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.