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Big Real Estate “Re-set” Opportunity – Mantra For Thriving Through COVID–19

If the above are implemented, these reforms have a potential to bring a “Tsuanmi” in the economic upsurge of the nation and make real difference…….Madam Finance minister Listening?

Photo Credit : Reuters

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FY 2019 -20 for most of the businesses was not a year to celebrate about. Economy had slowed and by March most of the businesses had a revenue shortfall of around 10-15%. In the last quarter of the year, salaried class was expecting only a lower than normal salary raise and businesses houses were busy figuring out their next move to cope up with the economic scenario. COVID – 19 that hit Indian in March 2020 however has no only changed our lives, but will impact the economy in a manner that is probably unimaginable. Like every adversity COVID – 19 gives us an “Opportunity”, to “Re-Set” and think with a fresh perspective. This is the time to think “ZERO BASE” reforms and not “INCREMENTAL”.

Indian Real Estate and Construction industry together is the second biggest employer in the country. It is projected to contribute 13% of the country’s GDP by 2025, and reach a market size of US $1 trillion by 2030. As per various studies carried out, real estate industry impacts over 248 industries, i.e., from the obvious cement & steel to ceramic, mining, paints, electrical, consumer durables and even service industries of facilities management, mortgage and finance, security agencies, etc. We proposes following quick reforms so that this “sleeping and often ignored giant” can become the key driving engine of our economy not only in the COVID – 19 period, but for a long period of time.

Real estate can bring a lot of good news is that there is a bottomless demand for housing and real estate of all kinds at a “Affordable Price Point” i.e., in the MID INCOME segment. Policy makers and governments have thus far focussed on “Low Income” and “EWS” housing only, leaving behind MID Income housing, commercial office and retail space and also industrial real estate. This approach has not borne any great result and this also has been difficult for private industry to cater to due to a series of issues starting from expensive land to building bye-laws, financing system etc., and can only marginally impact the economy at large.

MID INCOME housing involves a construction of approximately Rs. 2000 per sq.ft. which is almost double of Low Income or EWS housing. This difference is on account more materials used i.e., tiled flooring, MS grills, UPVC doors & windows with glass, Steel sink with Stone slab in kitchen and at times furnishings like Cupboards and electrical fittings like fans and geysers. Therefore MID – INCOME housing drivers more number of industries in comparison to Low Income or EWS housing and it is time to focus on MID - INCOME housing as well. This housing has faced a lot of issues and the biggest of them has been the excessive taxation. According to studies done, taxes form up to 40% of the sale price of a house in form of Stamp – Duty, GST and other taxes and levies.

It is our belief that without the reform stimulus to mid-income housing, real estate and construction industry, India will not truly move ahead on the path of economic recovery. This industry will face one of the largest impacts of COVID -19 and we hereby urge the government to consider and implement the following 5 point “BIG Real Estate RE-SET” ideas if it has to not only fight COVID – 19, but bring the brighter “Acche Din”:

1. Government should allow 100% deduction of any money paid (capital and interest) to buy first house by any individual from income. The current deduction is only up to 200,000. Many individuals will cross over from rent to buying a house as if such deduction is given. There is already an inventory of 4.5 lakh homes and this can be one of the schemes where a solution for such large inventory can be found. Also this will go a long way in fulfilling the dream of ownership of house to one and all.

2. Housing loans should be provides at the “repo rate + 1% spread”. This will benefit the customers and the entire industry will kick start and will give a big push to the economy in general. These loans should only be given to developments that procure 90% of the items by value from India.

3. Real Estate specially housing should be bough under GST and there should not be any double taxation. Currently a home buyer pays GST and also Stamp duty. This makes house very expensive and these prohibitive transaction costs affect the industry and economy negatively. Before GST, the stamp duty was in the range of 5 to 7%, now there is an additional burden of 12%. This is highly unjustified. While GST reform may take time, there should be immediate rationalization of stamp -duty and “Circle Rates”. It has been observed recently that state governments have very high stamp duty rates and also “very high circle rates” in some areas. Transactions are therefore recorded at that rate, irrespective of the transaction price. If rates of stamp-duty are brough down, there will be more transactions recorded at the actual price and the revenue to the exchequer will actually increase. In our view the stamp duty should not be more than 2% and we should also work to having an e-registration to cut down the red tape in the court of registrar.

4. India is one of the few economies in the world , probably 15, where there is “GST on rent”. This is a very draconian taxation. It limits investment in commercial real estate and poses a burden on the investors and occupiers of real estate. GST should be levied only on the maintenance of services in the building.

5. To reboot the economy, all construction projects that are stuck should be started again and only if these projects are brought in line by direct central government funds. This will not only given employment and much needed infrastructure, it will make India an attractive investment destination the need of the hour.

We believe that it may not be possible to revive the real estate sector and construction sector with any amount of stimulus package as India is too large an economy. At best such stimulus like revival of NBFC bond market may help the industry in the very short term, but will not set right the basic malady in the system. We all believe that once the cure of COVID-19 is found, real estate and other businesses will return to normalcy. This may be a good assumption to have, but do we really want to be NORMAL? In my belief this is the time to cash in the re-set opportunity and become not just a GOOD but a GREAT economy. If the above are implemented, these reforms have a potential to bring a “Tsuanmi” in the economic upsurge of the nation and make real difference…….Madam Finance minister Listening?

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


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Sunil Agarwal

Sunil has over twenty five years of experience in the real estate sector and is the founder of Black Olive Ventures (“BOV”), a valuation and real estate advisory services company. Previously he Co-founded and was the CEO of private equity backed real estate developer, SARE. He has also worked at senior positions with private equity firm ICICI Ventures, HSBC, DS Group, Colliers Jardine & Chesterton Meghraj (now JLL India) and RICS School of Built Environment. Sunil has a strong track record of Turnaround Management and Start-up’s and has expertise in Real Estate Development, Funds Management, Transactions, Advisory, Valuations, Corporate real estate and Education. Sunil is a Civil Engineer, Urban Planner, MBA and has an honorary Doctorate in real estate.

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