Smooth Road Ahead for the Reform Process
Real estate developers and VT providers rejoice as the Modi-led government is again voted to power.
by Yash Pandya
Ask anyone connected with any aspect of real estate development, including, obviously, those providing vertical transportation (VT), what they fear the most. Nine times out of 10, the answer will be “lack of continuity.” Imagine being part of a high-rise project based on specified norms and having changes announced just days after its launch. Everything that was perfectly in place can suddenly go for a complete toss.
Similarly, with demonetization, the Real Estate Act and the Goods and Services Tax (GST) having taken real estate development in a very different direction, dealing with the obvious slowdown while making adjustments and implementing new processes was a necessity. As 2019 dawned and a ray of positivity spread across the sector, everyone was eager to experience the benefits of the reforms process.
The only concern was, what if this government doesn’t receive the people’s mandate? What if a different government decides to undo the reform process or, worse, come up with its own norms that require new adjustments? So, when the Narendra Modi-led government was voted to power again, the sighs of relief were huge and audible. So, what are the implications of this scenario for the real estate and VT sectors?
Developers in Kandivali West, one of Mumbai's fastest-growing suburbs, benefit from pro-development policies. With the return to power of the Narendra Modi-led government, real estate developers, as well as VT providers, across India see the promise of continuity within government policy toward the sector.
Dr. Niranjan Hiranandani, national president, NAREDCO, said:
“We look forward to the continuity of the progressive policies that were initiated in the past five years. We believe the new government works further for structural reforms and the steps that will boost real estate business and strengthen consumer sentiment toward Indian real estate. The Indian real estate industry is hopeful that the government will redress and resolve the prolonged issue of the liquidity crisis that the sector is currently facing. Moreover, rationalizing the taxes by subsuming stamp duty under GST will grant a big relief to the homebuyers. We highly recommend that the National Housing Policy boost rental housing in order to fulfill the ambitious target of Housing for All by creating surpluses."
Nimish Gupta FRICS, managing director, South Asia-RICS, opined:
“This spells confidence for macroeconomic activity picking up pace again, along with the outlook for realty businesses to improve in the mid- to long run. The election results will also have a more-immediate and direct bearing on consumer and investor sentiment. Having a stable government at the helm bodes well, especially in the current scenario, where the realty sector is reeling under the pressures of a liquidity crisis. I firmly believe that the Modi government in its second term will lay greater emphasis on enforcement and implementation of the reform and regulatory mechanisms it set in motion in 2016. It is also heartening to know that, despite the hardships the sector has faced, the reform agenda is equally endorsed by all stakeholders.”
So, with a Modi 2.0 in power at the centre, it is now time for real estate developers and VT brands to savor the fruits of the reforms process and make up for hardships endured during the transition phase.
Yash Pandya reflects the changing paradigm of new-age journalism, which is part of storytelling, part statistical data and part what the future might hold. Though based in Mumbai, he has traveled abroad extensively and considers himself a "global writer" who is not constrained by geographical boundaries.
GST Council’s Smart Solution Welcomed
Options silenced critics and presented a win-win proposition to residential real estate project developers.
By Yash Pandya
Always read the fine print. This warning came to mind a few months ago when the GST Council shared its pronouncement on the requested rate reduction for residential real estate projects. The withdrawal of benefit of ITC (Input Tax Credit) was criticized as a step that negated the rate reduction benefits. New project launches and implementation would be affected by the overall cost and pricing implications, a section of developers had insisted.
Well, the 34th GST Council Meet had quickly taken this feedback into account and offered developers two options to choose from before fiscal 2018-19 concluded. Arvind Nandan, executive director-Research, Knight Frank India, explained that the previous GST Council Meet had done a remarkable job of radically scaling down GST rates for buyers (1% in affordable housing and 5% in others, from 8% and 12%, respectively) in an attempt to stimulate demand. That, however, had left the builder gasping, since ITC was taken off. The builders were left pondering if the ITC they had availed would now add to their project costs, thereby eroding margins.
Therefore, the council decided to offer an olive branch to the builders, albeit within limitations. A one-time choice was offered to builders to adopt either of the GST regimes for projects that are under construction until March 31, 2019. This offered a suitable opportunity for the builders to use their judgments (avail ITC with higher GST rates charged to buyers or new GST rates without ITC) and push aggressively for sales, Nandan pointed out.
