By: Brotin Banerjee, MD & CEO, Tata Housing
From being the governance wild child to maturing into a market influencer, India’s real-estate sector has transformed in the past decade, with a paradigm shift from family owned businesses to corporates along with a few companies listing on stock exchanges. The change began with the government opening doors to Foreign Direct Investment (FDI) in 2005 and then welcoming the next wave of stability as corporate houses brought image restoration for the sector. Led by corporate entities, realty companies soon adopted corporate governance wherein transparency began to trickle down into the system as a norm slowly.
An expansion fury gripped the sector during 2005-07 and the market peaked with a staggering growth in demand, substantial development and increased foreign investments. But the highs of 2005-2007 were soon challenged by the global meltdown in 2008 as FDIs flows began to shrink. By mid-2008, the fervour in the sector was replaced by cautious evaluation of business models and plans. The key agenda of entities in the sector was to renew focus on affordable housing and spring back in action. By 2010, the real-estate industry – Indian and global entered into stage of a rehabilitated optimism, mitigating the adversities that the recession had generated.
But after surviving a journey of boom to bust, the optimism of 2010 was short-lived with things gradually moving towards uncertainty yet again in 2013. In the period of 2000-2013, USD 22.43 billion flew in the form of FDI in realty, comprising 11 per cent of the total FDI flow in the country. But 2013 saw a significant fall in the value of the currency, increased inflation, political uncertainty with impeding elections and a highly volatile stock market. Hence, the sector is currently at an inflection point in the cycle.
Not surprisingly, there has been a strong focus from the government to recognise some of the omnipresent challenges that have been plaguing the real estate sector. While there is no doubt that the sector holds huge potential to attract FDI in its various segments – including townships, housing, built-up infrastructure – it is now being addressed, more than ever, that progress is impossible without joint efforts from the industry and the government, alike.
While on one hand, the industry needs to bring increased transparency, clear land titles, improve delivery and project execution; on the other hand the government must provide fiscal incentives to developers to build environment friendly buildings, low cost and affordable housing for the masses, review existing FDI guidelines for investment and increase the flow of foreign capital into the sector. The sector’s rallying cry hence has been for the adoption of the globally successful model of Real Estate Investment Trusts (REITS). The investment mechanism is also being contemplated by the Securities and Exchange Board of India (SEBI).
Building a single company or group that owns and manages real estate properties on behalf of investors, much like shareholding in a company – REITs, essentially, can sculpt a significant step for encouraging foreign investments and meeting growing demands for additional funds and bring in the required transparency in the system. Nonetheless, in the short run, the main concern for the roll out of REITs in India is clarity on its tax efficiency.
Hence, the industry is increasingly appealing for a ‘pass through’ status through a change in the Income Tax Act, and one-time waiver of stamp duty and property tax. It is only through such initiatives that REITs can be a more investor-friendly vehicle.
Converging corporate governance with growth
For a sector that is the second largest employment generator, growing at a rate of about 20 per cent per annum and stimulating demands in over 250 ancillary industries –cement, steel, paint, brick, building materials, consumer durables; Indian real-estate has huge potential demand in almost every segment including commercial, residential, retail, industrial and hospitality, etc. Being at the forefront of the government’s agenda the sector is expected to grow to approximately USD 140 billion in FY17. Within real estate, the housing sector alone contributes around 5 per cent of India’s GDP currently and in the next three to five years it is likely to increase to 6 per cent.
With its potential to propel economic growth, in 2013 the real-estate sector saw the government addressing afflicting issues and leading a beginning of change. From introduction of The Right to Fair Compensation, Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013, regulating industry and taking care of customer interests with the Real Estate Regulation and Development Bill, 2013, re-considering liberalisation of FDI (a decade later of its first introduction) to introduction of real estate investment trusts (REITs); policy revisions on across all aspects of the real estate business are now on the governments radar.
While the implementation of these policies is questionable, the momentum for change for the real-estate sector is encouraging.
Enforcing investment structures
In the period from April 2011 to July 2013 the sector attracted FDI of approximately Rs 1,00,000 crore, making it one of the important sources of funding. However, the volume of FDI into the sector has been on a decline owing to multiple reasons, one of them being unattractive policy which is over a decade old. Hence, experimenting with advanced funding options such as REITs and provide industry players with a globally competitive edge is rightfully the next step.
The draft SEBI (Real Estate Investment Trusts) Regulations, 2013 although well thought out, seems to lack commercially viability. The obvious and much-discussed road blocks are taxation, foreign investments and stamping of agreements relating to transfer of property to the REITs. To make the REITs regulations workable there is a need to provide an exit avenue and liquidity. Further, the definition of ‘real estate’ or ‘property’ should be broadened to include all commercial and residential property and completed infrastructure assets such as roads and highways that have a regular income flow.
On the residential real estate segment, against the backdrop of a rising economy and concurrent income growth it is time to review policies and highlight the gaps, such as repealing the century-old Rent Control Act, proving muscles to the Land Acquisition, Rehabilitation and Resettlement Act, Service Tax abatement on construction activity and a consolidated FDI policy.
In Conclusion
As the property markets in the West are emerging fresh out of crisis, emerging markets, such as India, are likely to lose some of their attractiveness. Unless, India rises to corporate governance of a new high, it will no more be that attractive for the investors. Governance of the next level is needed to provide legs to the industry to fight challenges and demonstrate utmost commitment in implementing appropriate and timely policy measures, creating an investor-friendly environment to couple with India’s lucrative market of a burgeoning middle class segment and a growing millennial customer base.
