Roof Over Our Head: Our Fortnightly Real Estate Commentary Dec 2017


I. Getting Real Estate back on track (Source: Mint)

The biggest fallouts affecting the long term growth of the real estate sector came from project delays, diversion of funds by builders, one sided builder buyer agreements, unfulfilled promises and lack of finances. The intermediate step between the above factors and the industry not doing well is the current state of crisis of confidence on the part of consumers, stemming possibly from the above factors. Members of the real estate industry can no longer sweep these reasons under the rug, since these have become big enough to threaten the viability of the sector itself, or at least a part of it.

So, what should the different participants real estate developers, government, intermediaries (brokers), online portals and you, the consumer do differently for this sector to do well in the long term? ‘Doing well’ does not only mean that people start buying more homes than today and prices start rising. ‘Doing well’ would encompass a deep correction of practices and building up of a long term confidence in consumers.

Government: This is the only entity in the entire ecosystem that seems to have taken the bull by its horns and made the most progress in the past one year. Starting from demonetization to establishing the Real Estate (Regulation and Development) Act, 2016, (RERA) to launching a slew of measures enabling affordable homes, the central government has tried to repair the malaise. However, the government should have introspected that cash has come into this sector not because the developers want it or because the consumers want it, but largely because local authorities have historically demanded cash to give approvals for projects. The maze of up to 50 approvals needed for every project encourages this rent seeking behaviour, in turn encouraging mediocre industry participants and finally discouraging clean business houses from entering this sector.

State wise variations in construction norms, occupancy certificates, joint development rules and others again discourage large national entities from emerging in India. Since the relationship with local authorities is sadly a critical success factor, we see most developer companies expanding to a maximum of 2-3 cities. A true stream lining and standardization of these on the ground processes and policies at the level of states and local municipals will take this sector ahead by 10-20 years. Automating and making online all these processes is the only way forward. This will get a huge pushback from the ground in various states and local bodies, but a determined government can make this happen.

Real estate developers: The main protagonists in this sector need to pay heed to the lessons from other sectors that got regulation forced down their throats because of the excesses being committed (remember life insurance). In all other industries, the consumer is the king , what is good for the consumer is good for the business. The same rules of business and long term prudence should apply to real estate too.

We need to fight on the basis of superior construction, smooth deliveries, after sales service, great brands and finally superior and predictable returns to investors. In the process, we would have to engage with the central government on ways to solve our predicament of local approval policies. The good news is that there are quite a few real estate companies in India that are trying to run their businesses on sound business principles. It is the longer tail of companies that is trying to win through short cuts and these should be reined in urgently. RERA has fired the first salvo. If the local approval processes are cleaned up, many of the smaller companies would lose their dubious competitive advantage on their own. But till then, the prudent companies need to continue to walk the talk, supported by RERAand grab share through robust business strategy and excellence in execution.

Brokers and online portals: Brokers should be on the side of the consumer and explain the pros and cons of the deal. But the broker community has a bad name and should take pains to work on that. Now that all brokers need to get registered under RERA, they should understand the implications of the same and try to play by the rules. We need to win business through hard work, more options shown understanding clearly the needs of the consumers and acting on behalf of the consumers. There is, of course, revenue pressure, but abiding by the above principles will also bring in more wealth in the long run. They need to continue to work to improve the quality of listings by verifying these more and thereby give the consumers a what you see is what you get experience.

The consumer: RERA is on your side. Your money will be used in the project you have bought into, you will get what you saw in the marketing brochures, no changes will be made in the project plan till 50% of your building mates agree to that and you will get a penal interest if your project is delayed. You need to be more assertive of your rights.

You need to be more aware of what you are buying, the agreement you are signing, the long term investment prospects and the best loans available. Select the right developer by looking at track records in construction, delays, quality and very importantly, in delivering what they promised. This may be the largest investment decision you make, so you owe a responsibility to your family to really think this through.

Finally, you should stop thinking that your real estate investment is going to give you returns of 50% per annum. As India’s economy matures and sectors develop, equity and real estate should continue to give you returns that are fixed deposit plus 7-10% per annum. There is no reason why any investment will give you super normal returns. In fact, you should run away from anyone promising more than 20% returns in any asset class.

It is a long list of to dos for all the constituents of the real estate market, but the die has been cast.

II. Reworking the rental market (Source: The Hindu)

The Draft National Urban Rental Housing Policy aims to alleviate housing shortage by encouraging renting out vacant homes.

Several breakthrough reforms with pertinence to the Indian real estate sector saw the light of the day over the last one year. Be it Demonetisation, RERA or the unified tax regime of GST all bore the power of rendering the real estate sector more transparent and professional.

