Real Estate Sector Needs More Broad-Based Approach
The preceding year tested the resilience of businesses across sectors with symptomatic issues of access to capital, production and demand. Real estate exhibited complications in all three areas and to evolve solutions various committees were set up by both state and central governments. The recommendations centered around restructuring, access to capital, reducing approvals costs and premiums while the 2020 budget ensured that benefits in specific segments like affordable housing push for demand. However, given the complex inter-linkages between capital, compliance, supply and demand there needs to be a more broad-based approach to ensure that the sector resurrects and importantly remains vibrant.
The critical piece to be addressed is to revive demand in real estate to ensure the efficacy of the other steps undertaken by the government. On ground evaluation of demand issues indicate support required for affordability, asset security and personal income.
As on date, large residential stock overhang exists creating financial problems for developer community while programmes like PMAY is yet to achieve targets set for 2022. Given that the residential yields in India are among the lowest in the world, specific programmes by the government both at state and centre can be undertaken to push voluntary admission of unsold stock under community rental housing schemes (“CRHS”). The rental payouts to the developers participating in CRHS should be escrowed, paid direct to banks and financial institutions to clear part of the debt to recapitalize the developers and improve the rating of companies to access further funding. Further, securitisation of CRHS stock should be allowed for the developer to monetize the assets and given the income is guaranteed by the sovereign, there shall be immediate access to investors domestically and globally. Tax shield for CRHS should be provided to ensure widespread participation and financial efficiency for investors.
On lines of commercial REIT, the community rental housing REITS should be given push. Given that 100% FDI in affordable housing is already being considered, finance ministry should study and propose a combination of both CRHS and affordable housing initiatives to provide better access to financial markets.
Salaried professionals opting for CRHS units should be provide with tax offset additional to HRA for tax savings. This will ensure that the stock under CRHS will be absorbed and at same time income in hand increased to push for more consumption.
Developers should be allowed to offset certain investment amount in affordable housing projects by providing tax or debt interest savings for premium or luxury housing projects. This incentive should be time-bound and combined with schemes undertaken by state governments to encourage investments. Further, buyers into such premium and luxury projects should be provided with one-time tax-saving provided that 75% of the unit value is paid in the corresponding assessment year. This will increase demand for such segment while also increasing cashflows to developers stuck with such stock.
One time ECB should be allowed into a specific real estate project which is RERA registered, for project size not less than 1.0 mn and construction is about 25% complete. The ECB should RERA escrow monitored, repaid before issuance of the completion certificate, while allowing for use of 50% of such ECB to retire any long-term debt in the project of more than 3 years. This will enable to address issues of non -performing assets for banks and NBFC while broadening the access of capital for developers.
To ensure that additional development rights from government and public sector land are put to use properly, a transferrable development rights (“TDR”) trading mechanism should be established like commodities exchange. This will allow for free market participation in buying of such TDR and utilising them in projects. A seamless federal mechanism should be evolved to address the single window clearance and regulations at both centre and state level. Issuance of bonds underwritten by such TDR for enabling monetization for public sector units to benefit their finances.
The entire real estate sector should be provided with infrastructure status as it is key to solving the housing problem in the company. The government should withdraw the taxation on the unsold property on a notional basis based on the annual value of the property which should only be taxed when constructed as income-generating property. This will specifically help developers facing headwinds from macro-economic factors impacting the demand thereby holding stock in trade for longer periods.
Capital gains for joint venture partners should be only be taxed in the year their a portion of the stock is completed and issued with the certification of completion. The liability of capital gains should only be limited to the portion complete rather than entire land thereby helping landlords.
Limitations on the set-off loss for house property set out in Finance Act 2017 should be removed or at least increased to levels such that it promotes investment in the housing sector.
The limitation on the carpet area of the commercial areas within the affordable housing projects for claiming deductions under 80IAB. However, in large projects, they may be a requirement of higher commercial portion to address the support infrastructure in the project. Further, the deduction is only allowed when the completion certificate for the entire project is provided while large projects usually are developed phase-wise and thereby provision of claiming the deduction for the portion completed should be allowed.
