How to revive real estate sector? Government must consider these moves

By: |
Published: January 17, 2020 12:42:57 AM

From increasing the CLSS income caps to reducing GST on cement, there are quite a few moves the government should consider.

real estate, real estate sectorTaking the real estate sector out of the woods is critical due to its strong linkages with other sectors.

Real estate in India faces a severe credit crunch. The sector depended heavily on NBFCs for its credit requirements. Hence, the sharp slowdown in NBFC sector and NPAs plaguing the banking sector has had severe repercussions. RBI’s latest Financial Stability Report highlights that overall credit (Bank + NBFC + HFCs) to the sector grew by 21% y-o-y in June 2019, against 37% the previous year. Yet, small developers are feeling the credit squeeze—the share of NBFC in credit availability to the sector has gone down. Access to credit at a lower cost would be a big relief for the sector. The government should give the sector ‘industry’ status to help it access funds at lower rates and cut down cost of capital. The Centre’s Alternative Investment Fund, for last-mile funding of affordable housing, is also in the right direction. But there is urgent need for quick and effective implementation.

The other big challenge is dwindling demand. Private final consumption expenditure has been recording weak growth, reflected in poor sales growth of even FMCGs. With the consumer pessimistic, housing, a high-ticket consumption item, has been severely impacted. At present, Section 80 C of the Income Tax Act does not provide for a focussed benefit on housing. A separate annual deduction of Rs 150,000 for principal repayment will provide the much-needed fillip for home loans. A segment that specifically requires further government’s attention is the Affordable Housing. Despite budget efforts, conversion of latent demand to actual sales has been slow.
Even while affordable housing launches have been strong, sales have fallen by 8% in 2019 (lower-than Rs 50 lakh price segment in the top-8 cities). The annual household income cap for availing the Credit Linked Subsidy Scheme benefits should be increased across all categories so that it is in sync with house prices in major urban markets. The affordable housing price definition should also be increased from Rs 45 lakh (considering house prices in major markets) to enable lower GST rate benefits to a wider consumer base. Moreover, reducing the cement GST from 28% will provide a big fillip to infrastructure and housing sector.

A positive development is that now, demand is mainly from end-users. Of the total demand, only 5-10% is from investors, against 60% investor participation seen in cities like Mumbai and Delhi in the past. This has helped reduce artificial escalation in prices. It is better to encourage investors’ appetite for real estate sector through REIT (currently available in the commercial real estate space). The one REIT listing we have had so far has given attractive returns and there are more REITs lined up. The government should make investment in REIT attractive by reducing the timelines of investment from three years to one year for long-term capital gains taxation.

Taking the real estate sector out of the woods is critical due to its strong linkages with other sectors. Of foremost concern is the high exposure of the banking and NBFC sectors to the real estate sector. Banks’ exposure to the real estate sector is around 21% of total loans and advances while that of NBFCs is around 6% of the total assets. Hence, a stress in the real estate sector has its repercussion on the banking and NBFC sector in the form of higher NPAs. On the other hand, a pick-up in demand in the real estate sector can boost overall demand and employment growth.

Chief economist & national director (research), Knight Frank. Views are personal

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Next Stories
1How to catch tax theives: Use tech more aggressively!
2Artificial life: Development of Xenobots, programmable organisms to have far-reaching therapeutic implications
3Sebi caves in to India Inc: Here’s why extending deadline on splitting CMD job is unfortunate