Echoing Nandan’s views while addressing the CII Real Estate Confluence 2019, Chandrajit Banerjee, DG, CII, said that providing a choice to realtors to opt for the reduced rates or continue with existing rates with ITC for ongoing housing projects should make compliance easier for them. The GST Council had once again shown its desire to ensure a smooth and efficient tax regime, he opined.
Rohit Poddar, joint secretary, NAREDCO West, and managing director, Poddar Housing and Development Ltd, concurred that decisions taken by the authorities had given relief to developers. While the new GST rates for ongoing under-construction properties may hit the margins for developers, the power to choose between old and new rates was favorable for the developers and buyers both. Overall, the decision was in the favor of ongoing under-construction properties and stable growth will be visible in the sector, Poddar underlined.
With the new fiscal year having commenced and focus being almost entirely on the election result announcements, real estate development in India is like a racehorse waiting for the starter’s gun to go off, poised to gallop forward at full speed. The VT industry has great expectations from FY 2019-20.
A New Investment Avenue Beckons
The VT industry has much to cheer about, given the success of India’s first REIT IPO by Embassy Office Parks.
The demand for elevators and escalators being inexorably intertwined with the pace of real estate development is an inescapable reality that cannot be ignored. With the real estate industry witnessing constant ups and downs over the past three years, there has always been a question mark hovering in the background about one crucial aspect — funding.
Post-demonetization and the introduction of the Real Estate Regulatory Authority (RERA), followed by the Goods and Services Tax (GST), individuals hitherto investing in Indian residential real estate projects had begun actively exploring other avenues. Office spaces emerged as an ideal replacement, given the higher return on investment, but there was a slight hesitation, because many had limited understanding of this segment.
The stage was set for a grand entrance, and the much-awaited debutant proved it had been well worth the wait. As Arvind Nandan, executive director of research at Knight Frank India, pointed out, the success of India’s first Real Estate Investment Trust (REIT) initial public offering (IPO) by Embassy Office Parks was a good omen. He explained:
“Since the yields look to remain stable on the back of steady rentals, this is perhaps one of the better times for REITs. The major hurdle of the Dividend Distribution Tax was eliminated a couple of years ago, but several other forces still had to join hands. With the strong office markets in 2018, most of those forces seemed to have finally come together. The investors, after showing a shy approach on the initial two days of the IPO, finally came forward on the final day. This should now help other REIT listings in the near future. The investor can look forward to a diversified portfolio henceforth, with real estate being one of the options. The performance and the returns will now hold the key to the future of the REIT market.”
Anshuman Magazine, chairman and CEO for India, Southeast Asia, the Middle East and Africa at global real estate investment services firm CBRE, had emphasized on the IPO’s opening day that India offers major advantages for REITs, including availability of a wide variety of quality assets, sustained government support in easing regulations, a wide investor base and opportunities for capital appreciation, among others. Hence, he said, it is likely that India's first REIT will be successful and help elevate investor sentiments in the country’s real estate market. Magazine continued:
“Improved investor sentiments in office assets are likely to generate a potential fundraising avenue for developers and propel major corporations to lease/purchase space in quality buildings. While the office sector is expected to dominate REIT listings initially, it is expected to be followed by the retail and logistics sectors in the long run, thereby opening up avenues for the real estate sector at large.”
All in all, investing in Indian real estate seems to have just become a lot easier, and that will clearly have positive implications for the vertical-transportation (VT) industry, as well.
Yash Pandya reflects the changing paradigm of new-age journalism, which is part storytelling, part statistical data and part what the future might hold. Though based in Mumbai, he has traveled abroad extensively and considers himself a “global writer” who is not constrained by geographical boundaries.
Is the Glass Half Empty or Half Full?
The GST Council’s final decision on reducing the rate on real estate has evoked mixed reactions
They say every cloud has a silver lining. For the Indian real estate industry and, consequently, vertical transportation, the GST Council’s much-delayed pronouncement on the requested rate reduction is one such example. On one hand, there are loud cheers at the benefits expected from a certain section of developers.
According to T Chitty Babu, chairman and CEO of Akshaya Pvt Ltd.,:
“The revision in GST rates is certainly going to bring much-needed relief to homebuyers. For real estate developers, compliance will become more transparent and simpler. We welcome the government’s decision to revise the GST rates for affordable housing segment to 1%. The change in definition of affordable housing is certainly going to improve the buyer sentiments. Also, the much-awaited change in GST rates of under-construction properties to 5% is a going to be a game-changing decision for homebuyers and will boost the housing sales in this segment and attract a slew of investments in the sector.”
