Paradigm Changes for Sustainable Real Estate in India

In one fell swoop, the Budget has removed the inefficient vestiges of the real estate value chain.

T
he effort to purge real estate and fix the maladies ailing the sector that started in 2014 with key legislations culminating with Real Estate Regulatory Bill (RERA), got a further impetus in this Budget. The Finance Minister clearly defined the mood and the direction that the Legislature has for the sector and it all augurs well for the industry at large.
Noteworthy additions in the budget that are not directly linked to the sector but would have a deep impact on it, such as a limit on cash transactions per day to not more than Rs 300,000. Now, we all know that there are elements of cash transactions that impact the sector and have been a bane for a long time, especially in terms of keeping the middle layers in the marketing channel; the brokers and investors relevant. This one move would create sufficient deterrents for these inefficient vestiges of the value chain, helping purge the market and in the process, create cost efficiencies, thereby helping rationalise prices. Coupled with the digitisation of land records and the Benami Property related legislations, we can anticipate a near choking of use of real estate as a parallel economy magnet.
The clear impetus of the government on promoting urban infrastructure through its thrust on roads and airports is a great enabler for real estate. While on one hand it will reduce the burden of urban reflux from the top eight cities by opening up avenues in many others, given connectivity unleashed through these measures, it will also help create more affordability and homogenise demand across the country, making housing more affordable for the larger populace.
As a pre-cursor to the Budget, the Prime Minister had announced reduction in interest rates for housing for the bottom of the pyramid segments by as much as 300bps. This was a definite step to revive demand.
The Finance Minister's announcement to declare affordable housing as infrastructure is well in line with the Prime Minister's vision of Housing For All by 2022. This one move will help replace expensive local capital from unorganised sources as well as banks with priority sector lending rates from local lenders, while at the same time opening up development finance agencies as an alternate funding source for the sector. Cheaper debt from more benign jurisdictions will also find its way to promote bottom of the pyramid housing which will help make the value chain more robust and delivery oriented.
For genuine users and investors; as against traders in real estate; the reduction in time period for long term capital gains on real estate from three years to two years is also a welcome move. This, coupled with relaxations on the consideration period for unoccupied houses will make real estate attractive as a hedge investment for the large middle income investors, thereby broad-basing the market for the sector. While on one hand it will provide an effective alternative to the trader-investor category, at the same time, it will promote demand offtake which has slowed down considerably in the last few years. Though it may sound as a dichotomy, that in the same breath, the limit on tax deduction for interest payout on home loan for an investment house has been defined at Rs 200,000 from no limit earlier, but this is to curtail the arbitrage seekers looking at real estate as a short-term tax saving tool and not to dissuade long term investors which the sector needs.
From a policy level, the Budget heralded a thought process that merits all-round and holistic development of the sector which will help improve the fundamentals both at demand and supply levels as well as improve the value chain and cost of capital aspects of the industry. Indeed, it has been a path breaking move!
This article authered by
Jasmeet Chhabra,
Managing Partner,
Cerestra Advisors Limited.

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