From the zamindari system in 1947 to the launch of India’s first Real Estate Investment Trust (REIT) in 2019, the Indian real estate sector has come a long way. In fact, the past few years have witnessed several challenges and have also been quite eventful for the Indian property market. While old archaic laws and practices have been rooted out, new ones like the Real Estate (Regulation and Development) Act (RERA) and the Insolvency and Bankruptcy Code have led the way, in safeguarding home buyers’ interest and investment. On India’s 73rd Independence Day, here is a snapshot of the events that has made Indian real estate what it is today.
Enactment of the Real Estate (Regulation and Development) Act
After years of discussion and speculation, the real estate regulatory authority finally took shape in India’s property market, with the intention to regulate developers, brokers and safeguard home buyers. The RERA came into force in May 2017 and mandated all builders and property agents to register with the regulatory authority. Under the law, every state authority will have an adjudicating bench and appellate tribunal, to hear home buyers’ complaints. Now, the centre is planning to create a unified online portal, for all state real estate regulatory authorities, to simplify the process further.
Launch of REITs
It was in March 2019, when India’s first real estate investment trust (REIT) by Embassy Office Parks, was listed. Its launch has brought fresh hopes into the cash-strapped real estate sector. With the help of these publicly listed trusts, investors with small ticket sizes can invest in real estate, instead of investing in company shares or bonds. At present, REITs are allowed only for commercial real estate. REITs are expected to fuel the demand for office spaces, from sectors IT/ITeS, banking and financial services institutions, logistics, manufacturing and consumer goods.
GST replaces VAT and Service Tax
The Goods and Services Tax (GST) was introduced in July 2017, which replaced the Value Added Tax (VAT) and service tax on under-construction property. Initially, a GST of 18% was levied on real estate with input tax credit, which was subsequently brought down to 5% for regular housing projects and 1% for affordable housing projects, in March 2019. The GST also helped the exchequer, as it became easier to track transactions and the money trail in project construction. As multiple taxes are subsumed within the GST, it is hoped that this will reduce developers’ construction costs, along with a reduction in cost of logistics.
Insolvency and Bankruptcy Code, 2016
In order to consolidate all types of bankruptcy cases, the Insolvency and Bankruptcy Code (IBC) was brought into picture in May 2016. The Code is aimed at being a one-stop solution, for resolving insolvencies. Earlier, this was a long process that did not offer an economically viable arrangement. The IBC protects the interests of small investors, home buyers and makes the process of doing business less cumbersome. As per the Code, the entire process needs to be completed in 270 days. According to media reports, the overall bad loans of commercial banks peaked at Rs 10.36 trillion as of March 2018. Total claims filed, were worth Rs 2.53 trillion and the IBC has recovered Rs 1.08 trillion – a recovery rate of 42.8%.
PMAY: Impetus to affordable housing and Housing For All
The Pradhan Mantri Awas Yojana (PMAY) was launched in June 2015, to provide affordable housing to every family in India. Under the PMAY, over 2 crore houses are to be built in urban and rural areas. Under the mission, four different kind of schemes were offered, covering the economically weaker sections, lower income groups and middle-income group families. Several government authorities and developers are now extending benefits of the PMAY to home buyers, offering interest subsidy and other financial benefits.
Draft Model Tenancy Act
The Urban Development Ministry has introduced the Draft Model Tenancy Act in the public domain. This law, when implemented, is intended to safeguard the interests of tenants and landlords. This was the first time that rental housing was put on the agenda, by finance minister Nirmala Sitharaman, in Budget 2019. Even though the policy is not binding on states/UTs, as land is a state subject under the Indian constitution, this could be a way ahead for those people who do not see home ownership as a goal. Also, the policy does not have any retrospective effect, which means existing rental contracts remain outside the purview of the policy.
71 years of independent India: The real estate milestones
By: Ashutosh Limaye
As the country completes seven decades of independence, it is worthwhile to remember the milestones that have had a lasting impact on India’s real estate industry
August 15, 2017: Often, how a particular industry shapes up, depends on the government’s initiatives and interventions – largely done through new, sector-specific policies, as well as tweaking older ones. While the government’s role is important, it is the market conditions, geopolitical events, socio-economic changes in population and the element of time itself that are fundamental in the evolution of industrial sectors. Given that real estate is a major industry across the world, there has been a constant focus in many countries, to have more transparency in the sector through regulations and technology. India too, has seen many policies in recent years but certain milestones are spread over decades.
