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Decade of Action

Saturday 01st January 2011- Times Property.

Happenings in the real estate sector, past and future tense

The growth of real estate in India over the last decade can only be described as an "adult in the making". India is emerging as an important business location, particularly in the services sector. India's favourable demographics and strong economic growth makes the country an attractive place for investors, given that demand for property is determined mainly by business developments and demographic trends. Historically, the real estate sector in India was unorganised and characterised by various factors that impeded organised dealing, such as the absence of a centralised title registry providing title guarantee, lack of uniformity in local laws and their application, non availability of bank financing, high interest rates and the lack of transparency in transaction values.

So what has really led to this change? Land, that too at the lower cost, constitutes an important element in growth of the real estate sector. Repeal of Urban Land Ceiling Act in 1999 can be considered as one of the major steps taken by Government of India (GoI) which has led to availability of considerable parcels of land that were earlier frozen. One of the most pressing requirements of the real estate sector was availability of adequate funds from different sources. Considering this need, the Government of India opened its doors to Foreign Direct Investment (FDI) in March 2005 by issuing the first Press Note 2 of 2005. Presently, FDI upto 100 percent is permitted under the automatic route in townships, housing, built-up infrastructure and construction development projects (which would include, but not restricted to housing, commercial premises, hotel, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure). Since the opening up of window for investment, the real estate sector has attracted total investments of USD 8.9 billion. It is expected that the market size will increase to USD 180 billion by 2020. Similar to FDI route, the Domestic Venture Fund route has also attracted significant amount from domestic investors for investment into the real estate and infrastructure sector.

Another major challenge for the Government was to have a slum-free India. If statistics are to be believed then number of people living in slums are expected to double by 2030. To address this challenge, the GoI announced 'Rajiv Awas Yojana' in Budget of 2009 with an objective to have slum-free India by 2014. It is estimated that India has a huge deficit of houses and in order to meet this expectation and achieving the vision of housing for all, JNNRUM launched by the GoI is gaining momentum. Besides policies and regulations, the GoI has also provided income tax incentives depending upon the nature of project. e.g. Affordable housing projects (including Slum Redevelopment and Rehabilitation Projects) approved before March 31, 2008 is eligible for profit linked incentives under section 80-IB(10) of the Income-tax Act. The tax incentive is 100 percent of profits earned from the business of developing and building specified housing projects subject to satisfaction of certain conditions. The three land mark legislations starring at the door step of the economy Direct Taxes Code, 2010, GST and IFRS would change the rules of the game and hence these legislations should be crafted as also implemented carefully.

The way forward Growing real estate needs supported by strong macro-economic fundamentals would necessitate additional amount of liquidity into the system. Encouraging small investors to invest and mopping up large sums through REITs (Real Estate Investment Trusts) and REMFs (Real Estate Mutual Funds) is essential. This would facilitate the much needed supply of funds for the real estate sector to provide housing to for 1.2 billion people at the rate of providing almost 10 million units annually. SEBI has already issued draft REMF regulations in 2008, but will have to accelerate the rollout after careful considerations. The necessity for a regulatory body to regulate the Real Estate Sector, being dominated by unorganised and non-corporate players has been echoed for a long time. Accordingly, the Ministry of Housing & Urban Poverty Alleviation (MHUPA) has released a draft Model Real Estate (Regulation of Development) Act. This draft needs to be significantly streamlined to facilitate monitoring of the development activities at the same time provide the desired operational flexibility to the developer's community.

Granting infrastructure status to some of the critical priority projects in the real estate sector is vital for sector's growth as building Integrated townships, Mass housing colonies, Special Residential Zone, etc. are more or less the same as building large scale infrastructure facilities. If it is accomplished, banks could extend loans to the industry on similar norms as they adopt for infrastructure companies. This will also attract investments from foreign investors. Needless to mention, such projects should also be provided tax incentives as are eligible to the infrastructure projects. Apart from the aforementioned reform measures, there are several other measures that the Government can consider taking on a priority basis to support the sector in maximising its growth. Single window clearance should be introduced at the earliest, while eliminating the need for environmental clearances, if the plan is as per zonal requirements. Finally, if GoI were to make affordable housing a success story, the developers should be provided incentives in the form of land at concessional rates along with other tax incentives, provision of surrounding infrastructure, loans at concessional rates to the buyers and the like.

Source: KPMG Real Estate and Construction Team

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