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Demonetisation and RERA: How will it impact property prices?

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Demonetisation and RERA: How will it impact property prices?

On November 8, 2016, the Government of India de-notified currency notes of Rs 500 and Rs 1,000 as legal tender. The temporary shortage of cash adversely impacted several sectors that depended on cash, notably R
On November 8, 2016, the Government of India de-notified currency notes of Rs 500 and Rs 1,000 as legal tender. The temporary shortage of cash adversely impacted several sectors that depended on cash, notably wholesale markets, the informal sector and even parts of the real estate industry. The real estate industry involves both, formal as well as informal sector stakeholders.

By some estimates, the real estate sector itself is a significant repository of unaccounted money in India, usually by way of property purchased in ‘benami’ form in cash. By other estimates, about 30% of monies changing hands within the real estate transactions are unaccounted.
A key purpose of demonetisation was to eliminate such unaccounted cash in such transactions.

Ironically, while the purpose of using of unaccounted cash in a real estate transaction has been to avoid taxes and reduce the effective cost(s) of transaction, they have actually, in effect, been instrumental in driving up pricing within the real estate sector.

This has been so, because of a steady supply of real estate assets that may not find actual physical use in the near future but provide suitable avenues for ‘parking’ of unaccounted monies. The step of demonetisation has essentially caused the demand to temporarily, if not permanently, slow down in the purchaser segments which have traditionally used real estate to ‘park’ unaccounted monies. In terms of the supply stock, this has affected sales in the secondary market, as well as assets developed at a small scale, viz., petty contractors working as developers.

Demonetisation has hit the real estate industry in three ways: Slowdown in production, including stoppage of new launches. Shifting of demand and reduced purchaser interest in new products. Prices being lowered to clear ready inventory. See also: Is the post demonetisation period, a good time to invest in property?

Remonetisation: Will real estate prices come down or go up? The argument in favour of higher property prices

Prior to demonetisation, deals between developers and land owners often used to be entirely cash-based.
If cash transfers are made illegal for land-based transactions, there is a real possibility that land owners will load the tax costs on the price to the developer and in turn, the developer will load this cost back to the purchaser. This will increase the prices of the real estate product, but with no substantial gain in margins for the developer.

The argument in favour of lower property prices

The focus is now to provide value-for-money homes that can attract more buyers with a lesser budget. However, these stocks are often produced in areas that have limited connectivity to places of work and lack basic economic and social infrastructure. Consequently, there is little value, in terms of usability of such an asset.

However, the asset is still worth investing into for speculative long term capital gains. There are no real recurring costs involved in holding the asset without using it. By some estimates, over 60% of housing stocks produced in the last five years within the central National Capital Region, is reported to be unoccupied. If these vacant stocks were to be subjected to a significant holding tax or penalty, it will become unattractive for speculators to invest into and in turn, reduce demand for paying high prices. At such a juncture, even if taxes paid by a seller of land is front loaded on to the final price at which the real estate asset is transferred to the purchaser, the developer may not mind cutting profit margins to ensure that the price still stays affordable.

How the Real Estate (Regulation & Development) Act will impact the market The Real Estate (Regulation and Development) Act (RERA), 2016 came into existence after almost eight years of deliberations, largely fuelled by concerns over unscrupulous practices of developers, such as delaying of projects, demanding unscheduled or unaccounted payments without actually delivering the product, misrepresentations, etc. The Act makes it mandatory for promoters to register all projects with the State Real Estate Regulatory Authority, along with extensive information about them, the project implementation schedule, layout plan, land status, government approvals, sub-contractors, etc., which will be made available to consumers.

All commercial and residential projects with a plot area of more than 500 sq meters or eight apartments inclusive of all phases, will have to be registered with the authority. Projects which have not received a completion certificate and are ongoing will also be required to be registered with the authority, within a period of three months of the commencement of the Act.

Conclusion The exercise of demonetisation and subsequent remonetisation, has posed new challenges for the real estate sector, which was already gearing up for compliance with the RERA. The key aspect that needs to be addressed, is the fact that operating costs for the real estate industry may go up while demand may continue to rationalise to the extent where potential purchasers refuse to (or are unable to) pay beyond a certain price. While affordability and the ability to pay for a house has been enhanced to an extent, through introduction of subsidies in interest rates, the prices at which houses are sold remain on the higher side.

Source:  moneycontrol.

Regulations

373 Maharashtra Cities To Fall Under PMAY Scheme

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The state of Maharashtra has added 232 cities to the existing 142 which makes it 373 cities under the Pradhan Mantri Awas Yojana Scheme (PMAY).

