as a tool to tackle inflation issue, so that home sales can pick up. The major concern surrounding the sector is the affordability of housing for home seekers and profitability of making the house available for developers and builders. Therefore, the industry is widely pinning hopes that government would take necessary measures to reduce inflation.

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