How the current financial regime will help face the challenges in real estate
The economic slowdown sweeping across geographies has had global repercussions. The gloom has impacted all sectors, with the real estate sector too caught in the crossfire. Let us see the measures taken by the Government to revive the sector and the related implications.
The Government is committed to bringing the economy back on its feet as can be noticed by the measures included in Budget 2020, but it is an uphill undertaking to save a struggling real estate sector. It needs to be reviewed through a comprehensive bird’s eye view of the sector.
Current scenario of realty
At present, the business real estate is riddled with complications. The liquidity crunch continues to remain an issue because of the sins committed in the past - acute consumption downfall resulting in liquidity crunch after Non-banking Finance Companies (NBFC) struggled to pay back loans taken from banks in 2018 – leaving the market gasping for breath. Additionally, the careful lending approach followed by Public Sector Banks (PSB) despite the number of Non-Performing Assets (NPA) coming down, continues to be a problem for the market.
While the commercial side of the business seems to be growing on the back of improved business sentiments and attractiveness of India as a Foreign Direct Investment (FDI) destination, the residential and retail sectors are predicted to be at an early recovery stage. With the first Real Estate Investment Trust (REIT) finding success in 2019 in the domestic market, we do hope that a strong foundation has been laid to spur new REITs into being registered in 2020. This shall have a positive impact on the image of the sector by providing regular and decent returns on the investment.
The low demand for residential real estate is another challenge caused due to the trust deficit created in the last few years because of a dearth in timely delivery of housing units by developers. However, Real Estate Regulatory Authorities (RERA) have now started inculcating more transparency by introducing a robust regulatory regime. A regulatory framework also offers confidence to the market and ensures that the time and cost of litigation is reduced.
Affordable housing remains a crucial area of focus in the Budget, with the tax exemption for loan repayment extended by another year. Developers are also being encouraged to take more such projects by way of extending the tax holiday on profits till March 2021.
Challenges existing in the sector
There are quite a few challenges that the sector is currently battling. Liquidity remains a challenge, even though the Government has sanctioned the Alternative Investment Fund (AIF) for last-mile funding of net positive projects; a lot remains to be done from the overall economy’s perspective. FDI is a challenge as India continues to be cautious in terms of its policies allowing foreign investors in the sector.
The inability to establish uniform standards is a critical issue impacting the sector. It leads to mistrust between the buyer and developer over the final delivery of a project. Lack of ethics also afflicts the sector which can be resolved through compliance to standards and professionals playing a key role under the aegis of RERA to help supply satisfactory delivery of products. Additionally, the sector has a huge shortage in terms of qualified professionals and skilled labour, resulting in a gap between the wants of the sector and its goals. There is quite some demand for construction operatives which is not getting fulfilled, although the Pradhan Mantri Kaushal Vikas Yojana (PMKVY) has made efforts in this direction. The required skills are absent, and the construction sector is not able to breed the necessary attraction for talent and scale. This has also led to poor technology adoption in the sector due to lack of education and training.
It remains a challenge to attract millennial job seekers to real estate as it is not a popular career choice for them. With depreciation in skilled workmanship due to outdated skills and technology, the quality of products has suffered. The single-window clearance for projects is still a distant dream as the time taken for various approvals from land acquisition to start of construction is significantly high. The market still looks at capital sales approach rather than a regular accrued income through rentals or other operating mechanisms which needs to be encouraged.
Light at the end of the tunnel – looking ahead
The Government’s focus on resurrecting the economy as outlined in the Budget should lead to an early recovery of the residential and retail sectors. With the growth in the commercial sector set to continue, there is also a renewed thrust on industrial and warehousing real estate because of National Infrastructure Pipeline (NIP). The NIP is expected to have a cascading effect on the urban/semi-urban/rural built environment. Additionally, the Government’s attention to the education sector should provide further opportunities for student housing.
Rental Housing should be formalised in a structured manner for catering to various social strata, depending on monthly income. Industrial corridors are expected to push huge demand in the sector. The bond market should improve with the FDI cap for investment being increased from 9% to 15%. This should hopefully attract more participation from foreign investors and greater liquidity in bond markets. Affordable housing continues to be a promising sector. With the Budget refocussing its policy framework for real estate, big developers should see the potential of the segment.