The upward trajectory of consumer sentiment is a strong indicator that the market has responded well to these reforms. The incumbent government has embarked on a determined journey to transform the sector into a more wholesome industry.

While the primary and secondary residential markets undoubtedly benefited from the plethora of reforms, the rental market has also received a shot in the arm. Various reforms and announcements made over the last one year can potentially boost this crucial segment.

April 2017: An end to fake rent receipts

Under Section 10(13A) of the Income Tax Act, employees can get tax exemption under House Rent Allowance (HRA). Hitherto, employees merely needed to submit rent receipts to get this benefit, along with the landlord’s PAN details if the rent amount exceeded Rs.1 lakh per annum.

However, with its decision to cap the loss on second property purchased with a home loan, the government has effectively plugged a tax loophole used by innumerable employees for tax exemption. As per the recent tribunal ruling, the assessing officer can now demand proof such as the leave and licence agreement, and a letter to the housing cooperative society informing about the tenancy, electricity bill, water bill, etc.

This new ruling has cracked down on the practice of salaried employees submitting sham rent receipts.

June 2017: Impact of withholding of tax on Rental Income

The new section (194IB) introduced in the Income Tax Act makes it mandatory for individuals paying monthly rent of more than Rs.50,000 to withhold taxes at 5% on rental payments and to deposit this amount within a prescribed time. Prior to this amendment, individuals were not required to withhold such tax. This new section has been inserted to widen the scope of TDS (tax deducted at source).

With this, landlords receiving higher income as rent will come under the tax scanner. They will now be liable to report the full rental income in their tax returns in order to claim benefit of the TDS amount. Moreover, with the recent linking of PAN and Aadhar numbers, the chances of malpractices going unnoticed have reduced.

The winds of change have clearly started to blow post demonetisation. Both tenants and landlords now prefer to keep their transactions clean by not indulging in any cash payments. Moreover, tenants have also become more vigilant regarding the rental agreement and rent receipts.

Despite its immense potential as a market force, why has the Indian rental housing segment has not made consummate headway? The primary reason is that it is a largely unorganised sector and developers do not find building project exclusively for rental purpose, a very viable business proposition.

Over the past few years, the country has seen a cultural and socio economic shift. From 5.5 million to 9 million a year, migration of people in pursuit of better education and career opportunities in Indian cities from rural and semi urban areas has almost doubled in the last ten years. This directly pushes up the demand for rental housing.

Also, it by now is an emerging market reality that many of India’s millennials prefer to rent rather than buy homes largely because property prices in most metropolitan cities are not affordable and also because the rental options can provide better location advantages.

The government, with its ambitious ‘Housing for All by 2022’ mission, is also half way through its tenure and the pace of housing construction is still far behind schedule. It is a distinct Indian paradox that despite the acute housing shortage, approximately 11 million units lie vacant and unused. Clearly, efficient use of this existing inventory via rental housing (in markets where trunk infrastructure is in place) would ease some of the pressure.

The draft National Urban Rental Housing Policy aims to alleviate housing shortage in urban areas by encouraging renting out these vacant homes.

III. Build Green, Build Smart ( Source: The Hindu)

Population growth and the corresponding rapid urbanisation are causing our communities and cities to use more resources than ever, which means more waste, less fresh water and an increase in the amount of greenhouse gas emissions. Buildings, in particular, are responsible for a substantial portion of global energy use, resource consumption and greenhouse gas emissions.

According to the UNEP Buildings and Climate Change Report, buildings account for more than 40% of global energy use and one third of global greenhouse gas emissions. In the United States, for instance, buildings account for almost 40% of the national CO2 emissions and out consume both the industrial and transportation sectors. Therefore, the building sector has the largest potential for significantly reducing natural resource depletion.

Green is profitable

As the demand for more sustainable building options increases, thanks to a growing global environmental consciousness, green construction is becoming increasingly profitable and desirable within the international construction market. The global green buildings sector continues to double every 3 years, with emerging economies like China, India and Brazil leading the way.

Survey of respondents for 70 countries reported that 60% of their projects will be green by 2018.

Green construction market is expected to continue its growth in the coming year due to sustained investment in green technologies, manageable inflation rate, increased government infrastructure spending, declines in long term interest rates and steady market signal for resale value.Upfront investment in green building makes properties more valuable with an average increase of 4%.

Lower maintenance and energy costs the drive rapid return on investment and retrofit projects are generally expected to pay for themselves in just Seven years.

Hope you enjoyed reading this edition of our newsletter


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