Real Estate Development is a very Capital intensive Industry, where raising funds play a crucial role in the costing of the project for any Developer. Land being scarce the cost of acquiring Land is the largest Investment along with all the statutory permissions from the authorities and the construction cost. Also, the Industry has a long gestation period; hence cost and management of funds can make all the difference and be the game changer for any developer.
Traditionally most developers would depend on the individual investor for their funding either on the high rate of interest (@24-36% p.a) or in terms of share of profits where the developer would sell some stock initially at a very attractive price to raise funds for the project. Gradually with the Industry getting recognition, the developers got access to organized finance in the form of working capital and project finance from Banks and financial institutions.
Now with the recent announcement in the Budget confirming Infrastructure status for affordable housing, financial institutions will have to offer finance to Developers of Affordable housing projects at very attractive rates of interest. Getting priority sector lending will get builders more funds at reasonable rates and they may pass on these benefits to the home buyers. Thus Infrastructure status for affordable housing will be a good thing for the middle class as it will make homes cheaper and spacious. Measurements of the housing units have also been specified, so expect bigger and better ‘budget’ accommodation
Developers so far reluctant to touch the affordable housing segment despite high demand are likely to be attracted by the easy access to capital at lower rates and tax incentives. Even big brands will now be encouraged to get into this segment.
The infrastructure status proposal is likely to impact all projects under construction. Builders are expected to quickly move to comply with the affordability requirements – limiting the size of housing units to 60 sq.mt (carpet area), developing projects within 25 km of the municipal limits of four metro cities. All these projects will now qualify as infrastructure and get easy access to financing. While existing buyers will now be assured of timely completion, new buyers and new launches may receive some relaxation in terms of pricing.
“The real estate market is likely to see maximum launches in the affordable housing segment. There will also be a structural shift in pricing and not a price cut. The benefits that builders will get under the scheme include a tax holiday which means that they will not have to pay tax on the profits earned from these projects. More builders will thus enter this segment.
Developers will also get five years to complete the project instead of three years at present out of which maximum time goes into getting approvals. Builders who do not complete projects on time will not get the incentives.
Pravin Makhija is the Founder – CEO of Dreams2Realty, a Mumbai based, award-winning Brokerage and Real Estate Advisory firm. A Commerce Graduate with a PG in Law, he is passionate about making real estate a more transparent and more service-oriented business.
Demonetisation today is becoming synonymous to chaos, confusion and inconvenience. However, putting aside the short-term perspective, it is bound to come as a blessing in disguise, as India is set for a digital revolution and the overall payments landscape of the country is up for a complete overhaul. With digital transactions money will come into system, it will be accountable, generate tax and develop the country’s economy. With this money which has come into banks, the government will be able to come up with better welfare schemes. This will actually strengthen government machinery for better implementation of schemes.
For real estate, it might be a short-term glitch — particularly for land deals, commercial transactions, hospitality or retail. Small builders and those in specific cities/ micro markets where cash dealing was more prevalent will be most impacted. Registration prices in residential space may also go up to adjust for cash component. Therefore, resale of property will be impacted more than primary sales. Organized real estate sector may also face demand slowdown for a short while, largely due to ‘wait and watch’ susceptibility of buyers and investors.
However, gradually, once banks have a high lending capacity with money in the system, we will see a decent lowering of interest rates. Lower interest rates will bring down the EMIs on home loans, making real estate more affordable and attractive. Precedents suggest that low interest rates give the real estate industry a massive boost by escalating positive sentiment and demand, especially in the residential segment. Also, if supply of resale properties declines due to price crash, it may favorably impact primary sales. We also need to consider the fact that while real estate comes as an asset and offers handsome appreciation with time, it also helps in income tax deductions. Rentals also add as an earning potential from a property.
Also, as a positive impact of demonetisation, banking systems are bound to witness a windfall of funds, increasing their lending capacity and in turn driving down the interest rates. High lending capacity of banks offers benefits to overall industrial and business ecosystem, strengthening the overall economic conditions of the country. Therefore, in the longer run this will have an upward impact on the purchasing power of the people instigating demands in all sectors, including real estate. The year 2016 has witnessed some positive and potentially long-lasting changes being introduced in the Indian real estate. The passing of RERA (Real Estate Regulation and Development Act 2016), the Benami Transactions Act and now the demonetisation move will ensure that going forward, the sector will lose much of its historic taint and become more transparent. These moves will ensure increased transparency, improved investor confidence, better access to funding and higher FDI.
So, if we have to measure an overall impact on the real estate sector, it can be safely said that real estate will be a much more attractive investment option than volatile / lower-return offering bullion, equity or bank deposits. The Indian real estate sector will emerge stronger, healthier and capable of long periods of sustained growth. As of now, there is no reason for developers and investors, who have conducted their dealings transparently and legally. to panic.
Source: Financial Express