Industry and trends
5 Major Issues in the Indian Real Estate Sector and What We Think Should Be Done
Real estate sector in India has come a long way over the past decade. It has become one of the fastest growing markets in the world. This growth is attributed mainly to the rapid urbanisation and rising income levels.
The number of Indians living in urban areas will increase from 434 million in 2015 to about 600 million by 2031. And the housing sector is expected to contribute around 11% to India's GDP by 2020. The opportunity is vast. So much so that real estate growth is pegged at $180 billion by 2020 with a CAGR (Common Annual Growth Rate) of 11.2%.
Now let's look at the other side of the coin. A slow market, declining sales volume, delayed projects- these and more are the issues that you often hear about when it comes to real estate India.
Unending project delays
Problem: Construction delays have plagued the sector for quite some time now. Now, while developers are at fault for using the funds of one project for another, we also need to look at other underlying factors.
For a housing project in a metro city, a developer needs over 40 regulatory approvals for starting construction. It takes anywhere from several months to a year or even more. It not only delays a project but also increases the cost of the property by 10-20% for both buyers and developers.
Solution: While RERA has addressed the issue of right usage of funds, the sector certainly needs a single-window clearance system to streamline and fasten the approval mechanism.
Problem: At present, there are several ongoing infrastructure projects in the country that are expected to change the dynamics of real estate in India. These include the Metro Rail in major cities and infrastructure projects such as road widening or expansion. However, acquiring land for such projects is a herculean task.
Solution: The government should revise the Land Acquisition Resettlement and Rehabilitation Act 2013.
Unlocking land parcels is also essential for affordable housing. At present, substantial land parcels are reserved by central and state government entities such as the railways, ports, and defence authorities.For achieving the ambitious 'Housing for All by 2022', the under-utilised and vacant land parcels must be freed for development through land regulations, land readjustment, and pooling policies. Click To Tweet
Further, the government needs to accelerate the process of digitising land records for making land-related transactions much more transparent.
High property prices
Problem: Property prices in Indian markets have gone way beyond the buying capacity of the common man. Until 2016, taxes accounted for almost 25-30% of the total cost of a property. With the Goods and Service Tax (GST), the tax on under-construction properties has come down to 12%. However, the stamp duty and registration charges are not subsumed into GST.
'The additional burden on the sector on account of the stamp duty averages 5%-7%. If the state governments abolish the same or merge with the existing GST rates, it will help bring down the cost of properties,' says Surendra Hiranandani, CMD, House of Hiranandani.
Post the announcement of 'Housing for All by 2022', several affordable projects have entered the market. But unfortunately, a majority of the projects with 'affordable' tag are coming up in the peripheries where the trunk infrastructure is not in place. This is a classic case where the supply is vacant.
Solution: Government and developers must join hands to develop necessary social and physical infrastructure simultaneously with the project.
Outdated building bye-laws
Our cities are gasping for space, and the current Floor Space Index (FSI) norms in the cities are not on par with the current requirements. It said that the permitted FSI in Indian cities is very low - in the range of 1 to 1.5.
State governments need to revisit the FSI norms.
Problem: Developers face a major challenge with funding. Lack of industry status does not allow developers to access funds at an affordable rate (except for affordable projects).
Solution: Industry status is the need of the hour. Additionally, it is also essential to incentivise developer building affordable and green homes.
Further, it is equally important to make Real Estate Investment Trusts (REITs) attractive for investors by providing tax sops. It will open more channels for foreign funding in the real estate sector in India.
'When a REIT sells shares of assets, the capital gains are taxable. Further, in other countries where REITs have been functional for a long time, buyers have been exempted from stamp duty. Such tax benefits, if and when they are provided in Indian REITs, will act as a catalyst in making REITs more functional and attractive in the long run,' explains Shobhit Agarwal, MD and CEO - ANAROCK Capital.
Do you have any more suggestions for these problems? Let us know in the comments below.