Government Initiates GST Rate Cut and Redefines Affordable Housing Slab

The slash in GST rates to 5% without ITC from the previous 12% with ITC for premium homes, and to 1% minus ITC for affordable homes from the earlier 8%, gives the beleaguered realty sector the much-needed breathing room and will certainly help it maintain some forward momentum in 2019, feels Anuj Puri, Chairman – ANAROCK Property Consultants adding, another booster shot given by the government is changing the very definition of the budget-range of affordable housing.

Extending the definition to housing priced within INR 45 lakh is credible. It will make more properties from the premium budget fall in to the affordable segment category, and thus benefit buyers in cities like MMR where property prices are exorbitant.

Yet again, affordable segment has got a major push today and buyers of this segment will benefit immensely. This will certainly cause sales of housing units within this segment to rise to a significant extent. Most players currently have considerable unsold stock within this segment.

ANAROCK data confirms that there are as many as 5.88 lakh under-construction homes lying unsold in the top 7 cities. Of these, 34% are priced below INR 40 lakh alone. With affordable housing now being defined within INR 45 lakh budget, more properties qualify for this ‘sweet spot category. The GST cut, coupled with this critical change in definition, will induce more sales in homes falling in this budget range – a win-win for both builder and buyers.

Cash-strapped builders have been hoping for all and any Government interventions which can help boost their sales volumes. This GST cut will provide such a boost, at least in the short-term as more fence-sitters who had been postponing their purchase decisions now have an additional incentive to take the plunge.

For the premium segment, this move may not be a game-changer leading to vastly improved housing sales, but we will see sales rise to an extent. More importantly, this move sets the stage for a stronger revival for the real estate sector in the future. The reduced rate, though nominal, will alleviate developers’ liquidity issues to some extent. Along with the other positives that the recent interim budget provided, it will create a more positive environment for all real estate stakeholders.

An important factor in this rate cut is its timing. With the general elections closing in, builders have been worried on account of the lower sales which were invariably a by-product of the period preceding elections. Investors generally refrain from market plays in this time, and buyers also go into wait-and-watch mode as they await sops from a newly-elected government or stronger market sentiments resulting from continuity of the incumbent government. For this reason, builders also generally refrain from launching new projects in this period.

It would have been ideal of GST had been entirely removed for all residential property categories. This would have provided some serious acceleration for the market. That said, this GST cut is very welcome, and the industry now looks forward to proactive solution to the underlying issues that the sector faces. Until then, even small booster shots in sufficient numbers can help incite positive sentiment and developers can now look forward to some improvement in their balance sheets.

Joint Ventures for Sustainable Real Estate Development

The Indian real estate sector is currently passing through a critical phase and the government has finally realized the fact that there is a need to create positive environment in order to attract investments and kick-start the sector, if we are to achieve housing-for-all by 2022, writes Manju Yagnik, Vice- Chairperson, Nahar Group.

Towards this end, the government has begun the process of initiating a number of favorable industry policies like Relaxed FDI rules, proposed Development Plan 2034, State Regulatory bill,  Smart Cities, GST etc. These are some key drivers which have the potential to improve the market sentiments and propel growth of the realty sector in India. 

Real Estate sector is the second largest contributor to the economy after agriculture. The growth of this sector is therefore essential for the economic growth of the country.

The main challenges faced by developers during 2015 were uncertainties in government policy which directly affected the confidence level of the buyers and the developers alike, issues related to the easy access to funds and liquidity crunch faced by most developers during the year as banks and financial institutions were hesitant to lend to the sector and ease of doing business. Both these factors delayed new project launches and slowed down completion of ongoing projects.

In such a scenario where there is a dearth of capital or limited avenues to raise funds for development of projects, there is a growing trend being witnessed that of developers who are now looking at joint partnerships to develop projects. Here, there are two types of joint venture (JV) partnerships namely - one with the land owner and developer and the other where like-minded developers come together to develop projects. This kind of association takes care of capital requirements, reduces the risk involved and helps in faster development of larger residential projects.

The joint venture where landowner jointly develops the property with developer has been quite successful and currently a few leading developers are developing projects based on this type of a model. Here, developers partner with the land owners in jointly developing the property. This type of development is mutually beneficial to both the parties as the developer does not have to invest large capital to buy the land (which constitutes nearly 50% of total project cost) and the land owner will not have to arrange funds for the construction nor will he have to scout for developers to construct and market the project. The Joint Venture partnership also facilitates developers with local expertise in a new city where a developer wants to start a project. This way a developer can look at starting projects in multiple cities with local partners.

Nahar Group too has few of such projects which are on-going and upcoming.

This is currently trending in the real estate sector due to various reasons, one of them being market slowdown and dip in sales, which in turn has created liquidity crunch and limited access to funds by developers. In fact, with the passing of the Real Estate Regulatory Bill we may see more of such alliances as submission of 70% of project revenue into escrow accounts, being made mandatory, would ultimately limit the liquidity of the developers.

But on the flip side, the State Regulator bill could lead towards finally getting industry status for the sector. The HRA will help in weeding out fly-by-night operators who malign the industry and bring more transparency. Also, this will result in well established players getting a wider platform to operate, with more clarity and possibly single window permission being made available as the regulator would require the completion of the project in given stipulated time frame. Banks and financial institutions will also not hesitate in advancing loans once industry status is achieved.

The other recent trend that is gaining traction among leading developers across the country is that of a few developers forming an alliance to undertake residential projects jointly. Here the concept is based on individual developers bring to table their respective expertise in developing the project. For instance one developer will bring in the capital, another helps in getting necessary approvals from local authorities and third constructs the project while the fourth does the marketing of the project.

In this way each developer, based on the expertise, takes care of one department in the entire gambit of project development which ensures economy of scale, reducing risk and completion of project within the given time frame. Of course this is done with a lot of pre-arranged agreements acceptable by all partners.

These joint ventures seem to be the result of developers trying to beat the downturn and sustain themselves in a rather competitive and challenging environment. As the saying goes "Tough times call for Tough measures" can be apt to describe these innovative plans of developers in the given situation and time to come.

Therefore to conclude, joint venture is the new paradigm shift in real estate development and we can look at more of such associations among various stakeholders within the real estate industry partnering together in the hope of getting better valuation and self-sustenance in the long term.

About the author: 

Ms. Yagnik has been associated with Nahar Group for over two decades. After completing her graduation from Kurukshetra University, she decided to use her skills in a profession that was challenging but yet matched her passion. She entered the real estate industry by  joining the Nahar Group. Creating unique land spaces, coming up with unique initiatives for consumers, understanding consumer behaviour, being a decision maker, managing people, she has been a part of every activity in this group since then