The year 2016 has been an eventful one for India’s real estate sector. The first half of the year witnessed early signs of a revival in momentum, as reflected in improved sales and a drop in unsold inventory levels across the top residential markets in India (as compared to
H1, calendar year 2015). As the world’s fastest-growing large economy, India’s progress in the year has been supported by FDI reforms, healthy consumer demand and improved agricultural output driven by a good monsoon. The broad consensus was that India’s real estate sector appeared to be reaching an inflection point, with time correction in prices, the implementation of the Real Estate Act 2016, low interest rates and an overall supportive policy/regulatory environment all serving to contribute to a revival in consumer sentiments.
2016 has also been the year of strategic policy initiatives, the broader objective being the creation of a conducive economic system that would boost long-term industrial growth and improve ease of business. Specific to the sector, the Real Estate Act 2016, with its thrust on transparency, accountability and the protection of home buyer interests, seeks to empower all stakeholders engaged in the business and consumption of real estate. The Benami Transactions (Prohibition) Amendment Act, 2016, establishes a regulatory mechanism to further strengthen the fight against tax evasion and improve transparency. Yet other announcements, such as the exemption of Dividend Distribution Tax (DDT) for SPVs to REITs and relaxation of FDI norms, were aimed at improving financing to the sector.
As last year, affordable housing continued to attract significant attention, driven by continued and accelerating urbanisation, rising home ownership aspirations and an urban housing shortage estimated at 18.8 million units as per the ‘White Paper – Indian Housing Industry’ by research and consultancy firm RNCOS. 100 per cent deduction in profits for construction of affordable housing (upto 30 sq. mtr. in the four Indian metros and 60 sq. mtr. in other cities) and interest subsidy for first-time homebuyers, are some of the initiatives that were introduced to improve supply and spur construction activity in the segment.
In the month of November, 2016, the Indian economy witnessed a major shake-up, set in motion by the withdrawal of legal tender character of high-value currency notes. There has been much debate on the pros and cons of demonetisation and its comprehensive impact. The immediate impact continues to be felt across many industries and sectors, as manifest in a drop in consumption spends and growth rates in the near term. From a real estate perspective, the short-midterm impact of demonetisation is expected to vary across regions, as the sector is fairly localised in nature. With intending home buyers likely to adopt a ‘wait and watch’ approach, it appears as though we might witness a temporary slowdown in the sector till the economy adjusts to a new normal.
While the primary market in tier I cities is expected to remain largely unaffected, the tier-II and tier-III markets might be impacted to a higher degree, along with the luxury segment. However, demand for affordable housing is unlikely to be significantly impacted by demonetisation, since the cash component in the segment is typically minimal and transactions are primarily routed through bank borrowings. Though it’s difficult to predict the impact of demonetization at this stage on real estate sector including affordable housing segment.
2017: A year of Change
Growing cities – The fact remains that India’s cities are growing and will continue to do so, driven by urbanisation, rising disposable income and mounting consumption of goods and services. Demonetisation notwithstanding, therefore, the demand for quality housing that is strategically located and attractively priced will sustain. From the perspective of resultant pricing shifts, cities and micro-markets that are end user driven are likely to remain stable. For intending home buyers, the new year has already started on a positive note, with some banks lowering their lending rates and more borrowers now eligible for loans and reduction in home loan EMIs, in addition to reduced tenures for existing borrowers, wherever applicable. This softening of interest rates bodes well for the growth of the real estate sector.
The evolving home buyer – While it’s difficult to predict the sector’s journey through the new year in exacting detail at this point, home buyer preference for institutionalized developers with demonstrated track record and good governance framework will likely strengthen in 2017. This is especially relevant given the evolving customer profile, larger share of home loan customers and practices that are followed with respect to no undervaluation of properties or payments in cash (by such real estate developers). We believe real estate markets across India are maturing and will increasingly be end user driven, going forward. In fact, over the past two quarters or so, end users have been actively pursuing options, with closure rates improving for right-priced projects in good locations.
GST – An important and game-changing reform that merits special mention is GST or Goods and Services Tax, expected to be rolled out in 2017. When implemented, GST will subsume a series of central taxes and state-level levies, and could benefit the nation in the long term, by way of a wider tax base and greater participation in the formal economy.
Sustainable urban development – Green buildings, or developments that are resource-conscious, are increasingly finding flavour with consumers in India; this is on account of increasing awareness of both the long term benefits to the environment and demonstrated savings in operational (utilities) costs of such buildings. And yet, India’s cities have a far smaller proportion of green developments, when compared to other developed countries – the US or the UK, for instance. Incentives and tax benefits can contribute to stakeholder buy-in and improve the pace and scale of ‘green’ development. We believe that green and inclusive urbanisation that encompassed the entire lifecycle of buildings (from construction, to operations and end of use) can provide a new direction to India’s real estate/infrastructure sector.
On an overall basis, over time, the recent moves at regulating the economy are expected to increase transparency and the ability to attract institutional capital across industries and sectors, despite some initial short-term turmoil. Consequently, we believe that the Indian real estate sector will emerge stronger, healthier and capable of long periods of sustained growth, provided adequate policy/regulatory support.
Under Construction Flat Booking Finds Tax Deduction Under Time Constraints
If a buyer makes a transaction to book an under-construction flat and if he acquires it within the three-year period of the sale of his old house, then he is entitled to a tax deduction, says a ruling from the Mumbai bench of the Income-tax Appellate Tribunal (ITAT). If an apartment is booked in an under construction project than it must be viewed as a method of constructing residential tenements, says the December 18 judgment.
That means if the buyer uses the entire gain from the transaction to buy another house within two years or construct another house within three years. The two- and three-year period applies even if the buyer bought another house a year before selling the first one. But the property should have been bought in the name of the seller.