Homebuyers will be able to save a lot on their home investments depending on the value of the homes, due to the revision in GST, said Babu. He continued:
“We can witness a tremendous turnaround in the coming quarters, as the homebuyers who were holding off on their purchase decisions will now be able to take advantage of both the recent repo rate cut and the revised GST structure, allowing them to make their homebuying decisions with confidence. With RERA in place, too, the real estate sector is heading towards an upswing in the near future.”
While some saw a silver lining, some only saw the cloud. There was despair among some developers taking into account the wider repercussions when it comes to under-construction projects and new launches. While the complicated task of figuring out how the benefit of input tax credit (ITC) should be passed on to the buyer has been eliminated, there are other implications to be considered, as well.
Parveen Jain, NAREDCO vice chairman and CMD, Tulip Infratech, explained:
“Slashing GST rate from 12% to 5% on housing under construction but withdrawal of benefit of ITC (input tax credit) has the apprehension that the same may become the part of the cost, culminating in the rise of sale prices and may hinder the sale of under-construction housing. Now homebuyers may prefer only ready-to-move-in homes, as GST is not levied upon them.”
Ramesh Sanghvi, CMD, Sanghvi Parrsssva Group of Companies, identified a more immediate problem: the implementation date for the new rates. He explained:
“The realty sector is set to take yet another hit in the coming month. The announcement would dissuade people from entering into the market in March, since new rates would be introduced from April 1. GST rates on affordable housing have also been reduced from 8% to 1%. Why would anyone want to buy anything in March after these rates are declared a month in advance? The only hope is after the Lok Sabha elections."
While the February 2019 interim budget and RBI monetary policy announcements had influenced market sentiments to some extent, the reduction in GST rates for real estate was expected to be a key growth driver for high rises, and the elevators that are an integral part of them, as well. However, it seems to have changed gears and swerved in the “wait and watch” direction for a short while.
Gaining Some Transparency
A decision on reducing the GST rate on real estate hopefully will be announced this month.
by Yash Pandya
There’s a satirical anecdote where one poor person asks another the secret of staying warm on cold winter nights. The reply: "Just think about all the thick woolen clothes that well-meaning socialites will be donating during summer!"
The Goods and Services Tax (GST) has a similar relationship with real-estate development in India and, therefore, indirectly, the demand for vertical transportation. The third regulation to impact real estate in a trio of reforms — after currency demonetization and the Real Estate (Regulation and Development) Act (RERA) — the GST segregated new construction projects into two categories almost overnight.
One could either buy into a project or phase of it that was “completed” and be spared of paying GST, or book in an under-construction project and try to figure out the way forward. Houses coming under the Credit-Linked Subsidy Scheme (CLSS) meant lower GST, while figuring out how the benefit of input tax credit (ITC) should be passed on to the buyer required a mathematical genius, so the launch and pace of new projects slowed down considerably.
The GST Council had been urged to reduce the GST on real estate, and there were great expectations that a meeting held on January 10 would have some good news in store. However, the decision was put off, and a seven-member ministerial panel was formed to decide the same. Its decision is expected in the next meeting. Hopefully, it takes ground realities into consideration.
The question being asked is whether the GST rate on under-construction residential real estate will be lowered and, if so, by how much? Moreover, would the reduction be with or without ITC? A reduction in the GST rate should have a direct correlation on property prices, and house-hunters would obviously rejoice. However, many analysts have pointed out that the ITC credit plays a crucial role, as well.
As Abhishek A. Rastogi, Partner, Khaitan & Co., explained:
"For affordable housing projects, the rates should come down to 5% instead of the existing 8% with credits, and normal housing projects will be comfortable paying tax at 8% with credits. ITC available to these sectors for each project comes to approximately 60%, whereby they can easily pay 5% by credit and the remaining 3% by cash without facing any liquidity issue. But the existing rate of 12% for normal housing projects is a bit too stiff at the moment and needs to be revised urgently to revive this sector."
February 2019 begins with the interim budget being announced; hopefully, that, too, would have some positive news for the real-estate and vertical-transportation sectors, which, coupled with the anticipated reduction in GST, should provide a much-needed impetus to both.