When the Modi government took over for the second time last year, the performance of the real estate segment was muted owing to the prevailing liquidity crunch, high inventory overhang, weak affordability and subdued demand conditions. However, interest rate cuts and focus on affordable housing, not to mention the creation of the Rs 25,000 crore stress asset fund for stalled projects, did propel the sector towards a road to recovery but the COVID-19 outbreak spoiled the party.
If the Modi government introduced several structural changes during its first term in office such as the implementation of RERA, GST, IBC, PMAY scheme for affordable housing, it focused on several liquidity boosting measures as it took over the office for the second time last year.
The Reserve Bank of India slashed repo rates by a total of 135 basis points in 2019 in order to boost economic growth and increase liquidity. Affordable housing remained upbeat in 2019 thanks to multiple government sops throughout the year. First-time homebuyers were given further tax deductions (now amounting to Rs 3.5 lakh in a year) on interest amount of home loans below Rs 45 lakh availed within FY 2020-end.
On the commercial front, notwithstanding concerns about an ongoing domestic economic slowdown, demand for office space was resilient due to expansion and consolidation plans of various multinational and domestic corporations. The financing environment for the segment was also favourable in light of the successful listing of the first Real Estate Investment Trust (REIT) in India, as well as the strong interest for rental yielding assets demonstrated by foreign investment funds. Unfortunately, COVID-19 proved to be a major dampener.
Creation of an alternative investment fund of Rs 25,000 crore for last-mile funding of stalled housing projects
For the housing sector, the government announced the alternative investment fund (AIF) of Rs 25,000 crore to facilitate the completion of stuck affordable and mid-segment homes. This was meant to help complete 350,000 stuck housing units.
The government, acting as the sponsor, committed Rs 10,000 crore with fund manager SBICAP Ventures Limited, Life Insurance Corporation of India (LIC) as well as other investors contributing the remaining amount.
It laid down 5-point criteria for the eligible: Stalled for lack of adequate funds; Affordable and Middle-Income category; Net worth positive projects including NPAs and projects undergoing NCLT proceedings; RERA registered; Priority for projects very close to completion.
The fund has achieved its first closing at Rs 10,500 crore but actual disbursements from the project have been minimal – about Rs 45 crore till date. It is essential that the fund be disbursed quickly to complete stuck projects.
“The chief constraint in the operationalisation of the fund is the rigidity in its mandate, wherein the existing lender (Banks/ NBFCs/HFCs/) is not being accommodated at all. Secondly, the AIF expects a return of about 12-15 percent on its investments in projects, which is very high given the fact that the projects in the ambit of the fund are “stalled”. This high RoI leads to an increased in project cost, which eventually passes on to the already aggrieved homebuyer,” CREDAI said in its letter to the Prime Minister on May 25.
FM’s COVID-19 package
Providing major relief to real estate developers during the coronavirus pandemic, the government earlier this month extended the timeline for project completions and registration of project timelines by six months. This is a big move that will de-stress developers significantly since construction activity had been halted all across the country. Homebuyers’ wait for their homes will get extended by this move.
A Rs 30,000 crore special liquidity scheme for NBFCs/HFCs and MFIs has been announced which will ease liquidity woes of stressed players. This will benefit the real estate sector significantly, given that NBFCs and HFCs are major lenders to it. According to a report by ANAROCK research, NBFCs and HFCs together contribute almost 56 percent of total lending to real estate in India currently.
The government also announced the one-year extension of the CLSS scheme up to March 2021. This will help push demand for affordable housing. Ever since its implementation in 2017, the CLSS scheme has already benefitted over 3.3 lakh families and the extension will further aid many more families to avail housing under this scheme. Under the PMAY scheme, the middle-income group – I (MIG -I) with income between Rs 6 lakh and Rs 12 lakh can avail interest subsidy of 4 per cent whereas middle-income group – II (MIG -II) with income between Rs 12 lakh and 18 lakh can get interest subsidy of 3 per cent under the scheme.
The ANAROCK report said there are currently 15.62 lakh under-construction units across the top-7 cities, of which nearly 39 percent are in the affordable segment, priced less than Rs 40 lakh budget.
In a bid to grant relief to companies defaulting on loans due to the COVID-19 stress, finance minister Nirmala Sitharaman on May 17 said no fresh insolvency would be initiated for one year under the Insolvency and Bankruptcy Code (IBC) and that coronavirus-related debt would be excluded from the definition of default. While these measures seek to offer breathing space to real estate companies to recover, they may curtail remedies available to homebuyers, said experts.
The RBI this month for the second time since COVID-19 stuck slashed the repo rate by 40 basis points. The repo rate now stands at 4 per cent and reserve repo rate at 3.35 per cent. The apex bank cut rates in its March 2020 in an advanced monetary policy review. In total, they have cut the repo rate by 115 bps since the lockdown started. This is expected to make new home loans cheaper.
Much needs to be done to boost demand
Realtors said while several steps have been taken by the government to boost liquidity, little has been done to incentivise home buyers to buy or improve confidence post-COVID-19.
“To boost demand, the government should reduce the maximum rate of interest on new home loans to 5 percent by subsidising interest component of EMIs for the next five years. It should raise the limit of principal deduction on housing loan under Section 80C to Rs 2.5 lakh and interest deduction under Section 24 to Rs 10 lakh and not levy capital gains for residential properties held for a period of longer than one year. It should also resume subvention-based funding,” Credai said.
On the issue of Goods & Service Tax (GST), the builders’ body comprising more than 15,000 members have said the current regime provides a rate of 1 percent for affordable housing (those costing Rs 45 lakh). It wants the benefit to be extended to units costing up to Rs 75 lakh in metros.
“There is an urgent need to reduce GST rates and stamp duty charges at least for the next six to nine months,” said Gaurav Gupta, president, CREDAI-Ghaziabad, adding if this is done along with increasing the income tax exemption limit, the total savings accruing to homebuyers would be around Rs 5 lakh.
“That would certainly boost the demand among buyers during these trying times,” he said.
According to Piyush Gupta, Managing Director, Capital Markets, India, Colliers International, even though the RBI has reduced interest rates, the borrowing rate for real estate developers continues to remain high.
“NBFCs are not being able to pass on the benefit to realtors due to their own set of problems such as balance sheet management issues and asset-liability issues. It is due to this that private funds continue to increase their cost of lending, which is now as high as 18 to 22 percent. It is now a demand-supply mismatch issue. The government should look at relaxing norms by which PSU banks and private banks can lend directly to the real estate sector,” he said.
Also, while prices of units have on an average been reduced by 15-20 percent through direct or indirect incentives and affordability is much better, the government needs to take steps to boost the confidence of homebuyers to invest in a long-term asset, he said.
Reduction in transaction costs could also go a long way to boost demand.
“A reduction in GST for under-construction units and stamp duty albeit for a few months could help boost the confidence of buyers. It will help move inventory,” he added.
Also, considering the fear factor associated with the spread of the virus in major cities and its satellite areas, labourers on construction sites in cities have been moving back to their native places due to which the construction sector is facing acute shortage of labour and projects in cities are likely to see a delay of over six months.
“In order to ensure renewed labour force participation, some short-term measures can be taken to mitigate their problems, that may include giving increased wages, food and accommodation facilities. Also, providing medical insurance with adequate coverage to every labour and providing safety consumables like PPE, regular sanitisation could ensure a sense of security in them. However, implementation of these measures will lead to an increase in the construction cost of the project,” said Taha Ansari, director, project management (North India) at Colliers International.