Real Estate Sector - The government’s next round of reforms is likely to be focused on real estate as the industry has failed to recover from the twin shocks of demonetization and GST.

In order to boost the economic growth that has slowed to a six a year low, the Indian government is working closely with RBI to address real estate sector’s problems.

On an event marking the silver jubilee celebration of the National Stock Exchange of India, the finance ministry stated that the government’s next round of reforms is likely to be focused on real estate.

Viability of the Sector: What data reflected?

• Private sector lenders have the largest direct exposure to the commercial real estate sector and would be susceptible to “asset-quality difficulties" if the sector continues to struggle.

• According to a report, around $10 billion of development loans are coming up for repayment in the first half of 2020. This may impact mainstream banks that have lent money to shadow lenders or invested in their bonds. 

• A study reported that the outlook for the country’s real estate sector in the September quarter has fallen to the level that was recorded during the uncertain times before general elections in 2014.

• A report also shows that the number of property developers reporting bankruptcy has doubled during the past nine months, which has added to the woes of NBFCs.

• As of 30 June, 421 developers are under the corporate insolvency resolution process, up from 209 as of September-end of last year.

 

Reason for the Real-estate Sluggishness:

The real estate in India is currently in the midst of fairy challenging times. In the past three years, the sector has witnessed a few noticeable macro shifts.

• Ban on high-value currency notes: The crunch of high currency notes from the market resulted in piling inventory, stagnant-to-falling property prices and dwindling funding for developers.

• Introduction of GST:  Another reason for which the real estate industry has failed to recover from the shocks of the introduction of goods and services tax that was introduced in July 2016.

• Real Estate Regulatory Authority:  RERA that was passed by the center in 2016 and most states in 2017 put a lot of onus on builders which further halted new offerings in the residential space.

• Demand-Supply Gap: The demand-supply gap has been an issue with most of the key real estate markets. However, the big funding challenge came in India in 2018 after the IL&FS crisis.

Issues and Challenges in Real Estate Sector:

There are positive and negative things taking place in the real estate sector. The issues faced by India’s real estate sector are summarized broadly in the below section: 

• Issues Faced by Customers: The purchase of any residential real estate involves three parties- the buyer, the seller, and the lender. Because of the inherent tendency of the three parties to pull things in different directions, things get pretty complex. 

• Projects Delay:  Delay in projects due to various reasons like court intervention in land issues, finance, approval etc have aggravated the slowdown of the sector. The consumer had to suffer because the customer is paying rent where resides and paying EMI for a home loan at the same time due to the delay of projects.

• Fraudulent Activity of the Developer: Fraudulent activity by the dis-honest developers has also dismantled the productivity of the sector.

• Misleading Advertisement: Fraudulent advertisement to sell a product is quite popular and frequent in real estate. The main reason for flourishing fraudulent methods is the absence of any regulator and standard guidelines.

• Un-ethical Interest Issues: Most of the builders pay only 2 to 3% interest in case of default from their side but when customers default (like refuses to buy) then they have to pay around 16 to 18% which is unfair.

Challenges Faced by Real-Estate Industry:

 A number of issues continue to plague India's real estate market-

• Procedural Difficulties: There are almost 50 approvals or more need to be taken for starting a real estate project and further these approvals are required from different govt departments or authorities. 

• Lack of clear land titles: The land titles are not clear because of poor record-keeping and division of land in many parts till independence. The slow pace of modernization of land records is further aggravating the problem.

• Speculation in Land and Real Estate Prices: The prices of land and real estate in India has increased exponentially in the last decade and causes overpricing of commercial or residential property.

• Sources of Finance: Finance is the key to the development of any industry. Due to the poor image of the Real Estate sector, banks are becoming reluctant to provide loans and making regulations tougher to avoid bad loans. 

• High Input Cost: The real estate is capital and labor-intensive industry; thus rise in the cost of labor and construction material due to inflation poses many problems to the real estate industry. 

Government’s Policy Initiatives:

Looking at the viability of the Real Estate Sector in India, the government has taken steps to enhance the activity of the real estate by implementing several major policy initiatives such as 

• Real Estate (Regulation and Development) Act, 2016: RERA has laid down a regulatory framework that aims to enhance transparency, bring greater accountability in the realty sector. It is being termed as a game-changer in the real estate sector to provide affordable housing.

• Amendment to the Benami Transactions Act: It lays down stringent rules and penalties associated with dealings related to ‘benami’ transactions. It establishes a regulatory mechanism to deal with disputes arising from such transactions and levying penalties to increase institution-investor participation.

• Change in Arbitration Norms for Construction Companies: To help the ailing construction sector, the government has cleared reforms including speedier resolution of disputes and the release of 75% of amounts that are stuck in arbitration. 

Way Forward:

The Central government has promulgated a number of policy initiatives for the regulation of the real estate sector in India. The government has also introduced RERA to bring complete transparency between buyers and sellers. But the sector now is facing various illnesses from multiple directions. 

In order to broaden the scope of real estate sector in India, the government must need to take into consideration the following-

• A political consensus has to be reached and uniform policy across states has to be implemented for faster project execution.

• Sustainable development of our urban built environments is another key challenge. It is important to ensure that our cities are SMART. This could be achieved by an enhanced focus on 

• Mass transit systems,

• Green construction methods, 

• The creation of Green spaces, and 

• Sustainable technologies for managing water, waste and energy resources.

Apart from this, the following Measures also needed:

• India is still dependent on banks for debt functions. “Banks alone cannot serve that cause. Government funding is essential to revive the sector.

• In September, the government announced a ?20,000 crore special funding boost for stalled projects that are in the affordable and mid-income category.

• In order to revive the installed projects, the government needs to push money to the hand of the developers as well.

• On the other hand, If the government could encourage banks to start lending again, that would be a huge boost.

• If there is zero GST implemented for real estate projects at least for six months, it would make a marked difference.  There is an urgent need for active lenders in real estate, with existing banks not lending enough.