Impact of Rera, Gst and Demonetization on The Real Estate Sector

The purpose of this literature review is to sufficiently position the study within the realm of existing publication as it relates specifically to the topic while also foreshadowing the determined research approach.

Implementation of the three major factors RERA, GST and Demonetization in the Indian Real Estate sector has created many short term problems and our economy is still getting accustomed to it. However, all these are certain to make the industry more transparent and boost investor confidence in India. However, tumultuous events over the past 14 months that saw the government aggressively push a culture of transparency through measures such as Demonetization, Goods and Services Tax (GST) and the Real Estate (Regulation and development) Act, 2017 (RERA) have irrevocably altered the course of the industry.

Vast unsold inventory levels that peaked in 2014 at 7.2 lakh units forced developers to curtail supplies in a bid to lighten this inventory load. This course of action has seen reasonable success even in the face of lackluster demand as unsold inventory levels have fallen 24% since H2 2015.

The real estate sector has been grappling with liquidity issues and piling debt. The total outstanding debt of listed real estate developers in India has risen from INR25,000 crore in FY07 to over INR83,000 crore in FY17

Clocking the largest percentage drop in supply volumes during this decade, 2017 has turned out to be an influential year for the Indian residential real estate market. The annual supply levels in the residential market are now just one fourth of those in 2015. While the shunted growth in residential supply has been getting progressively worse, that of demand has been relatively muted. Notably, Mumbai and Pune saw marginal growth in sales which can be attributed to the 5% and 7% drop YoY in prices for 2017 respectively.

Hit by demonetization, residential sales dipped by 41% from October to December 2017 across eight major cities as compared to the same period the previous year, while launches fell even sharper by 61% (Knight Frank, Dec 2017). While there is a significant shortage of housing in urban regions, it is estimated that the top-eight cities in India have approximately 6.5 lakh unsold units. At the current rate of absorption, it may take over five years to clear the housing stock in regions such as Delhi–NCR and Mumbai, which have the highest unsold inventory in the country.

The sales department is largely influenced by finance companies and the deal is achieved in a transparent way. That is why this has a limited impact on large cities, although some tier 2 and tier 3 cities do have a business tactic where cash transactions remain a factor in primary sales.

There will be minimal impact on the office leasing and sales, as the cash component does not play an important role in such transactions. The Indian office space market has been plagued by a huge lack of viable office space over the past four years while demand has stayed comparatively steady. This slide in office space development has been arrested in 2017 with supply growing by 7% in annual terms during H2 2017. However, overall transactions continue to substantially exceed supply and this has pulled down the vacancy levels to 11.6% from 13.5% a year ago.

When it comes to GST’s impact on the commercial office real estate market, with the prior service tax for commercial leases at 15% and current GST at 18%, there is a minimal impact in terms of increase in taxes.

Due to the unregulated nature of India’s real estate sector, fundamental problems associated with dispute resolution and delayed project deliveries had the balance in favor of supply-side stakeholders. Provisions such as mandatory disclosures by promoters were targeted to bring financial discipline, which will consequently spike investors’ interest. Earlier, due to the higher rates of statutory fees and taxes, including multiple taxes inflated the cost of construction, making affordable housing projects financially unviable for the private sector developers.

After the implementation of RERA, a developer now has to register their project, residential as well as commercial, with the Regulatory Authority before starting the marketing & sale process in these projects. In case a project is to be promoted in different phases, then each phase shall be considered as a standalone project, and the promoter shall obtain registration for each of these phases. According to RERA (2016), developers are now required to state the carpet area of the property in addition to information like layout, agreements, details of architects and contractors to buyers. Thus, it makes stating of super-built up area as size of the property, against the governmental norms and therefore, buyers can no longer be charged according to the super built up area. Therefore these changes will result in an increased carpet area price. Further, developers can start the selling process only after getting the approval which will lead to increased cost for developers. This will in turn create more consolidation in the real estate sector (FE Online, 2017).

