Signs of recovery in real estate but challenges ahead

December 18, 2012

(Any opinions expressed here are those of the author, and not those of Thomson Reuters)

The year 2012 has been a rollercoaster of sorts. Inflation remained above comfort levels, the GDP growth rate slipped and so did the industrial output. The Reserve Bank of India doggedly kept the repo rate unchanged, barring once in April.

In real estate, while there were signs of recovery in 2012, many challenges still exist for the sector. Input costs have remained high and an acute shortage of skilled labour is expected to continue next year.

The government needs to build on positive steps taken towards meeting the challenges of affordable housing and urban development. Allowing external commercial borrowing for low cost housing and road construction; approval of 100 percent foreign investment in single-brand retail and 51 percent in multi-brand retail is likely to have a positive impact on the real estate sector in the coming year. But the focus should be on implementing these initiatives.

While the government is taking the right steps, more reforms are needed to boost the sector. The introduction of legislation such as the real estate bill is expected to increase transparency and boost investor confidence in the Indian market. We continue to advocate the formation of a regulatory authority for the sector which will ensure planned and transparent development and protect the interest of customers.

In a recent report, Jones Lang LaSalle said new organized retail project completions will increase by 109 percent year-on-year in 2013. More importantly, India’s major cities such as Mumbai, NCR-Delhi, Bangalore, Chennai, Pune, Hyderabad and Kolkata will see the addition of close to 9.5 million square feet of organized retail real estate in 2013, while Mumbai, NCR-Delhi, Bangalore and Chennai will together contribute 70 percent of retail space absorption. Other cities like Pune, Hyderabad and Kolkata will account for the remaining 30 percent.

Secondly, for realty players promoting affordable housing, a tax incentive would be very welcome. Other financial incentives could include capital subsidy for PPP initiatives, regulated lower interest rates, discounts or waivers in stamp duty and registration, and priority sector credit for home loans up to 2.5 million rupees.

Also, many prospective buyers stand to gain if the subsidy for home loans in metros and tier-1 cities is increased for houses up to 3.5 million rupees. In fact, instead of having a national benchmark of 2.5 million rupees, the government should map markets and implement different slabs to facilitate development of affordable housing. Also, there should be a reduction in interest rates for this asset class.

State governments need to establish a single-window clearance system, which serves the three principal objectives of realistic price discovery, land allotment and granting approvals in a time-bound manner. A haze of contradictory approval requirements, administrative delays and a dysfunctional system which works on multiple clearances are a bane for players in this sector. It’s high time state governments change archaic rules.

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