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Ease of doing business in realty sector: ‘Implementation of key reforms will make sector attractive’

Reforms like RERA, GST and REITs have the potential to increase investor confidence and to attract institutional investments into the sector. However, it all depends on how soon these policy changes come into effect

Written by Anshuman Magazine |
December 17, 2016 2:20:26 am
Real estate, real estate sector, Real Estate Regulatory Act, GST, Goods and services tax, Real Estate Investment Trusts , RERA, Indian realty market, business, markets, realty sector business, india business, business news, india news, indian express news Under-construction DDA flats that were alloted in 2010 in Dwarka, Sector 18. (Source: Express photo by Oinam Anand)

Apart from its current efforts to bring transparency into the country’s domestic economy, the government has been working towards bringing transparency into the real estate sector as well. Several steps taken by the government in recent times —from the Real Estate Regulatory Act (RERA) and the Goods and Services Tax (GST), to Real Estate Investment Trusts (REITs) — have all been implemented for improving the ease of doing business in this sector, as well as for increasing investor confidence. After implementation, these policy changes are likely to attract more institutional investments into the Indian realty market — from domestic as well as foreign institutions.

Opportunities with new policy regulations

Real Estate (Regulation and Development) Act or RERA: The much-awaited Act — covering both residential and commercial realty segments — was passed in March 2016. Although its actual implementation can only be effective once all the states create their respective state-level authorities, an effective implementation can be a game changer for the real estate and construction sector. It has been among the key measures which the government is trying to implement for the development and regulatory transparency of the real estate sector in India.

Once implemented in the right spirit, it will not only help regulate the sector and promote transparency, but could also facilitate greater volumes of domestic as well as foreign investment flows into the sector. The confidence of home buyers in the property market is also likely to revive as a result of the same. RERA mandates the registration of real estate projects and directs the developers to delineate functions and duties of the promoters and sets out penalties for non-compliance. In view of the slowdown in the housing sector, the Act is expected to be a significant sentiment booster for end-users and investors alike.

Although the industry is likely to have issues initially with the Act coming into force, a regulator will bring in credibility for the sector in the long run. This is further likely to open up funding avenues and bring down lending costs for the sector. The sector will undergo some major changes such as consolidation of players, and increasing incidences of joint ventures. Overall, with a few modifications, the Act could prove to be landmark legislation, resulting in a radical shift in India’s real estate dynamics.

Goods and Services Tax (GST): The constitutional amendment for an early implementation of the landmark Goods and Services Tax (GST) has been India’s biggest structural reform in decades. The landmark regulation will remove a plethora of indirect taxes and establish India as a single unified market. The true impact of GST, however, can only be assessed once the final tax rate is out. It must be considered that the sector has linkages with almost 250 ancillary industries such as cement, steel, and concrete, among others. Any adverse impact on these key input industries may also have a negative impact on the real estate and construction sector.

Real Estate Investment Trusts (REITs): Yet another game changing policy initiative has been the government’s announcements on REITs. Although the government released the finalised guidelines for the establishment of REITs in India in late 2014, concerns regarding double taxation led to the delay in its implementation. These issues were finally addressed in 2015 and further clarifications were provided in the Union Budget of 2016-17 to expedite the launch of the country’s first REIT. Initially, the REIT portfolios in India are likely to consist of commercial office and retail assets. The commercial REIT-ready space alone in the top seven cites is about 200-300 million sq. ft. About half of this stock is owned by leading real estate developers who have been acquiring investable assets across these cities over the past few years. With a compelling need for additional funding mechanisms, the effort to allow REITs is yet another step towards the organised development of the sector.

We are currently witnessing a paradigm shift in the structure of the real estate sector in India — there is rising maturity and development that is in turn creating a ripple effect of positive market sentiment and changing the perception of the sector at a global level. Efforts by the government to formalise the sector in recent years are indicators of the potential of the real estate market in the country.

Some challenges remain

Despite positive policy initiatives for the sector and a robust macro-economic growth story, a number of issues continue to plague India’s real estate market. The most important among these is perhaps the awaited implementation of the Land Acquisition Bill. Stringent land acquisition norms currently hinder the development of large scale infrastructure and urban development schemes. A political consensus has to be reached and a uniform policy across states has to be implemented for a 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 enhanced focus on mass transit systems, green construction methods, creation of green spaces, and sustainable technologies for managing water, waste and energy resources, among other aspects.

Overall, the abundance of technically skilled workforce and India’s demographics and economic dividend have created immense opportunities for a thriving real estate market. These factors are likely to help over-ride most concerns regarding further development of the Indian real estate sector.

Going forward, India will continue to retain its position as a bright spot in the global economy, with better growth prospects expected to support office space leasing in 2017. Even though the global economic scenario remains muted, India’s appeal as an established outsourcing market will still continue to fuel the expansion initiatives from corporate firms based out of the US, Europe, the West Asia and Africa.

Positive macro-economic sentiments are likely to propel leasing activity by the domestic corporate firms as well. Additionally, reforms such as the GST, clearance for REITs, relaxed foreign investment norms in the real estate sector, and the implementation of RERA, might work towards enabling ease of doing business in the country, while supporting corporate entities entering or expanding their footprint across leading cities in India.

Author is chairman, India & South East Asia, CBRE

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