Bottom Line: The government is in a fix to offer middle class Indians budget incentives in general and to the homebuyers in particular to send across the message that it is indeed committed to its oft-repeated objective of ‘Housing for All’.
To say the eco-political compulsions are asking the government to dole out largesse in the upcoming Union Budget 2017-18 would be stating the obvious. The government is in a fix to offer middle class Indians budget incentives in general and to the homebuyers in particular to send across the message that it is indeed committed to its oft-repeated objective of ‘Housing for All’.
However, the state of the Indian economy suggests the government will have to walk a tight rope with the Union Budget 2017-18 amidst the forecast of a slowing economy. Though the banks are now flush with funds due to the government’s demonetisation and limiting the extent of cash withdrawal, the overall effect of the measure has not gone down well with the health of overall economy.
Already, the data released by the Indian Central Statistics Office has estimated that the economic growth would be slow to 7.1 per cent in the current fiscal year ending March 31. This is not only slower than the government’s own estimation but also slow compared to 7.6 per cent last year. Among the economic experts the slow growth forecast is seen as the first indicator of the impact of the demonetisation drive.
The estimates have been reduced in all the sectors, except agriculture, which has improved due to the positive monsoon season. The analysts believe this forecast is very toned down since the real impact would be seen in the upcoming fiscal year. Moreover, the impact on agriculture would also be visible as the demonetisation immediately prior to the crop season will take its toll.
Challenges galore with budget
- The emerging eco-political compulsions suggest Finance Minister to read a home buyer budget for the middle class Indians
- The state of economy leaves little room for any budget bonanza
- Feelers with the rate cut ahead of budget indicate more sops but the economic forecast a dampener
- Growth in real estate can help GDP growth but excess liquidity could also derail the economy with artificial growth
The real estate fraternity is nevertheless upbeat and believes that the state of economy definitely allows the government to provide major relief to the real estate sector in general and the home buyers in particular.
They cite the Morgan Stanley Research Report dated 6th December 2016, which suggests the Indian annual property sales in expected to propel from 2015’s USD 105 billion to USD 462 billion in 2025. Research estimates a 14% CAGR for property sector demand growth, 2015-20 (8% volume, 6% pricing), and an 18% CAGR in the five years after that, versus the 12% CAGR (5% volume, 7% price) of the past six years.
India in 2015 appears similar to China in 2000-03 on key macro parameters – GDP (US$1.8trn), per capita income (US$1,500), urbanization (33%), demographics (27-year median age, with comparable population size), and improvements in the regulatory environment. In the past 15 years, China’s economy and per capita income have quadrupled, urbanization has doubled, and the property segment has grown 10x, to US$1.3 trillion in annual sales. In the longer term, this implies a structural uplift to India’s property sector.
“It is a peculiar situation and the impact of the state of economy is market ot market reality. This is because while the cash driven markets like Dehi-NCR are witness to slowdown, the service class markets are not that much affected. Of course, the slow moving job market is challenging but on a macro level one-size-fits-all statement cannot be made about the economic situation,” says Nikhil Hawelia, Managing Director of Hawelia Group.
Kaizad Hateria, Brand Custodian and Chief Customer Delight Officer, Rustomjee Group asserts that it is not that any sops are being taken away from the economy; it is in fact adding to the economy. The budgetary relief will not cost the economy. In fact, it will be a boost to the economy. It is high time that the real estate should be taken seriously. For instance, opening of PE should be done in a speedy manner.
“Based on proprietary regression analysis and in-depth China case study, research estimate a 14% CAGR for property sector demand growth, 2015-20 (8% volume, 6% pricing), and an 18% CAGR in the five years after that, versus the 12% CAGR (5% volume, 7% price) of the past six years. Inadequate urban planning and low infrastructure spending are key risks to our outlook,” says Hateria.
Parth Mehta, Managing Director, Paradigm Realty believes that due to demonetization there are expectations of benefits for the common man in the upcoming budget. Realty sector will be benefited indirectly by exemption in tax rates, thus increase in buyers purchase power for budget housing. The budget needs to work on holistic model where the developers are incentivized for budget housing.
“The budget should cover the entire value chain right from materials procurement, government premiums, lower turnaround time for approvals to developers and as well stamp duty payments, lower home loans rate for the buyers. This would ensure that complete value chain is perfected for the delivery of the affordable housing,” says Mehta.
Vivek Mohanani, Joint Managing Director, Ekta World adds that in the previous two Union Budget sessions, the government offered various incentives to businesses in a bid to boost investments and economic growth. The year 2016 has laid a strong future foundation for the real estate sector with the policies like Smart Cities concept, Housing for All by 2022, GST, RERA Act implementation, Demonetization and Benami Transaction act, which will further sanitise the real estate sector in the coming years.
“The real estate market is expected to gain positive sentiments post the announcement of the budget. The upcoming Union Budget 2017-18 is believed to be heading towards the right direction looking at the steps and initiatives taken by the government in the current financial year,” says Mohanani.
Hopes apart, it is challenging for the Finance Minister to ensure that the Indian real estate remains a predominantly end-user market, driven by urban immigrants, upgrades & family nuclearisation, and the average Indian moving towards home buying age (projected to be 31 years, by 2025). Proposed regulatory changes (e.g., RERA, REITs, demonetisation) should improve sector practices and benefit quality developers but the state of the Indian economy leaves little room for any largesse.
By: Ravi Sinha
