Let us begin with an irrefutable fact: the real estate sector is crucial to India’s economic growth and stability. After agriculture and railways, it is the third-largest employer in the country. More importantly, it supports many sub-sectors such as steel, cement, paint, and infrastructure, thus generating indirect employment opportunities and incremental economic value. With the country’s real estate space expected to be worth $1 trillion by 2030, the sector would be instrumental in fulfilling India’s vision of becoming a $5 trillion economy.
And yet, real estate in India remains plagued by several issues. Abominable levels of transparency, liquidity challenges for developers, and sudden economic and policy changes such as the 2016 demonetization, GST, etc. While realty players are working to address these bottlenecks and have even found support from government initiatives such as RERA, there is a long-standing need that has still not been addressed: the accordance of infrastructure status to real estate.
Industry bodies such as the Builders Association of India, RICS, and ASSOCHAM have been steadfastly urging the government to grant the sector ‘infrastructure status’ for several years. In the days before Budget 2021, the National Real Estate Development Council (NAREDCO) stated that a housing revolution was the need of the hour, and urged the government to provide infrastructure status to the real estate sector to enhance its borrowing capacity. But, while Finance Minister Nirmala Sitharaman introduced several measures to boost the sector in Budget 2021, infrastructure status still eludes real estate.
Infrastructure status to the real estate industry: What will change and why it is needed
But why is it important for real estate to secure infrastructure status? Because, historically, the sector has largely been unorganized, and the lack of standard industry practices has been the Achilles’ heel in its attempt to evolve into an organized industry. Securing infrastructure status will address these concerns by paving the way for real estate’s inclusion in the Central and State industrial policies, as well as its recognition by the RBI as a priority sector. This will translate into the introduction of sustainable policies to boost the sector and improve market regulation complementing progressive policy measures like RERA.
In fact, the government had accorded infrastructure status to the affordable housing segment in 2018, which has since seen a tremendous boost in supply. Accounting for almost half of the overall real estate sales in Q3 2020, it also played a vital role in the sector’s recovery after the pandemic. As real estate continues to face challenges, there is an urgent need for infrastructure status to be extended to the entire industry.
Benefits
● Clear policy and greater transparency
The development will behove State and Central agencies to introduce norms to regulate developers, as well as upcoming and ongoing projects. All transactions undertaken in the property purchase process will be rationalized, thus improving accounting practices and curbing the flow of black money. It will also drive state institutions to address bottlenecks like the digitization of land records, a process that continues to be riddled with inefficiencies.
It will also lead to the creation of provisions to check that developers utilize funds for their intended purpose and health and safety measures are in place for all stakeholders. In effect, infrastructure status will help real estate in India to operate with considerably more transparency and be held accountable to the same standards that govern other mission-critical sectors in the economy.
Among other benefits of infrastructure status will be a greater focus on introducing schemes like single-window approvals and the fast-tracking of clearance for licenses. At present, developers are required to obtain more than 70 clearances in a process that can take 1-2 years.
It will also likely push the government to take steps to improve supply – such as streamlined GST rates, capital and interest subsidies, and exemptions or relaxations from stamp duty, tariffs and other duties – as well as steps to improve demand, like the removal of the ban on the Subvention Scheme. It will also create the right ecosystem for research & development, and innovation in the industry. With real estate expected to have a 13% contribution to the country’s economy by 2025, such a transformation would significantly accelerate the industry’s growth and, in effect, the country’s GDP.
● Greater investments and a boost to borrowing capacity
Real estate in India has attracted more than USD 25 billion in Foreign Direct Investment (FDI) since 2005, even as many investors remained sceptical due to sector-wide opacity and delayed project deliveries. In Q3 2020, real estate in India attracted USD 235 million in capital, registering a 52% growth in investments over the previous quarter. This suggests that the regulation that would follow the endowment of infrastructure status could attract even the most prudent investors. The enhanced transparency and a faster clearance process brought on by well-defined industry practices will also boost investment sentiments among domestic players.
With this status, the industry will attract investments from sovereign wealth and pension funds as ‘infrastructure’ investments are tax-exempt. It will also enable equity investments in the sector and will make borrowing for project development easier, as developers will be permitted longer loan tenures, lower interest rates, and better terms.
These developments will help to reduce the cost of borrowing for developers and lead the government towards developing the necessary guidelines to allow developers to refinance their existing debts. It will also pave the way for large investors to become financing partners with developers. These measures would go a long way in helping developers address their cash flow problems and restart work on stalled projects.
● Lower property prices and a boost for ownership
The greatest challenge that real estate developers face is the cost of capital. Anything that helps to reduce this will bring down overall project costs, and developers will be able to pass on the benefit of lower costs to property buyers. Infrastructure status could also compel the government to restore Input Tax Credit (ITC) to developers, who could then pass on the tax benefits to buyers.
The resulting growth in demand will also help reduce the burden of unsold inventory on developers. Just months before the pandemic-related lockdowns came into effect, the industry had unproductive assets (under-construction, stuck, or delayed projects) worth INR 4.5 trillion across just the top seven Indian cities. Considering the demand for property in the country will only continue to rise in the future, a price incentive for property ownership can shore up considerable revenue for the industry. With the rising allure for property investments, in light of fluctuations in equity and commodity markets and record-low interest rates on loans, the time is right for infrastructure status to finally be awarded to real estate.
While established realty players are already working to transform the real estate industry and meet international benchmarks, certain policy and regulatory gaps can only be filled once it attains infrastructure status. Such an intervention is necessary for it to reach the stature and efficiency witnessed by other sectors like IT and manufacturing. It will also help to establish transparent business practices and inculcate a consumer-centric approach across the industry which, in turn, will drive growth for both the real estate space and the larger economy.
Source: https://www.constructionweekonline.in/