Real Estate : Revival without Reliefs

Real Estate : Revival without Reliefs

Fiscal reliefs for real estate are a must but they can only provide short term survival. Demand revival without impacting govt revenues is the key to the long term health.

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Zooming through the various webinars on revival of real estate, one would have observed that the prominent suggestions were GST input credit, reduction in GST rates, reduction in municipal charges, limited period zero stamp duty etc for reviving real estate.

There is no doubt that most of these are much needed measures should be implemented. However, there is a difference between survival of the supply side and revival of the demand side. The above measures will provide the much needed ventilator to developers but not a long term immunity. Time and again, it has been proven that the long term survival of the industry lies only in the vaccine called “home sales”.

What is therefore important is to address the key reasons that dissuade customers from buying a home. Interestingly, many of these can be addressed without revenues loss to the government



1.  Averseness towards buying under-construction apartments

With large number of incidences of under-construction projects getting stuck owing to approval related issues or to lack of developer’s financial resources, customers are now averse towards under-construction purchases - even if it means more choices and better pricing .

Two initiatives could address these concerns :

          a. Defer all Govt. payments. Use RERA Escrow to secure the same :

Today, developers have to keep 70% of their receipts in the RERA’s escrow account. Developers should now agree to make it 85% and for such developers, government should agree to defer all government payments till the project is complete. Since money from sale would remain in escrow, the government payment would remain secured.

More importantly, when government’s revenue get linked to the completion of project, it makes government an effective stakeholder in the project. So any action by the troublesome RTI activist or a corrupt officers will now be seen as against public interest. Lower project risk would mean more bankability and also reduced averseness from customers.

b.   Normalise GST without revenue loss :

The current slab of GST @5% for under-construction units and ZERO for ready units means customers see lower value in under-construction purchases. This shifts demand towards the more expensive ready apartments which results in zero GST for the government. Developers and govt should agree to make GST 1% for both under-construction as well as ready units. Since bulk of the sale today happens with zero GST, the net loss to the ex-chequer will be minimal. Consumers will now be able to capitalise on cheaper option of under-construction purchases.

The big benefit, however, will come from large under-construction sale which will revive many stalled projects and thus start generating incremental revenues for govt and jobs for people. The minimal loss to the ex-chequer will easily be compensated by this gain.

Lastly, even the banking sector gains as larger under-construction sales means lower delinquency levels

2. Fear of job losses and the Risk of home prices coming down.

In the post-lockdown era, the indecisive customers will now have one more reason - fear of job loss – to defer their purchase decision. And those who had moved close to the final purchase decision would now perceive increased risk of home prices coming down.

These two factors could significantly depress sales. Such deep-rooted concerns can be addressed only through innovation.

           a. EMI Insurance

One good option that developers and HFCs can together work on is an EMI-insurance product where the customer will be assured of the EMI payment in case of job loss during the next 24 months.

        The confidence in creation of such kind of insurance product comes from the fact that    
         large quantum of currency being printed in the western world. After things settle down
         in 12-18 months, this money will travel across the world to chase assets. Investment in
         assets will lead to job creations. A similar trend was seen as a result of the quantitative
         easement post  9x 11 crisis. So while the consumers may feel the risk at his individual
         level, the financial institution’s risk perception post-24 months will be much lower.

          

           b.   Derivatives in real estate :

In the past, when consumers feared fall in prices, developers offered Price Protection plan. In addition, now developers, HFCs and Regulator can work out a financial structure where an HFC ( or an investor ) can buy call option from developers by paying say 10-20% of the home price. When the building is ready after 12-24 months, there will be much more money floating around ensuring good returns to the investor. For developer, it would make sense since in the current market, he may not able to sell all the apartments in a project to home buyers but with call premiums adding to project equity, it would be easier for him to raise funds towards project completion. The investor may consider sharing a small upside with developer ensuring developer’s interest in better price realisation post-completion.

The revival of real estate is not just in the interest of developers but of the larger eco-system, therefore the developers, HFCs and the Government need to come closer and work cohesively. Social Distancing will not provide a long term cure.

- Deepesh Salgia

  Director, Shapoorji Pallonji Real Estate