Happy New Year 2016!
No, we are not late in celebrating the good times. 2016 has been that kind of a year for real estate – January saw the first green shoots and impact from the FDI changes from late last year, February brought the good budget news of DDT not being applicable to REITs amongst other positive developments and so far the first few days of March have seen the Real Estate Bill finally getting passed. Notwithstanding the due formality of the president’s assent, the bill - covering all projects on plots measuring 500 sq m and up (ongoing projects as well as new launches) - is certain to become a law.
Also read: Up and close with Real Estate Investment Trusts (REITs)
Changes ringing in
It was good to see that the budget targeted the supply side - reforms in REITs/ InvITs, affordable housing as well as additional tax incentives for first time home buyers - and now the Real Estate (Regulation and Development) Bill covering the other angle - demand - by ensuring project delivery, information sharing and redressal of grievances leading to far greater transparency and accountability in the sector.
Earlier it was not suitable for an investor to list properties using REITs due to the 15%+ Dividend Distribution Tax (DDT) hit and with Long Term Capital Gains tax (LTCG) applicable on unlisted company holdings up to 3 years. Bringing commercial assets along with residential assets under the purview of the RERD Act, along with no DDT and the LTCG applicability after 2 years itself and put together with the earlier clarifications on pass through status, indeed a smooth road has been created for REITs to take off. It will definitely entice more investors into the real estate market from the capital markets where the LTCG period is one year.
With the RE bill making it mandatory for 70% payment by cheque - and utilised only for the same project – to be held in separate escrow account for ensuring construction progress, in totality this implies an increasing shift towards white money – no more ponzi schemes of using advances of one project for completing older projects. In addition, delays will lead to high penal costs for the developers and in severe cases, jail term as against the current system where developer charges obscene amounts in case of delayed payments from buyers without reciprocating the same – and in general, their lack of concern - in case of their delays in giving possession.
No more super built up numbers in the air – carpet area is the way forward. Indeed, a case of What You See Is What You Get. This will lead to a spurt in consumer confidence – especially for developers with genuine business interest - strict punishment for errant developers as well as fines for project delays and faster redressal to consumer complaints will rein in the problem of unscrupulous elements in the industry.
Not only this, there will be tremendous information symmetry with developers having to disclose and not be able to change, without due consent from stakeholders - project plan, layout, government approvals, clearances, land title status, promoter details and completion schedule, etc. thus protecting the buyers from any ad hoc changes that are a norm presently.
Service deficiency is another landmark inclusion – if there is any construction flaw within a year of handover of project, the developer will be held responsible.
The one that got away
It is essential to ensure that this does not become another approval hurdle for developers or just another level of bureaucracy. It would have been ideal if government authorities which sanction projects to also be covered – both from point of view of delays and errors.
Slow moving permissions and lazy bureaucracy will only impede development and cause a further cost in terms of approval costs/ interest burden for liquidity management which will only get passed on and lead to artificial price inflation.
The upcoming law will need to be accompanied by strong measures to improve the ease of doing business in the sector - single-window environmental, state-level and municipal-level clearance is needed urgently.
Else there will be cases where despite best attempts by developer, there will be project delays and unfavourable penalty. With strict punishments like jail term, this could well be a major deterrent for good developers.
On the plus side, digitisation of land records has received an impetus and there seems to be some thought on streamlining approvals to ensure 'ease of doing business'.
Bring it on, April!
While the changes will be a challenge for the short term transitory period, eventually this will lead to a better business model for the long term, helping developers get access to fresh capital by becoming a structured, regulated sector with monitoring systems in place.
Not only an improved institutional fund flow into the sector but also more potential home buyers with the promise of protection from nefarious builder actions - in terms of time lost due to delayed project delivery, in terms of finance with higher interest payments on home loans and in terms of good experience with missed quality specifications.
The bill is a verdict for better transparency, clear accountability, equality for buyers and sellers and most importantly, a positive sentiment.
About the author
Vinay Rangani, General Manager, Investment Services, is a CFA charter holder and MBA with quality experience as a Buy side and Sell side Investment Professional with equal focus on equities and debt. He possesses a rich cross-sectorial experience with the major focus areas being real estate, infrastructure and technology - utilising multiple instruments and transaction sizes in the range of $2-$50mn.