RERA has boosted transparency, encouraged NBFCs and lenders to invest more due to the fact that a separate account needs to be created which will accommodate 70% of the total amount collected from the allotters which will be used for the cost incurred with respect to the project. An effective discount of 11–12% is to be expected in the form of freebies such as 24-month rent assurance, no floor rise charges, stamp duty waivers, and other preferential location charge, gifts in addition to the reduction in base prices.

RERA policy mainly protects the interest of property buyer. It is mandatory for developers to disclose the construction status on the Authority website on a quarterly basis which will enhance transparency regarding project completion status. Furthermore, the builders cannot change any aspect of the structure without prior approval from all the buyers. The developer mandatorily has to deposit 70% of the project funds in a separate account which will only be used for the respective project. One of the major reasons for project delays was diversion of funds to other projects which will be addressed effectively. Real Estate Appellate Tribunal (REAT) is set up for establishing an adjudicating mechanism for speedy dispute redressal and to hear appeals and orders from the Real estate Regulatory Authority (RERA). The buyer can file a complaint with the Authority which will be resolved within 120 days through this mechanism.

Research data shows (Economic Times) a sharp fall in home loan growth even though home loan interest rates have dipped yet buyer sentiments have not improved. Home loan growth in April-October fell 32.7% compared to previous year, this marks one of the biggest declines in the last five years, (source: Centre for Monitoring Indian Economy, CMIE). In the same period in 2016, home loan growth was down 4.27%, while in 2015, it was up 26.89% (Business Today, 2017). Post RERA implementation, lending options from bankers/institutions, lenders have significantly improved and availing financial assistance is easier now. Measures such as the RERA have boosted sentiments of the home-buyer. It also had a positive impact on the buyer who will receive little incentive on purchase market, as the unaffordable high prices continue to weaken and fall.

Post GST, the tax payable by a residential buyer for purchasing a property is 12% whereas earlier the buyer had to pay 4.5% VAT and 1% Service Tax for the same. There has been some upwards pressure on prices after considering all the set-offs and tax credits.

Indian market deems real estate broking as one of the easiest businesses to do. No specific qualification, experience and code of practice are needed. The government agencies only prescribed guidelines without defining roles and responsibility. According to an research (KnightFrank), there are 5,00,000-9,00,000 agents in India which has unorganized and unregulated affairs. Only a few worked with professional companies while others treated brokerage as a side business. Brokerage business in general, is linked with lack of professionalism, accountability deficit, opacity in activities, and a lengthy, costly dispute resolution mechanism.

RERA (Regulation and Development Act, 2016) makes it mandatory for the brokers to register themselves to facilitate a transaction. Prior to any sale made by a broker it is mandatory for them to be registered with the authority. Brokers will be penalized under RERA in case of providing wrong information to the buyers regarding sale of properties. Due to rigid and rigorous changes made by the Government, consolidation is bound to happen and hundreds of part time brokers will leave the real estate sector.

Projects are now growing as there is no available capital from the informal sources giving more push to institutional capital. All the three reforms, have suddenly made the market more transparent and attractive. The cost of land is declining, as financial institutions can now start raising funds for land transactions.

Retailers have had little effect on their business due to reduced cash transactions. There is a possibility of a luxury segment taking a hit due to the increased historical increase of cash acceptance. However, credit / debit cards and e-wallet must be used in rescue. Overall, there is no threat to the full power and growth of the Indian retail industry.

In the absence of such a trade ban certain medium and large-scale business remains unaffected but severely affects several small-sized business organizations activities. The country’s economy may be a recession in the next few months, but soon the Government’s influence is expected to return to your normal size. The long awaited drop in prices is a healthy step toward market recovery as this along with other measures such as reduction in unit sizes across cities will boost home-buyer affordability and eventually get buyers back to the market. The pace at which developers align themselves to the new regulatory norms and launch new products in the right ticket sizes that appeal to the homebuyer’s interests, will determine the trajectory of the market going forward.