It is mandatory that within a period of two years after or one year before the date of transfer of old house, the taxpayer should construct a residential house or acquire another residential house within a period of three years from the date of transfer of the old house. The date of receipt of compensation will determine the period of acquisition or construction in a case of compulsory acquisition.
This exemption is effective and can only be claimed in respect of one residential house property purchased/constructed in India. In the case of multiple house purchases or constructions, the exemption under section 54 will be available in respect of one house only. Any purchases made outside the country does not fall under any kind of exemption. Section 54 gives relaxation in such cases by providing relief to the taxpayer who sells his residential house and acquires another residential house from the gained capital.
After the sale of an asset, the difference between the buying price and the selling price is a capital gain or a capital loss. These are further classified as long-term or short-term. If a property is held for 24 months or less, with effective from 2017-18, then that asset is treated as Short Term Capital Asset. Then an investor can make
treated as Long Term Capital Asset. Then only a Long Term Capital Gain (LTCG) or Long Term Capital Loss (LTCL) can be made on that investment.
ITAT agreed that booking of a new flat in an under-construction apartment should be considered as a case of “construction” and not “purchase”, hence following the earlier decisions of the Bombay high court and the tribunal itself. Further ITAT allowed the fact that the construction can began prior to the date of sale of the old asset. Same was stated in the earlier judicial decisions of the Karnataka high court and Ahmedabad ITAT, that the date of commencement is not relevant but it is the completion of construction that comes in relevance to section 54.
HDFC and Quikr Make A Deal
According to a deal between HDFC and Quikr, a stake of more than 3 percent will be given to the mortgage giant in return to its transfer of offline and online real estate brokerage business to the classified ads platform.
After acquiring Commonfloor in 2016 Quikr already has a major presence in online real estate broking.
“Most of the searches for real estate are moving online. Quikr has a much bigger presence online. Through this deal, we are partnering Quikr in the broking business,” said HDFC MD Renu Sud Karnad. According to her, this deal will strengthen Quirks position with offline support.
The deal suggests that HDFC will transfer to Quikr its entire shareholding in HDFC Realty, a real estate brokerage platform, and HDFC Developers, which runs the HDFC RED online platform.
Karnad added that the deal expects Quikr to generate home loan leads for HDFC. The transaction consists of a co-branded alliance between both parties and the HDFC brand will continue to be used online for a year.
The e-real estate classifieds platform HDFC RED has around 7,000 project listings and generates traffic of over 80,000 unique visitors per month. HDFC Realty has a 300-member, in-house sales team, and 7,000-strong nationwide broker network. Avendus Capital was the exclusive financial adviser to Quikr while Kotak Investment Banking acted as the exclusive financial adviser to HDFC on this.
30 million monthly users make Quikr India’s largest classifieds platform. It runs multiple vertical businesses across real estate, automobiles, jobs, services, and goods. The Quikr Home, its real estate vertical generates 3.5 million monthly unique visitors.
Both companies intend to work closely and conduct analytics and identify potential homebuyers, and therefore home loan customers, early in their home-buying journey. Quikr founder and CEO Pranay Chulet said, “We see great synergies between Quikr and HDFC as we start working together to bring a seamless online-to-offline platform to developers and consumers.”
Retaining The Sustainability: GRIHA Launches Star Rating For Urban Homes
Green Rating for Integrated Habitat Assessment (GRIHA), is the National Rating System of India, a Sanskrit word meaning – ‘Abode’. Human architecture has always consumed resources in the form of energy, water and material from the environment. From their construction to operation, these habitats absorb the resources throughout their life cycles, emitting wastes in the end. This emission could be direct in the form of municipal wastes or indirect emission into the atmosphere, such as from electricity generation. Hence GRIHA was formed to reduce an architecture’s resource consumption, waste production and overall environment impact up to certain national acceptable limits.
In attempt to quantify all these aspects, like energy consumption, waste generation etc. GRIHA tries to manage, control and bring down the respective to the best possible limit. Being a rating tool, it helps people to assess the performance of their respective projects against the national benchmarks.
Hence it becomes an evaluation of the environmental performance of an architecture on a holistic level. Covering its entire life cycle, this evaluation provides a specific standard for a ‘green building’. This rating system aims to strike a balance between established institutions and emerging concepts, on a national as well as the international level.
The process starts with an online submission of documents according to the criteria. Then a team of professionals and experts from GRIHA Secretariat takes a site visit for the evaluation of the building. There are four different sections categorized by 34 criteria in GRIHA rating system. Some of them are site selection and site planning, conservation and efficient utilization of resources, building operation and maintenance, and innovation.
Sanjay Seth, CEO, Green Rating for Integrated Habitat Assessment (GRIHA) Council says, “A rating between one and five stars is being provided, helping the costumers to know about the sustainability of the houses”.
According to the Union Minister, Hardeep Singh Puri, the climate resilient and sustainable buildings are the need of the hour. As the government is aiming to construct around 1.2 crore houses for the urban poor under the affordable housing scheme.
In one of his keynote addresses, Andreas Baum, Ambassador of Switzerland to India and Bhutan said that the Indo Swiss collaboration is operating with the Indian Bureau of Energy Efficiency in the development of guidelines for energy efficient housing.
“At present India is witnessing a rapid urbanisation, if each building becomes greener than the last one, then we have a huge opportunity and hope for our country. We need to look beyond the conventional methods of building, in order to provide our citizens with a good quality of life. Hence, GRIHA gains important in meeting our national goals with respect to a sustainable society”, says Dr Ajay Mathur, director general, TERI & president, GRIHA Council.
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