Investor’s Confidence in Real Estate

Asia Pacific 5 years focus - India on Top

Real estate has long been one of the most sought-after investment avenues for investors in India. From the financial year 2008-20 real estate is likely to elevate at a compound annual growth rate (CAGR) of 11.2%. It is the second largest employer in India just after agriculture and is expected to observe growth at 30 present over the coming decade (Source: India Brand Equity Foundation).

Putting money into the real estate market is a tried and tested way to reap continual benefits and is probably the safest haven due to its tangibility factor. Over the last years, it was going through a roller coaster ride but again, there has been a particular increment in investor interest in the real estate sector in India. Let us understand why:

Price Appreciation

Many experts believe that the time is ripe to invest in the real estate sector currently. Among 55 international markets, India ranks at the 9th position after jumping 13 spots owing to price appreciation in the residential sector. A research done by Knight Frank, showed India as the top rank holder in Asia Pacific region, if we analyse the 5-year price appreciation (2012-2017).

Market Size

Currently, India’s real estate contributes 6.3 percent towards the country’s Gross Domestic Product (GDP), which is projected to double up to 13 percent by the year 2025. Besides that, 2017 saw mergers and acquisition deals worth $3.26 billion to be made in the real estate sector of India.

Government Initiatives

Government’s focus on affordable housing and development of infrastructure is providing an impetus to the real estate sector in India. The plan to build 100 smart cities under the ‘Smart City Project’ of the government is turning out to be a major prospect for real estate companies. There has been an increased migration to Tier I and cosmopolitan cities combined with rapid urbanization which has proved beneficial to the real estate markets. The government also stressed on achieving their mission of ‘Housing for All by 2022′ by giving the infrastructure status to the affordable housing sector. To cover a bigger buyer base, the government further revised the definition of affordable housing and houses classified under MIG, so that the developers can sell off their inventories. The galore of reforms have altered the Indian real estate business with its focus on elimination of black money and improved market transparency. The level of transparency, sector uniformity, financially disciplined developers, higher accountability and a uniform tax structure in the real estate sector, currently makes it the best time for investment.

Legislative Reforms

Introduction of Goods and Services Tax or GST and the implementation of Real Estate Regulation and Development Act, 2016 or RERA have transformed the real estate sector into a more organized industry. GST has consolidated the supply chain which has, in turn, enabled quicker and seamless movement of goods across the country and has increased the working capital available for businesses. RERA has, in turn, made it safe to invest in the realty sector, notably by NRIs. Simple documentation process has been made possible owing to property registrations and records of all states and union territories going online. Online records of property have decreased the susceptibility of property frauds making it easier for NRI investors to put in their money. RERA provisions make sure that the projects are delivered on a timely basis and the money paid is utilized solely for the project and not invested elsewhere by the developers. RERA protects the interests of consumers and only the most committed players in the real estate scenario will flourish.

Increased Investment

Owing to strong economic drivers, high yields, rapid modernization in the business base and accelerated reforms, India has been able to attract high capital investment in the past year. India’s six major cities – Mumbai, Delhi-NCR, Pune, Hyderabad, Bengaluru, and Chennai – received $2.87 billion worth investments up to June 2017. This is a 100 percent increase in investment. Among the six cities with doubled up investments, Mumbai ranked globally at the 81st position and attracted the maximum capital of $1,749 million (Source: Hindu Business Line).

Foreign Direct Investment or FDI

The World Investment Report 2016-17 by United Nations Conference had positioned India at the 4th rank for FDI inflows (Source: Live Mint). The continuous reforms and changes in the administrative system have resulted in the development of a worldwide appeal for investment in India. There was a significant surge in overseas investment, with 55 percent contribution from North America while 14 percent of funds contributed from European countries.

Buyer’s Market

The consumption side of our economy has been impacted by demonetization, and it is well evident market. For some time now there in the real estate has been a surplus of supply and lower consumption rates leading to huge unsold inventories across the nation. New home launches across top cities have gone down in recent months. This might be the reason why there is widespread speculation about real estate investments among people. However, one needs to realize that due to the implementation of RERA, developers are now merely focusing on completing their existing projects. The situation of excess supply and mismatched demand puts the buyers in a better position as they are now able to negotiate and get the best deal.

Home Loan Interest Rates at all-time low

Reserve Bank of India (RBI) slashed the repo rate – the rate at which the central bank borrows money from the commercial banks. The reduction in REPO rate resulted in the home loan rate cut. The interest rate for housing loans are currently floating at a low range of 8-8.5 percent making EMI costs considerably lower. The home loan rates are expected to maintain at a low level in the coming quarters as well, especially since the government is promoting low-cost home finance.

Announcements in the Union Budget 2018-19

  • The union budget 2018 announced creation of Affordable Housing Bank under the central housing financial institution the National Housing Bank. This move is expected to create funds for the CLSS or Credit Linked Subsidy Scheme and boost life into the Housing for All by 2022 mission.
  • The most talked about the announcement from the current budget was related to the imposition of long-term capital gains or LTCG tax. A 10% LTCG tax on equity gains over Rs. 1 lakh on equity investments held for more than 12 months might prompt investors to choose to invest in the realty sector instead.
  • The union budget also announced an allocation of funds to the tune of Rs. 2.4 lakh crore for smart cities and Rs. 1,019 crore for urban rejuvenation. The urban allocation fund will prove helpful in solving the basic problems of lack of potable water, diminishing green cover, outdated sanitation and congestion of roads. The injection of such high funds infrastructural development will surely boost the realty market in the concerned areas.
  • The government also extended the corporate tax rate of 25 percent for companies with an annual revenue up to Rs. 250 crores. The reduced tax burden on corporates might allow the real estate sector to see an increase in job opportunities and a rise of new start-ups.
  • The budget also proposed to develop 4 lakh kilometres of road. This move will certainly result in up-gradation of rural infrastructure bringing Tier II and Tier III cities of India in the forefront. This might help boost demand for housing and create investment opportunities in these regions.
  • A proposal to allocate Rs. 50 lakh crores towards infrastructure will convert into increased investments from Indian as well as foreign investors. Better connectivity and infrastructure is undoubtedly the prerogative to better housing and increased demand in real estate sector.

Future of Real Estate

Real Estate Investment Trust or REIT platform has received approval from the Securities and Exchange Board of India (SEBI). This will allow all kinds of investors to put their money in India’s real estate market. Over the years, it is expected to create an opportunity worth Rs. 1.25 trillion in the Indian market. Indian real estate developers have been proactively responding to the increasingly well-informed consumer base and have shifted gears in the view of globalization. Developers have also welcomed the government’s push for transparency and are meeting due diligence standards by welcoming revamped accounting and management systems. Foreign direct investment into Indian real estate is anticipated to surge owing to this augmented level of transparency.

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