New Delhi, February 28, 2017: RICS in association with the PHD Chamber of Commerce and Industry today released a white paper on Real Estate Sector Post Remonetisation and Real Estate Regulation. Extracts from the white paper:
White paper summary:
On November 8, 2016, the Government of India de-notified specified bank notes of Rs 500 and Rs 1,000 as legal tender. The temporary shortage of cash adversely impacted several sectors that depended on cash, notably wholesale markets, informal sector and even parts of the real estate industry. The real estate industry involves both formal as well as informal sector stakeholders.
By some estimates, the real estate sector itself is a significant repository of unaccounted money in India, usually by way of property purchased in ‘benaami’ form in cash. By other estimates, about 30 per cent of monies changing hands within the real estate transactions are unaccounted.
A key purpose of demonetisation was to eliminate such unaccounted cash changing hands during such transactions.Ironically, while the purpose of using of unaccounted cash in a real estate transaction has been to avoid taxes and reduce the effective cost(s) of transaction, they have actually, in effect, been instrumental in driving up pricing within the real estate sector. This has been so because of a steady supply of real estate assets that may not find actual physical use in the near future, but provide suitable avenues for ‘parking’ of unaccounted monies. The step of demonetisation, i.e. immobilising specified bank notes has essentially caused the demand to temporarily, if not permanently, slow down – in the purchaser segments which have traditionally used real estate to ‘park’ unaccounted monies. In terms of the supply stock, this has affected sales within the secondary markets, i.e. where properties are under resale from an original allottee to a prospective purchaser, as well as assets developed at a small scale, viz. petty contractors working as developers.
Demonetization has hit the real estate in three ways
• Slowdown in production, including stoppage of launch of new schemes
• Shifting of demand, reduced purchaser interest in new products
• Prices being lowered to clear ready inventory
The purpose of this paper is to examine the possible consequences of the exercise of demonetisation and the subsequent remonetisation on the real estate sector and its readiness to comply with the Real Estate (Regulation & Development) Act, 2016 – which itself has certain issues that may require addressing – more so after the demonetisation and remonetisation exercise.
Remonetising again: do real estate prices come down or go up
Going up: Prior to demonetisation, deals between developers and land owners often used to be entirely cash based.If cash transfers are made illegal for land based transactions, there is a very real possibility that landowners will load the tax costs on the price to the developer, and in turn the developer will load this cost back to the purchaser, increasing prices of the real estate product, but with no substantial gain in margins for the developer.
Going down: The focus is now to provide value for money homes that can attract more number of buyers with a lesser budget. However, these stocks are often produced in areas, which do not cater to basic standards of liveability, viz. limited connectivity to places of work, and lack basic economic and social infrastructure, and consequently there is little value in terms of usability of such an asset. However, the asset is still worth investing into for speculative long term capital gains. There are no real recurring costs involved in ‘holding’ the asset without using it. By some estimates, for instance – over 60 per cent of housing stocks produced in the last five years within the Central National Capital Region is reported to be unoccupied.If these vacant stocks were to be subjected to a significant holding tax or penalty, it will become unattractive for speculators to invest into – and in turn reduce demand for paying high prices. At such juncture, even if taxes paid by a seller of land is front loaded on to the final price at which the real estate asset is transferred to the purchaser, the developer may not mind cutting profit margins to ensure that the price still stays affordable.
Real Estate (Regulation & Development) Act, 2016
The Real Estate (Regulation and Development) Act, 2016 came into existence after almost eight years of deliberations, largely fuelled by concerns over unscrupulous practices of developers such as delaying projects, demanding unscheduled or unaccounted for payments without actually delivering the product, misrepresentations and so on. The Act makes it mandatory for promoters to register all projects with the State Real Estate Regulatory Authority, along with extensive information about them, the project implementation schedule, layout plan, land status, government approvals, sub-contractors, etc., which will be made available to consumers. All commercial and residential projects with a plot area of more than 500 sq. meters or eight apartments inclusive of all phases will have to be registered with Authority. Projects which have not received a completion certificate and are ongoing will also be required to be registered with the Authority within a period of three months of the commencement of the Act.
Challenges to be addressed
Too many laws: A key issue is the reconciliation of land laws and apartment ownership acts pre-existing within the State with the new law, and extension of its applicability. As for the latter, the law is applicable in what it defines as ‘urban areas’, a term that encompasses all municipal areas and areas within the control of an analogous local authority, or part of a planning area. However, several States do not have planning areas defined – and several Census towns (areas which are urban as per Census, but not under the municipal law of the State) are still governed by Panchayats. Although building and/or development control rules may exist for such areas as laid down by the town and country planning law or municipal law, these would not ordinarily fall within the description of ‘urban areas’ as defined under the Act.
Where is the law headed as of now?
As of the time of authoring this paper, a total of seven (or eight) States and all the Union Territories have already promulgated rules and regulations appurtenant to the main law. However, a number of concerns have risen with respect to States having effectively ‘diluted’ the provisions of the main law, particularly with respect to the applicability of law to on-going projects, statutory protection to homebuyers and disclosure of information by developers.
In conclusion
The exercise of demonetisation and subsequent remonetisation has posed new challenges for the real estate sector, which was already gearing up for compliance with the Real Estate (Regulation & Development) Act, 2016 far before that. The key aspect that needs being addressed is the fact that operating costs for real estate industry may go up while demand may continue to rationalise to the extent where potential purchasers refuse to (or are unable to) pay beyond a certain price. While affordability and the ability to pay for a house has been enhanced to an extent through introduction of subsidies in interest rates, the prices at which houses are sold are considerably on the higher side. Read More
Corporate Comm India(CCI Newswire)
