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Traditionally, property investment has been viewed as a safe and stable long-term asset in India. It is often an emotional decision for Indians and is perceived as an indication of one’s status and wealth in the community. Over the years, the importance of owning property as an asset, has only increased. This is reflected in the high returns reaped by many investors, in land and real estate, over the last few decades. It has been more so, with increasing disposable income and urban growth, making Indian cities a real estate goldmine for long-term investments. According to a recent report titled ‘Indian real estate and construction: Consolidating for growth’ by KPMG India, the real estate sector is expected to reach USD 650 billion by 2025 and surpass USD 850 billion by 2028.
Real estate versus other investment assets
While there are plethora of investment options available, such as mutual funds, stocks and bonds, real estate remains a preferred choice. This is because movements in real estate values are less dynamic than the stock market. Additionally, close to 75 per cent of the funds made available by banks, veer towards real estate investment. Further, the loans taken for real estate investments attract tax benefits of up to Rs two lakhs on interest paid towards the home loan, in case it is self-occupied and Rs two lakhs per annum on the housing loan, if it is not self-occupied.
A higher amount of home loan can also be sought, by including the spouse’s income during the application. Real estate also brings in a continuous source of income through rentals. These yields can be anywhere in the range of five to six per cent.
If the asset is for self-use, it also helps in saving expenditure on living on rent. Besides offering the comfort of having invested in a hard asset, the value appreciation offered by real estate, also makes it appealing for investment. Similar benefits cannot be reaped with other assets, as no other form of investment provides substantial loan assistance by the banks. Besides this, there are risks attached with other options such stocks and shares, despite good returns. Therefore, buying a house is a safe investment, as it reduces the overall volatility of one’s investment portfolio.
Presently, the cost of availing of home loans is also reasonable, with interest rates hovering around 8.75 to nine per cent. If the prevailing interest rates are pitted against the average annual rental yields of five to six per cent, the difference between cost of rent and owning a home becomes negligible.
Affordable housing schemes: PMAY and CLSS
The government has also introduced several schemes and incentives, with the aim of making it increasingly affordable to buy a home. One such scheme is the Pradhan Mantri Awas Yojana (PMAY) Credit-Linked Subsidy Scheme (CLSS). Under the CLSS scheme of the PMAY, a first-time home buyer can avail of a benefit of Rs 2.7 lakhs for purchasing a house of 1,615 sq ft carpet area, if the family income is up to Rs 18 lakhs. Additionally, a subsidy of 6.5 per cent is applicable on home loans up to Rs six lakhs. This is for a period of 15 years. Similarly, for home loans of up to Rs nine lakhs, an interest subsidy of four per cent is available and for a loan amount worth Rs 12 lakhs, an interest subsidy of three per cent is available. The home buyers can avail of these from any bank or housing finance company.
Besides these benefits, the government had increased the carpet area under the CLSS scheme. The carpet area in the MIG-I category of the CLSS was increased to up to 120 sq metres from the previous 90 sq metres. Carpet area for the MIG-II category of the CLSS was increased to up to 150 sq metres from the previous 110 sq metres. These figures have been revised further. Now, MIG-I has been increased to up to 160 sq metres and MIG-II has been increased to up to 200 sq metres.
Impact of RERA and GST on home buyers and developers
Real estate investment has also become attractive, due to the implementation of progressive reforms such as the Real Estate (Regulation and Development) Act (RERA) and the Goods and Services Tax (GST). India’s real estate sector was primarily unorganised and unregulated, leading to delays in the deliveries of projects. This affected the credibility of the sector and necessitated the need for a regulatory body, to bring transparency and protect the interests of home buyers. RERA was rolled out, to bring an effective regulatory mechanism to resolve consumer grievances faster. This has increased transparency, accountability and credibility of the sector, making it a buyers’ market.
Similarly, GST replaced the multiple taxation regime with a uniform and simple tax structure, thereby, promoting ease of doing business. Besides this, developers can now avail of 100 per cent input tax credit (ITC) on raw materials, reducing the construction costs and translating into better margins. This, in turn, will help them pass on the benefits to buyers. Moreover, unlike before, where multiple taxes including VAT and service tax were levied on a home buyer, now, a uniform tax rate of 12 per cent will be applicable on the purchase of an under-construction house. This will eliminate the chances of double taxation. Further, the GST for affordable housing has been reduced to eight per cent, making it a win-win situation for both, home buyers and developers.
While real estate serves as an asset that can provide good yields, it is important to keep in perspective certain indices, before making the investment. Some of them worth considering are location, valuation of the property, the investment purpose, the expected cash flows and appreciation, besides ensuring that the development is initiated by established developers.
(The writer is vice-chairman and managing director, SOBHA Limited)