Pakshal Sanghvi, director, Sanghvi Realty, expects pricing in the real estate sector to be impacted following GST and RERA becoming effective, and that it may take six to twelve months to pan out
The real estate sector is the second largest employer in the country after agriculture and ranks third among the 14 major sectors in terms of direct, indirect and induced effects in all sectors of the economy. The housing sector alone contributes 5-6% to the country’s Gross Domestic Product (GDP). India has huge potential to attract large foreign investments into real estate. In the coming years, the opportunities in the real estate sector will attract more global players to India and hence will help the industry to mature, become more transparent, improve management and adopt advanced construction techniques. GST and RERA will surely bring in the boost within the real estate sector through their progressive and diversified role.
The Indian real estate sector has been facing significant challenges in the past few years in terms of sales and overall growth. With a lot of measures, the sector was clearly pointing towards a slow and gradual, but sure recovery. Demonetisation brought a lot of confusion, uncertainty — and, most of all, rumor-mongering — especially when it came to the realty sector. No doubt, everyone was affected by this radical measure, and initially, all possible economic activities slowed down to a large extent.
This is not to say that the real estate sector has not been affected by the demonetisation move; however, it is important to understand where the pinch really lies, and where the silver lining is. Any misinformation in a sector that is largely sentiment-driven can lead to chaos. The secondary market got affected, considering the structure of the deals involved here. With the scarcity of cash, a large number of buyers went off the market and sellers could do little but wait. The rumored decline in the primary market was very far from reality, because of it consisting of ready-to-move homes and new projects which cater to end-users, whose primary sources of funding are banks and other financial institutions. Simply put, it is home loans which finance the purchase of such properties. So, this segment was effectively insulated from the currency ban. It was not expected to be affected, and in fact, was not — other than in terms of the initial confusion-induced decline in sentiment.
Above all else, these readings vouchsafe the faith that buyers have in developers with credible reputations. Real estate developers with transparent business practices have not been affected by demonetisation, and have instead witnessed sales growth. Talking about the current momentum, the impact of demonetisation has faded, definitely. The festive season beginning in September-end will witness unprecedented sales, with buyers sitting on the fence returning to the markets after a long time.
The real estate sector, which was earlier marred by non-transparency and multiple and confusing taxation, will become more organised and trustworthy, thus instilling confidence in the buyers. Customers who were earlier struggling with their complaints in consumer courts where judgments were quite delayed, can now approach RERA authorities for effective and efficient disposal of their grievances. Institutional investors also are now witnessing an increase in confidence due to the more effective regulator. The Act is bound to forge a symbiotic relationship between the discerning home buyers and genuine real estate developers. The Act will bring in increased transparency, increased liability of the realtor, increased security of buyer’s interest and money, increased discipline, and increased compliance.
Post demonetisation and RERA, there is an anticipation of a significant consolidation drive in the real estate sector that could result in a large number of unorganised players being wiped out. Pricing will be impacted with both GST and RERA becoming effective, but may take six to twelve months to pan out.
Talking about GST, a simple single rate tax structure of 12% for home-buyers is a welcome move along with a reduction in paperwork. GST will also help cut cash component in construction as products have to be sourced from registered vendors to get input tax credits. I am optimistic on the prices coming down marginally over a longer term.
Input Tax Credit is a game changer. Credits of input taxes paid at each stage of production or service delivery can be availed in the succeeding stages of value addition. This makes GST fundamentally a tax only on the value addition at each stage. To ensure that manufacturers, developers, and service providers pass on the benefit to the final customer, the government has included an anti-profiteering clause under Section 171 of the GST law. This makes it mandatory to pass on the benefits tax reduction due to input tax credit to the final customer. Hence both developers and buyers will be benefitted with Input Tax Credit under the GST regime.
India’s real estate is expected to attract interest from across the globe as real estate markets in many developed countries across the globe have slowed down. Earlier we have seen long term pension funds from Canada investing in the sector, and now we are seeing Chinese developers and funds actively looking for opportunities. China’s Fosun International plans to invest $1 billion through a realty private equity platform. Japan’s Mitsubishi Group is also expected to get active in real estate investments in India. With the change in the regulatory environment, many firms also want to get into a co-development module with the developers here or invest through the private equity route.