For the real estate sector, the year gone by was marked by dichotomies. While commercial leasing and transactions continued to exhibit strong growth and hectic activity, the residential sector remained mired in relative gloom in terms of volumes and sentiment.
Commercial leasing exhibited a strong trend with gross leasing in the top seven cities amounting to a total volume of 59 million sq ft, as per Colliers Research. This is a historic high figure for India and followed the high gross leasing trend of 50 million sq ft in 2018.
On the other hand, residential sales in the top seven cities in 2019 stood at only 261,000 units against 242,000 units in 2018. Against this, the unsold inventory in these cities was over 600,000 units. The sales achieved in 2019 and 2018 were brought about by a high demand for affordable housing.
The dichotomy lay in the fact that robust leasing would indicate strong leasing activity by companies which in turn would indicate strong job numbers which in turn should have resulted in strong residential leasing/sales.
But residential sales continued to lag given the negative sentiments brought about by delayed projects and continuing woes of non-banking financial companies (NBFCs).
Homebuyers too deferred purchase and preferred renting out over buying a house. Banks too were keen on resolving sticky loans rather than lending fresh or stuck projects.
The past year saw the Government take a series of steps to help improve sentiment and revive demand. These included enhancing the limits of loans under the Pradhan Mantri Awas Yojana (PMAY), increasing the deductions available for interest/principal repayments on home loans for affordable units, trying to inject liquidity for NBFCs through the Reserve Bank of India and finally setting up the Rs 25,000 crore last-mile funding fund for stuck projects with SBI Caps as the manager.
The latter has proved to be a sentiment booster with SBI Caps being flooded with applications from developers and we expect to see the first few disbursals in the last quarter of this financial year.
What can Budget 2020 do?
The real estate sector is the second-largest employer in the country today and directly and indirectly, accounts for 10 percent of the GDP. These statistics clearly indicate that the industry needs perking up.
So, what can be done? First and foremost, it is important to address the sentiment. This can happen if homebuyers decide not to postpone home buying and have the confidence to make a decision.
As for prices, the last few years have seen a substantial price correction. Price increases have been muted, if not stagnant and considering average inflation of around 5 percent over the last three years, prices have actually corrected about 15 percent to 20 percent for mid and high-end units. This holds true for most markets.
So, why is it that homebuyers are not willing to take the plunge? The government can ensure potential buyers take a step forward by giving substantial interest/principal set off waiver (from Income Tax) for a limited period of a financial year.
Against the current limit of Rs 1.5 lakh (Rs 3.5 lakh for affordable housing announced in Budget 2019), the government should consider a higher exemption limit of say Rs 7.5 lakh for all buyers who buy a house during the FY 20-21.
This would be valid during the tenor of the loan. Such a bold step could spur unfulfilled demand and sales could see a robust jump. This would materially incentivise homebuyers looking at buying units up to Rs 1.5 crore to Rs 2 crore.
Even homebuyers stuck with incomplete projects and paying easy monthly instalments (EMIs) are faced with the double whammy of not getting any Income Tax relief because no exemptions are allowed on under-construction properties.
The Government must be hoping to revive and complete most stuck projects within the next four years (now with the liquidity easing and announcement of the stressed fund). It makes absolute sense for the Government to provide homebuyers relief for under-construction units for the next three to four years.
To generate cash flows for developers, it is clear that while the stress fund is a big boost, it would address only a small portion of stuck projects. The rest could only be addressed by banks and NBFCs.
In order to push banks into lending for real estate projects, the government should consider relaxing the risk weightage norms for such real estate lending temporarily so that banks can earmark a higher percentage of funds for realty projects. They could also allow a one-time opportunity to banks to take over and restructure stuck projects with loans on them (where the cover allows).
On the commercial real estate front, there is a bit of confusion about the treatment of goods and services tax (GST) on projects which are being strata sold versus those being developed for leasing.
Where properties are not sold but developed for leasing, GST at 18 percent is applicable, basis the assumption that this is a service. Clearly, this needs to be addressed and ideally removed. This is a burden and pushes up the cost of construction and further challenges the cash flows available, especially at a time when there is a liquidity crunch.The author is National Director, Capital Markets at Colliers International India