Real estate, along with the construction industry, employed 52 million people in 2017 and was valued at $120 billion. Even though the sector is going through turbulent times, it would generate 15 million additional jobs over five years starting from 2017.
The real estate sector is heavily dependent on credit, both on the front-end as well as the back-end. Builders need credit to buy land and develop the project, while the customers need liquidity in the form of home loans to buy the constructed units. While the sector was sailing smoothly, the default by one of the country’s largest Non-Banking Finance Companies (NBFCs), Infrastructure Leasing and Financial Services (IL&FS) Ltd in 2018 led to a crisis-like situation in the entire NBFC/HFC sector. As a sequel, banks and debt capital market drastically reduced the flow of credit to NBFC/HFCs. Fearing imminent liquidity crunch, HFCs stopped disbursements to developers and also cut down the home loan advances from September 2018, which severely impacted the construction activity. According to an industry report, the value of stalled residential projects across the country touched $63 billion in 2019.
Even though the customers were unaffected by the liquidity crunch directly, it created a substantial impact on them indirectly. Countrywide, there are thousands of homebuyers who have invested in the residential units but have not received the possession of the houses. When a project gets stalled, the home buyer is the biggest victim. While the Real Estate (Regulation and Development) Act, 2016 has rectified the situation to an extent, there are still, many projects that got stuck before the law came into force which has severely impacted the home buyers. The biggest learning for the consumer is to select the right projects with well-funded and reputed developers. Additionally, consumers should avail home loans only from financially sound lenders and release the money to the developer as per stage-wise construction.
Various initiatives taken by the FM to boost home loans
Liquidity crunch in NBFC/HFCs post-September 18 has hit the real estate sector hard, which was already reeling under the pressure of substantial unsold inventory and delayed project completion. A lot of on-going projects got stalled, and new launches were put on hold due to the lack of funding and prevailing uncertainties. The real estate sector has also closed the forward and backward linkages with other vital sectors of the economy as well as the second-largest employer next to agriculture. Taking cognizance of the situation, the Finance Minister undertook a slew of initiatives in the last six months to revive the sector and the economy as well. These include:
- Creation of a stress fund of 25000 crore to provide last mile funding to all stalled housing projects irrespective of their stages of construction excluding those under liquidation stage. It will support approximately 1600 stalled projects involving 4.80 lakh flats.
- The reduction in the Goods and Services Tax (GST) to one percent for affordable housing projects and five percent to other projects
- Extending the exemption of income tax on profit to all eligible affordable housing projects launched until March 20.
- Relaxing the External Commercial Borrowings (ECB) guidelines for affordable housing.
- Improving the liquidity of NBFC/HFCs
- Providing 30000 crore fund to National Housing Banks (NHB) to refinance the HFCs
- Allowing investment by FII/FPI in infrastructure fund and NBFC bonds.
- Waiver of debenture redemption fund to encourage NBFC for public issuance of NCDs
- Tax exemption on interest on home loans up to 3.50 lakh from the earlier 2.50 lakh for affordable housing units worth Rs 45 lakh
- Exempting income tax on notional rent on the self-occupied second house.
- Capital gains benefit on buying two properties on the sale of one property.
- The Reserve Bank of India (RBI) reducing the repo rate by 135 bps and nudging the commercial banks to pass the rate cut benefits to customers by linking all home loans to the external benchmark rate.
Real estate sector in 2019
The year 2019 was a mixed bag for the industry. While the residential sector suffered, the commercial segment performed relatively better. Led by foreign private equity investors, the Indian real estate sector attracted investments worth $6.2 billion. Foreign funds made up 78 percent of the total investments with Mumbai being the largest recipient, capturing 25 percent of the total inflows. Moreover, the sector saw the listing of the first REIT of the country and the largest in Asia.
A promising 2020 for real estate
With the government announcing a host of measures, the outlook for the real estate sector and more particularly for the residential segment looks good. Moreover, the impact of various initiatives by the government and the RBI will be visible from April onwards.
According to industry experts, the commercial real estate segment will continue to witness strong demand in 2020. Stable demand from IT companies, start-ups and co-working companies will drive the popularity for commercial spaces. In 2020, the real estate sector would attract total investments worth $6.5 billion, a growth of five percent over 2019. The commercial office space, which constitutes 12-15 percent of the overall property market, will be the primary driver for investments.
Despite the several announcements by the government, the realtor community has pinned a lot of expectations from the upcoming budget. The industry expects the government to stimulate demand by providing additional tax benefits to homebuyers under Section 80C of the Income Tax Act.
As per an estimate by Fitch Ratings, real estate loans worth $10 billion are coming up for repayment in the first half of 2020. The industry is in a recovery mode but not healthy enough to service the loans. The fallout of default could extend to mainstream banks, which will again choke the flow of fund to residential projects. It will be significant support from government and RBI to consider one-time restructuring of genuine builder loans which turned NPA or likely to be NPA in the next 12 months due to liquidity crunch and slowness in demand. The real estate players are also expecting the government to extend infrastructure status to the entire residential real estate, as presently available to affordable housing projects.