The officials at the housing department feel that this step will aid the government take up more projects under the PMAY scheme.

Sachin Kulkarni, Builder shared his concerns over the lack of coordination between the department in executing PMAY projects. He said, “This is a good sign. However, the PMO’s seriousness in promoting HFA is diluted by the time it reaches the authorities. Apart from collecting application from interested beneficiaries, nothing has moved on the ground in urban centres. I hope that this initiative moves on fast track”.

Maharashtra CM Devendra Fadnavis recently states that the in order to create more housing stock the state’s Slum Rehabilitation Authority scheme be brought under PMAY so that it can receive the subsidy to create more affordable housing. He clearly mentioned that the government intends to create more housing stock and it was taking various initiatives and making policy changes for it.

Also Read- Affordable Housing To Get A Boost With PMAY’s Scope To Be Extended To Private Lands

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Real Estate Sector May Fall Under GST What Does It Mean For Buyers?

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One after the other the real estate sector has witnessed massive policy and law changes in its systems. Nonetheless, the tide has not passed yet. The GST council will take up a proposal to bring it under the uniform nationwide levy.

As the industry is still recovering from the RERA Act, the finance minister, Arun Jaitley said that there is a strong case to include real estate in the new indirect tax regime. He said this last week and also mentioned that GST Council will discuss it in November.

At present, the home buyers are paying 12 percent GST on under-construction properties. This percentage includes two taxes which are stamp duty and registration. The rate of which varies in each state but GST will make them uniform.

Santosh Dalvi, KPMG India partner (indirect tax) said, “If the entire real estate is brought under GST, they would have to abolish the stamp duty and we don’t know how the government plans to compensate the states for their loss.”

The stamp duty with registration and GST comes to approximately 18 percent for under construction properties. He further said, “So, it’s important to look at what rate it will be taxed at. We can then look at consumer prices”.

While agreeing, Bipin Sapra, EY partner (indirect tax), added, “It’s going to be a test for the government”.

Developers also pay taxes on raw materials. However, unlike other businesses, they don’t get any tax refunds through input credit. GST taxes every stage of the business activity to better compliance and compensates for it by permitting refunds.

Anuj Puri, Anarock Property Consultants chairman, said “By including real estate under GST, builders can get a fair amount of input credit, helping bring down costs,” He added that it would make homes cheaper for buyers.

According to Sapra, it will depend on the tax rate applicable.

Niranjan Hiranandani, co-founder of Hiranandani Group said, “Real estate under GST ambit means consumers will only have to pay one final tax.” He stated that with the commencement of RERA it brings transparency and GST would reduce the burden in terms of taxes payable while buying the home. He concluded, “Not only will this create positive sentiment but it should also boost actual sales”.

Also Read: Affordable Housing Is The Changing Face Of Indian Real Estate

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Home Buyers Will Be Covered Against Builders Who Are Going Bankrupt

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In a move to protect home buyers from builders declaring their bankruptcy, the Insolvency & Bankruptcy Board of India (IBBI) has amended rules which make it necessary for any company to showcase how they have dealt with interests of all stakeholders. This is directed towards companies like Jaypee Infratech and some of the entities of Amrapali Group.

The regulator has informed about the revised rules last week. This will ensure that banks and other creditors do not get away by protecting their interests at the expense of others who are impacted by the action.  Banks are part of the creditors’ committee. They become an important decision-making body after a company is admitted for bankruptcy.

An expert bankruptcy lawyer said, “The change in the rules has plugged a gap as flat buyers are of the view that there is nothing to protect their interests.”

According to the new law that was enacted last year intends to speed up the resolution process in a period of 180 days, with a possible extension of 90 days. This will be done by appointing insolvency resolution professionals who will take charge of the company’s operations and prepare a plan. As per the law, an information memorandum will be finalized if the creditor’s committee is willing to take applications from other interested companies to take over the company.

The insolvency experts say that the law providing for the plan binds corporate debtor (the company) and its members, employees, guarantors, and creditors, other stakeholders involved in the resolution plan. However, there are no obligations mentioned in the rule to give any treatment to the stakeholders other than the financial creditors (banks) and operational creditors, which includes vendors and others who may have dues.

The National Company Law Tribunal, based on the comfort provided by the revised rules, will choose the final resolution plan based on bids that are received. The lawyer further said, “The tribunal will not clear the resolution plan without giving notice to all stakeholders and the flat buyers can raise objections at that point of time.”

Also Read: Tanvi Group Fail To Deliver Homes And Declare Bankruptcy

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