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Real estate sector can be rescued without government relief

Developers, HFCs and the government need to come together and work cohesively for the revival of the real estate sector.

Deepesh Salgia 

Zooming through various webinars on the revival of real estate one would have observed that prominent suggestions were goods and services tax (GST) input credit, a reduction in GST rates, a cut in municipal charges, limited-period zero stamp duty, etc for reviving the sector.

There is no doubt that most of these are much-needed measures and should be implemented. However, there is a difference between the survival of the supply side and the revival of the demand side. 

The above measures will provide the much-needed ventilator to developers but not a long-term immunity. Time and again it has been proven that the long-term survival of the industry lies only in the vaccine called “home sales”.

What is therefore important is to address the key reasons that dissuade customers from buying a home. Interestingly, many of these can be addressed without the government losing revenue.

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Averseness to under-construction apartments

With a large number of incidences of under-construction projects getting stuck owing to approval-related issues or lack of developer’s financial resources, customers are now averse towards under-construction purchases, even if it means more choices and better pricing.

Two initiatives could address these concerns:

Defer all govt payments, use RERA escrow account to secure them

Today, developers have to keep 70 percent of their receipts in RERA’s escrow account. Developers should now agree to make it 85 percent and for such developers, the government should defer all government payments until the project is complete. Since money from the sale will remain in escrow, the government’s payment will be secure.

More importantly, when the government’s revenue gets linked to the completion of a project, it makes the government an effective stakeholder in the project. So, any action by an RTI activist or a corrupt officer will now be seen as against public interest. 

Lower project risk will mean more bankability and also reduce averseness from customers.

Normalise GST without revenue loss

The current slab of GST at 5 percent for under-construction units and zero for ready units means customers see lower value in under-construction purchases. This shifts demand towards the more expensive ready apartments, which results in zero GST for the government.

Developers and government should agree to make GST 1 percent, for both under-construction as well as ready units. 

Since the bulk of the sales today happen with zero GST, the net loss to the exchequer will be minimal. Consumers will be able to capitalise on the cheaper option of under-construction purchases.

The big benefit, however, will come from large under-construction sales, which will revive many stalled projects and thus start generating incremental revenues for government and jobs for people. The minimal loss to the exchequer will easily be compensated by this gain.

Lastly, even the banking sector gains as larger under-construction sales mean lower delinquency levels.

Fear of job losses, risk of home prices coming down

In the post-lockdown era, indecisive customers will now have one more reason—fear of job loss—to defer purchase decisions. And those who had come close to the final purchase decision would now perceive increased risk of home prices coming down.

These two factors can significantly depress sales. Such deep-rooted concerns can be addressed only through innovation.

EMI insurance

One good option that developers and housing finance companies (HFCs) can together work on is an EMI-insurance product, where the customer is assured of the EMI payment in case of job loss over the next 24 months.

The confidence in the creation of such kind of insurance product comes from the large quantum of currency being printed in the Western world. 

After things settle down in 12-18 months, this money will travel across the world to chase assets. Investment in assets will lead to job creations. 

A similar trend was seen as a result of the quantitative easement post 9/11 crisis. So while the consumers may feel the risk at an individual level, the financial institution’s risk perception post-24 months will be much lower.

Derivatives in real estate

In the past, when consumers feared a fall in prices, developers offered a price protection plan. 

Now developers, HFCs and the regulator can work out a financial structure where an HFC (or an investor) can buy a call option from developers by paying say 10-20 percent of the home price. 

When the building is ready after 12-24 months, there will be much more money floating around ensuring good returns to the investor. 

For developers, it will make sense since, in the current market, they may not able to sell all the apartments in a project to home buyers but with call premiums adding to project equity, it will be easier for him to raise funds towards project completion. 

The investor may consider sharing a small upside with the developer, ensuring the developer’s interest in better price realisation post-completion.

The revival of real estate is not just in the interest of developers but of the larger eco-system, therefore the developers, HFCs and the government need to come closer and work cohesively. Social distancing will not provide a long-term cure.

(Deepesh Salgia is Director, Shapoorji Pallonji Real Estate. Views are personal.)
Moneycontrol Contributor
first published: Apr 28, 2020 12:34 pm

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