Challenges And Solutions For Indian Real Estate

India's real estate sector is the third largest contributor to the GDP in the country. Pegged at USD 93.8 billion in 2014, the segment is estimated to grow to USD 180 billion by 2020.Supporting this growth, a number of factors are working in the favour of real estate, including the need for 11 crore houses by 2022, 100 Smart Cities projects, easing of FDI rules, focus on affordable housing and Housing For All by 2022, among others. Even, the Real Estate Regulatory Bill is touted to give boost to the realty sector. However, the path to success is always not easy.

Challenges ahead

Despite various opportunities, the challenges for the real estate sector are no less.

• Slow urban development: India is witnessing high urban population growth but India's per-capita urban infrastructure spending is very low, thus, restricting the real estate growth.

• Scarcity of land: While there is a good demand for housing and commercial projects in the country, the non-availability of land within city limits along with the rising land and construction cost is leading to an increase in the overall cost of the projects. Thus, making the projects unviable.

• Lack of adequate policy framework: There is a lack of coordination between central and state ministries. Further, numerous central and state level laws, rules, and regulations often result in a lengthy and cumbersome approval process.

• Complex approval processes: The lengthy and complex approval process leads to a high gestation period which eventually results in project cost escalation by 20-30 per cent. Currently, 30 to 40 approvals are required for any project which generally takes about two to three years.

• Restrictive development norms: Low floor area ratio (FAR), density norms, ground coverage, parking provision, etc., also pose as a challenge for the real estate.

• Unfavourable taxation policy: With several taxes, such as stamp duty, value added tax (VAT), etc., accounting for about 30-35 per cent of the total housing cost, the final sale price of the unit increases. This makes property unaffordable.

• Development norms: Stringent development and environmental norms lead to sub-optimal utilisation of land and also raise the per unit value.

• Lack of adequate funding sources: Limited foreign funding sources and underdeveloped equity and debt markets also pose a challenge for the Indian real estate.

• Cost overruns and project delays: Owing to lack of advanced technology and skilled manpower, the overall project economics is not achieved and there are further delays. In fact, at present, 25 per cent of housing projects in India are delayed due to this issue. 

• Unsold inventory: Due to stagnancy in the real estate market, the unsold inventory in India has increased considerably. According to Knight Frank, unsold inventory in India include 2,06,000 units in the National Capital Region (NCR), 1,81,000 in Mumbai, 1,00,000 in Bengaluru, 63,000 in Pune, 41,000 in Ahmedabad, 36,000 in Chennai, 36,000 in Kolkata and 31,000 in Hyderabad.

Challenges

These challenges do not mean that the future is bleak. There are various solutions too, including government reforms.

• In order to deal with an inadequate policy framework and project delays, the government should decentralise decision-making process and empower urban local bodies.

• The approval process should be streamlined by introducing single-window clearance mechanism backed by technology.

• Building development norms such as low FAR/FSI, density norms etc., should be reconsidered.

• Fees and taxes should be rationalised across project stages as they increase the construction cost by 30 to 35 per cent.

• Public Private Partnership (PPP) framework should be adopted to effectively address the major issues of the Indian real estate.

• A nodal agency to coordinate effort of various stakeholders should be formed.
  7. More funds should be allocated for the growth of the real estate.

• FDI in real estate should also be promoted to increase the funding sources.

• Cuts in interest rates should be announced to reduce the cost of borrowing and to help clear the unsold inventory and support future demand.

Government and even the private sector should increasingly focus on skill training and technology to bridge the gap.

Government's initiatives to boost real estate in Union Budget 2016-2017

A lot needs to be done and the government has already started taking positive steps in the right direction.

• The government has declared investment to the tune of Rs 97,000 crore on roads and the focus on rail and airport connectivity has also been increased, thus, paving a way for the creation of additional townships and increase real estate activity in the country.

• Tax holidays and deduction on affordable housing projects have also been announced.

• 100 per cent Service Tax exemption has been given to make houses up to 30 square metres in four metros and up to 60 square metres in other cities (approved between June 2016 and March 2019 and completed within three years of approval).

• Dividend Distribution Tax on Real Estate Investment Trusts (REITs) is scrapped to make investments attractive for global investors in the real estate sector.Huge allocation of funds for infrastructural development is another step that is taken. 

There is no doubt that through various measures undertaken by the government for the growth of infrastructure and real estate in Union Budget 2016- 2017 has done its best to infuse confidence in the real estate sector. However, more massive push for improvement in infrastructure including outlay for roads, railways and development of smaller airports to improve connectivity, favourable land acquisition policies and fast clearance of pending projects is the need of the hour.

Looking ahead

Various demographic trends suggest that India is on the verge of large-scale urbanisation over the next few decades. With more than one crore population getting added to urban areas, India's urban population is expected to reach about 81 crore by 2050. Thus, the real estate sector of the country has huge prospects for growth

The article is written by Parveen Jain, President, National Real Estate Development Council (NAREDCO) & CMD Tulip Infratech.