Budget 2023 must give a thrust to growing more cities, affordable housing

Real estate is an illiquid asset, but its short-term retail financing can bring liquidity into the system. (Representative image)

The real estate sector’s budget demands are all too familiar: industry status for itself to source longer-term and cheaper funds, greater tax breaks for the buyer so she has more money to buy houses, long term capital gains to kick in after 12 months from the current 36 months, and Real Estate Investment Trusts (REITs) being allowed to source funds from banks.

Some of these are important such as the need for formal funding to buy land. There is very little formal finance for land purchase, project loans are short term while the requirement is longer term. With formal finance difficult to source to buy land, developers have to use their own resources or get into joint development arrangements with landowners. However, once the land is purchased, developers have to plan the project and submit for approvals, which are many and not timebound. This loads the cost of interest on the capital used to secure the land onto the project cost.

Another key item on the developer wish list should be digitisation of land records as it significantly reduces risks. Years after the Central government allocated resources in 2008 for this purpose, the work is still far from complete. Maharashtra is the only state that has completed the digitisation process to some extent and more needs to be done.

But beyond these standards, the sector needs to look at growing the pie rather than working within the confines of existing cities.

Even after 75 years of independence, India’s growth story is restricted to six mega cities, a few smaller cities and very few others. Post-pandemic the growth story is shifting to smaller towns closer to the hinterland. This is a big opportunity for the real estate sector to grow the pie and start building in neighbouring towns in planned enclaves with government approved services.

In India over 7,000 new cities are to be developed in the next few years, as India urbanises from 35 percent to 50 percent in the next 10 years. Affordable rental housing for students, migrant workers, young adults in their first jobs in cities, in safe environments, with adequate facilities, connected to jobs and retail hubs would make these new cities sustainable.

The industry should press for finalising the state rental housing policy and it recommends extending the project time limit to five years as an incentivisation to the developer fraternity.

The Budget could also consider an affordable housing fund to incentivise developers to build smaller units in large and small towns. A study by Magicbricks in 2008 showed that large and small developers availed of one such incentive between 2005 and 2012 to create smaller, more affordable units across Indian cities. Unless affordable housing creation has tangible, measurable benefits for the private sector, it will not become a mass product, as is the need of the hour.

Ultimately, the success of affordable housing can only be when trading in housing becomes easier. Unless people are able to sell their existing smaller houses to buy bigger ones as families grow or conversely scale down to smaller houses as they age, housing cannot be deemed to be truly successful. For this tradability can only come when the stamp duty and registration come down significantly. Maharashtra proved in 2021 that even a short-term drop in stamp duty rates and premium charges for developers could spur intense buying across the board.

Both the state and trade stand to benefit from such an announcement. I believe the developers have to make a pitch for policy announcements at the Centre that will trigger change in policy at the state and city levels.

A significant part of developer wish lists should be meticulous urban planning with provision of water, electricity, sewerage, drainage and water conservation to tackle the problems of a rapidly heating world.

As the urban canvas grows, why should developers not ask for incentives to build with eco-sensitive materials, sourced locally and using energy efficient processes — green building technologies adhering to the Sustainable Development Goals (SDGs) that the government has promised on world fora. If developers adhere to these norms, giving incentives such as additional FAR/FSI, tax incentives and lower municipal taxes would help cities meet their SDG targets and India to meet its promised goals.

We also need the budget to give direction to prioritise the use of recycled products. Many a time construction and demolition waste recycling struggles to find takers for end products only because many PWDs have not mandated the use of recycled products. Moreover, research and development funds into waste, water recycling and live projects can be picked up by educational institutions that would bring out a host of new solutions.

Commercial real estate has benefitted from the introduction of REITS. With large aggregators such as Brookefield and Blackstone buying out well-maintained, performing commercial real estate, developers now have a chance to exit their performing assets and use the liquidity to develop more. Affordable residential real estate is still under-performing. Many individuals who invested in residential real estate in the golden years of several hundred percent returns have now started to exit these investments. But the system still compels users to replace one investment with another to avoid capital gains tax.

I believe new forms of investment in the industry by retail investors should allow the industry to mobilise private money to meet the capital costs. Many such schemes have been evolved informally by developers, and consumers with a risk appetite have invested funds in short-term high-yielding schemes. If the system can formalise these schemes by putting in safety nets around the schemes, it would be a win-win situation for all. Real estate is an illiquid asset, but its short-term retail financing can bring liquidity into the system.

Secondly, municipal bonds are a viable currency across the world. Well-functioning civic assets can be the base for issuing municipal bonds. Where developers create stand-alone cities on about 100 acres, can their civic assets be monetised for civic bonds? This will encourage developers to create and maintain civic assets to convert them into long-term return-yielding bonds.