The unsaid message by the government to the industry in its last budget before elections seems to be – “you now need to help yourselves”. While this seems a big harsh for an industry reeling under liquidity challenges triggered by the non-banking financial company (NBFC) crisis, it is important to also look back and see where they are coming from.
As governments would normally do, their last budget presentation is typically also an opportunity to present the report card of their performance. The 2019 budget was no different except for the tax incentive-based encouragement provided to invest in second homes and the benefit of higher disposal income by increasing the exemption slab from Rs 2.5 lakh to Rs 5 lakh.
If one were to take a deeper dive and look at the last four budgets, the real estate industry has emerged stronger and mature over the last four years and it is important that the government is given credit where it is due. The biggest game changer was in 2016 with the introduction of Real Estate Regulatory Authority (RERA) (though not a budget initiative), which transferred the bargaining power from the hands of the developer or builder to the hands of the home buyer. While the regulation has not yet translated into increase in sales, it has tremendously improved international investor and domestic buyer confidence in being able to claim their rights as investors/buyers in what was seen before as an inefficient and opaque marketplace.
While RERA improved the confidence in the market, the relaxation of the foreign direct investment (FDI) rules for real estate in 2014 has directly provided liquidity (in the form of FDI investments) in the market. While the relaxations primarily were directed to building confidence for investing in affordable housing, nearly 70 percent of the international institutions investment funds have focused on buying commercial office and industrial assets due to the extraordinary growth rate (15 plus percent) of absorption in that segment across key metros.
The second reason for the increased flow of FDI into the country was the impetus the government gave in introducing REITs in accordance with regulations of market watchdog Sebi (2015), rationalisation of capital gains tax for REITs (2015) and exempting REITs from DDT (2016). This, while giving India the opportunity to roll out its maiden and Asia’s biggest REIT IPO in 2019, is also serving a much bigger objective. In the mind of a potential international investor, it has generated the required confidence that India is committed to removing all the policy and regulatory shackles that was typically hindering it from becoming an efficient and transparent market.
The Pradhan Mantri Awas Yojana (PMAY) has got a special mention in this budget and rightly so. This was one of the key pillars of the government’s plan and while the total utilisation of the funds allocated is still less than 20 percent, delivering 1.53 million units under the urban scheme and about five million units under the rural scheme is commendable. In this regard, the ask from the industry has been for the roll out of schemes that incentivise state governments to free up land currently locked with government agencies and release them into the market at affordable prices to allow them to build affordable houses for the urban population.
While this does not seem to be on the cards for a while, the government has certainly taken alternate measures in the area of infrastructure by making India “the fastest highway developer” in the world. This provides developers an option to develop land parcels in affordable areas in the periphery of urban cities as connectivity to these locations increase.
All in all, the 2019 budget did give the real estate industry more than it was expecting considering it was an interim election year budget but more importantly, budget 2019 served as a reminder of the initiatives and policies introduced over the last four years that has gone a long way in strengthening the industry.
Joe Verghese is managing director at Colliers International India.