Telltale signs of maturity

Recent IPOs have provided the much-needed liquidity to the real estate sector. Now, the government only needs to do away with redundant laws to boost further growth

Real estate is among few sectors that have grown in tandem with the economy. After a 10-year hiatus since 1995, when real estate companies came back to stock markets in 2006 seeking capital, the sector went into a frenzy.

“There were no public issues of real estate firms since 1995,” said Akshaya Kumar, MD, Parklane Properties Advisors. Due to regulations, real estate companies could not comply with corporate governance norms. The dealings were not transparent as lot of cash needed to exchange hands, he said.

After 2006, real estate firms started thronging the stock markets and the government eased foreign direct investment (FDI) limits. This gave the industry the much-needed liquidity boost and real estate prices have been skyrocketing since then.

Industry experts believe this is only the beginning. The sector is still at its infancy, but there are also definite telltale signs of maturity.

Redundant laws have kept the industry growth in clutches. Rent Control Act has discouraged developers from building smaller houses that could be leased out.  Owners have to pay more than 5% of total cost of a house for stamp duty and registration. 

“Though land and policies related to it still remain state subjects, stamp duty needs to be rationalised,” says Kumar.

Most developers claim demand for smaller flats have gone down. The concept of 1-BHK flats is a passé.

Till last year the finance ministry provided tax exemptions to developers constructing small flats. They were allowed tax exemption if the flat was smaller than 1,000 sq ft in metros and 1,500 sq feet in non-metro cities. However, when the term of the incentive expired last year, the finance minister did not extend it.

Rohtas Goel, chairman and MD, Omaxe, says: “Reintroduction of this incentive will encourage developers to construct smaller flats and also affordable ones.”

One of the biggest highlights in the real estate sector this year has been the policy formulation that will lead to the introduction of Real Estate Investment Trusts ( REITs). But experts believe that unless tax incentive is provided, the success of  REITs is uncertain. Pranay Vakil, chairman of Knight Frank property consultants, says, “Tax benefits can ensure success of the  REITs.”

He said under REITs, income from operation should be exempted and the government should also not charge capital gain tax. “The Centre should also direct state governments not to charge stamp duty on REITs ,” Vakil said.

Experts believe there is a dire need for quality office space (classified as Grade A) in the country, which is also important for the success of  REITs. Commercial real estate business also suffered after the finance minister imposed service tax on property leasing.
Rajnikant Ajmera, MD of Ajmera Group, said: “Finance minister should abolish this tax. It has brought in a lot of complications in the property leasing transactions.”

“We also want the government to extend same tax sops to IT parks like those allowed to special economic zones (SEZ),” Ajmera said.

Developers want the finance minister to facilitate FDI participation in the sector further.
Confederation of Real Estate Developers Associations of India (CREDAI), an industry body, said: “FDI should be allowed for project expansions also and not only for greenfield projects.”

Pujit Aggarwal, MD, Orbit Corporation, said: “The government should come up with a three-year roadmap for the industry. We need to be informed what the Centre will do for the sector. The lack of such assurance is making many foreign investors wary of putting money into projects in the country.”

However, real estate’s rosy tale of growth also has some hidden thorns to it.
Raw material shortage and high steel and cement prices have become part of a developers’ constant woes.

Mukesh Patel, promoter, Neelkanth Group, said: “Government may not be able to control the price rise, as market determines it. At least, it can ensure the availability of steel and cement through imports.”

The industry is also plagued with manpower shortage. Real estate sector requires manpower from different backgrounds - ranging from engineers, architects to labourers.
Developers, thus, live in constant fear of not meeting their deadlines for lack of manpower.

“There needs to be a financial incentive for companies spending on manpower training,” Kumar says.

“Incentives should be given to developers who participate in projects such as Jawaharlal Nehru National Urban Renewal Mission.  It will be populist and drive more developers to take up projects that contribute to improvement of infrastructure of the city,” Aggarwal said.