- The new capital cities of Chandigarh and Gandhinagar were formed in 1952 and 1960, respectively. These were the first and rare occasions of planning entirely new cities in the country.
- The Maharashtra Regional and Town Planning Act, 1966, first incorporated the practice of development plans and town planning. The Planning Commission also issued its first guidelines for district planning in 1969, which led to many states to formulate district plans. However, except for a few examples, these initiatives didn’t yield positive results.
- The Urban Land (Ceiling and Regulation) Act was enacted in 1976, to curb speculative hikes in land prices in urban areas and to provide low-income housing. However, because of poor implementation, it ended up worsening the situation of availability of land for social housing and social infrastructure in urban areas and was eventually repealed in all states except West Bengal and Kerala.
- The government started setting up institutions, such as the Housing and Urban Development Company in 1970, City and Industrial Development Corporation in 1971, the Mumbai Metropolitan Region Development Authority in 1975, National Housing Bank in 1988 and the Housing Development Finance Corporation in 1994, to strengthen the residential real estate industry.
- In the backdrop of a looming fiscal deficit crisis, the economy was liberalised in 1991 through reforms, which set in motion its modernisation process. This created newer job opportunities and gave a big market of consumers, access to many products and services for the first time. This led to the entry of multi-national corporations into India in a big way and brought a new type of demand – contemporary, world-class office space.
- The phase of 1994-99 marked the completion of India’s first property cycle as the market, which was opened up, saw property prices go up for the first time, thanks to NRIs and foreign capital. However, the realty market tapered off after 1995, due to inherent inefficiencies. With the advent of the Asian Financial Crisis in 1997-98, foreign capital was wiped out and growth in capital values came to a halt altogether.
- The idea of commercialisation of the space above transit routes, was first introduced at Vashi station in Navi Mumbai, in 1992. Other stations, such as Sanpada, Juinagar, Nerul and CBD Belapur on the same railway line followed in Vashi’s footsteps but met with lesser degrees of success. However, the latest transformation of Seawoods-Darave railway station has met with phenomenal success.
- India received global recognition as a force in the software world, thanks to the Y2K bug, which also proved to be another turning point for the real estate industry. More foreign companies started setting up offices in cities like Hyderabad and Bengaluru, which led to growth in these cities’ commercial and residential real estate.
- Foreign direct investment (FDI) in real estate was first allowed in the year 2005, which opened up newer ways of funding and led to a maturing of the industry, in terms of business practices and product offerings. The FDI regime has been further liberalised in recent years, leading to record private equity inflows and entry of foreign developers.
- Just before the turn of the millennium, Indians were introduced to the concept of organised retail through the first mall: Spencer Plaza in Chennai, followed by Crossword in Mumbai and Ansal Plaza in Delhi. From the early 2000s, there has been a spurt of mall developments across the country.
- The government approved the restructuring and modernisation of brownfield airports, such as Mumbai and Delhi, as well as greenfield airports at Bengaluru and Hyderabad, through the public-private partnership model in 2006. This led to the introduction of the concept of airport cities and airport precinct real estate.
- The collapse of Lehman Brothers in 2008 triggered a panic, along with the sub-prime crisis, leading investors to scout for rationality in investments across asset classes. The ensuing economic slowdown and risk of job losses, made it difficult for investors to exit from their stakes in Indian real estate. The global financial crisis, however, had a big impact on commercial realty in India and a limited impact on residential realty in the country. The price fall led to quick sales and India’s residential market bounced back sooner than most expected.
- The Real Estate (Regulation and Development) Act (RERA), aimed at protecting home buyers, came into effect from May 1, 2017. This landmark Act will make home buyers confident, empowered with information and well-protected and make the non-serious players disappear from the highly-fragmented residential real estate market.
- Real Estate Investment Trusts (REITs) were first opened up in 2014 and the first REIT is due for launch soon. This will allow small-ticket investments in commercial real estate of the country. Given the expanding universe of Grade-A office properties in Indian cities, as well as rising rentals across their micro-markets, REITs offer an attractive way for investors to trade in prime commercial real estate.
(The writer is national director, research, JLL India)