Infrastructure status for real estate sector: Let us start with an undeniable fact, the real estate industry is critical to India’s economic growth and stability. After agriculture and railways, it is the country’s third-largest employer. More importantly, it supports a wide range of sub-sectors, including steel, cement, paint, and infrastructure, resulting in indirect job creation and incremental economic value. With the country’s real estate market expected to be worth $1 trillion by 2030, the sector will play an important role in achieving India’s goal of becoming a $5 trillion economy.
Nonetheless, real estate in India continues to suffer from a number of issues. Abhorrent levels of transparency, liquidity issues for developers, and unexpected economic and policy changes such as the 2016 demonetization, GST, and so on. While real estate players are working to address these bottlenecks and have even found support from government initiatives such as RERA, there is one long-standing need that has yet to address: the recognition of real estate as infrastructure.
For several years, industry bodies such as the Builders Association of India, RICS, and ASSOCHAM have urged the government to grant the sector “infrastructure status.” In the weeks prior to Budget 2021, the National Real Estate Development Council (NAREDCO) declared that a housing revolution was urgently needed, and urged the government to grant the real estate sector infrastructure status in order to increase its borrowing capacity. A number of measures in the Finance Minister’s Budget 2021 do not grant the real estate sector infrastructure status.
Infrastructure status to the real estate industry: What will change and why it is needed
But why is infrastructure status important for real estate? Because the sector has historically been largely unorganised, and the lack of standard industry practises has been its Achilles’ heel in its efforts to evolve into an organised industry. Securing infrastructure status will address these concerns by paving the way for real estate to be included in Central and State industrial policies, as well as to be recognised as a priority sector by the RBI. Additionally, the sector would benefit from long-term initiatives to boost it, such as RERA.
Government granted infrastructure status to affordable housing in 2018 resulting in a massive increase in supply. During the real estate sector’s recovery, it accounted for nearly half of total property sales in Q3 2020. The industry faces continuing challenges, including excess inventory, insufficient liquidity, and delays.
Clear policy and greater transparency
Several norms will have to be in place by state and federal agencies to regulate developers and ongoing projects. All transactions in the property purchasing process won’t occur, improving accounting practices and reducing the flow of black money. Also, authorities must remove bottlenecks such as inefficient land records digitization.
It will also establish health and safety provisions for all stakeholders so funds are used for their intended purposes. With infrastructure status, real estate in India will be governed by the same standards as other mission-critical sectors.
Another advantage of infrastructure is the focus on single-window approvals and licensing clearances. Currently, developers must obtain over 70 clearances in a process that can take 1-2 years.
It will also likely push the government to take measures to improve supply, such as streamlined GST rates, capital and interest subsidies, and exemptions or relaxations from stamp duty, tariffs, and other duties, as well as measures to improve demand, such as lifting the ban on the Subvention Scheme. It will also create an environment favorable to R&D and innovation in the industry. This sector should contribute 13% of the nation’s GDP by 2025; as such, accelerated growth would be significant.
Greater investments and a boost to borrowing capacity
Since 2005, real estate in India has attracted more than USD 25 billion in Foreign Direct Investment (FDI), despite the fact that many investors have remained sceptical due to sector-wide opacity and delayed project deliveries. Real estate in India attracted USD 235 million in the capital in the third quarter of 2020, representing a 52 percent increase in investments over the previous quarter. As a result, the regulations resulting from endowing infrastructure status could attract even the most cautious investors. Increased transparency and a faster clearance process brought about by well-defined industry practices will also boost domestic investment sentiments.
Due to tax-exempt status, the ‘infrastructure’ sector will attract sovereign wealth funds and pension funds. Additionally, equity investment will be feasible, and borrowing easier because developers can get longer loan terms at lower interest rates.
Furthermore, these developments will encourage the government to introduce refinancing guidelines for developers. It will also pave the way for large investors to join forces with developers as financing partners. Taking these measures will assist developers with addressing cash flow issues and restarting stalled projects.
Lower property prices and a boost for ownership
The cost of capital is the most difficult challenge that real estate developers face. Reducing this cost will lower overall project costs will cut, which will benefit property buyers. Additionally, the government may need to restore the Input Tax Credit (ITC) due payable to buyers.
The resulting increase in demand will also help developers reduce the burden of unsold inventory. Only a few months before the pandemic-related lockdowns went into effect, the industry had unproductive assets (under-construction, stuck, or delayed projects) worth INR 4.5 trillion spread across the top seven Indian cities. Given that demand for property in the country may rise further in the future, a price incentive for property ownership can provide significant revenue to the industry. The rise in property investments and historically low interest rates has made real estate an essential aspect of the economy.
It still needs to transform and meet international benchmarks once it becomes infrastructure. Such intervention is necessary to make it comparable to other industries like manufacturing and IT. Transparency in business practices will improve, which will benefit both the real estate industry and the economy at large.