While experts like Deepak Parekh and Hon’ble Minister Piyush Goyal had earlier propositioned price cuts to enhance the liquidity position of developers and load off unsold inventory, the sentiment of the sector does not concur.
In a recent blog by Loyalie CEO, Akhil Saraf, we had put forward an extensive point-by-point discussion on why externally mandated price cuts could be another nail on the hopes of a quick real estate industry revival. His views on the matter were extensively appreciated by members of the industry that had already been feeling unattended to.
This report is going to examine alternative suggestions we have receivedfrom some of you in the industry to help the real estate industry out of the slump.
1. Build a better narrative for the real estate sector
The real estate sector itself lacks a coherent narrative like other industries and does not get noticed for its good deeds, whereas criticism is never short at hand.
What it needs is a new method of communication that will give it an image of reliability and trust. Much like how the top mutual fund companies came under the Association of Mutual Funds in India to promote investments in mutual funds with the “mutual funds sahi hai” narrative, real estate companies too could showcase their initiatives that go amiss for the masses.
During COVID-19 lockdown some developers took the lead in keeping people safe and engaged by introducing a new lifestyle that revolved around the homes of customers.
Social Distancing Lifestyle (So Dis Lifestyle) was an initiative taken by top developers to offer their customers with curated content and engagement activities and spread positivity during a time of uncertainty by collaborating with Loyalie and allowing us to make a difference on their behalf. We are going to follow up with our view of the industry more extensively.
What developers should do?
⦿ Continue working towards creating a holistic lifestyle experience for homebuyers by understanding the emotional value of their product.
2. Development Rights for COVID Support
Buildings can have 1 exclusive quarantine/ ventilator facility for societies with 500+ apartments. Area wise monitoring can be set up for the participating buildings. These beds can be used exclusively for the society living there.
Builders investing in building these facilities can be incentivized with Development Right Boosters. They can consume or sell the same rights.
The government needs to ensure that the backend mechanism works in terms of the supply chain, and companies can retrofit housing societies with additional quarantine beds.
This point is specifically applicable to Mumbai, Gurgaon, and Bangalore.
What the government should do:
⦿ Since health infrastructure in the wake of COVID-19 appears quite challenged, the government can encourage developers to create quarantine and emergency facilities and offer buy-back guarantee on medical equipment at discounted rates after the end of the crisis.
⦿ It is integral that the FSI increase is coupled with this policy because that will allow developers to make more money and engage in homebuyer welfare which in turn will boost more sales.
Pros
⦿ It takes the load off the already strained medical infrastructure.
⦿ Becomes an immediate selling point for homebuyers.
⦿ Even if tomorrow a COVID-19 vaccination is available, this will still help take the load off the public health infrastructure.
3. Slash ready reckoner rates to increase sales
State governments collect stamp duty on the circle rate or the actual transactional value, whichever is higher. However, owing to real estate industry slump and the piling unsold inventory, this rate is becoming a major impediment for sales. It also has a major impact on the various premium payments to be paid to the approval authorities which are linked to such ready reckoner rates which effectively makes the product costlier by X%.
What the government should do?
⦿ Subsidize stamp duty for state governments to give homebuyers and developers positive reinforcement. Central Government can also provide income support for states like GST and VAT in the past.
⦿ Alternatively, abolish Stamp Duty and bring it in the purview of GST along with input tax credit.
⦿ Make the valuation of Circle Rate determination with periodic reviews.
⦿ Another option for product stamp duty could be to calculate it as Land + Construction components but charge only the Construction part of it rather than the final PSF rate which factors in the land cost as well. This has already been paid for by the developer and now is only conveying to a society as part of the finished product.
⦿ Make the base of payments of such premium at a lesser percentage of the ready reckoner value. Further stagger such payments during the life of project without any interest charges. From a Government perspective, the OC can be linked to completion of payments by the Developer community.
Pros
⦿ It is going to encourage homebuyers and developers to buy and sell properties that are stuck under the ready reckoner rate.
⦿ Help state governments who cannot afford stamp duty discounts with Union government subsidies.
⦿ Dynamic rates can help create public confidence to remove rate-fixing charges and at the same time it can move the market into a true market economy.
4. Expand the reach of the CLSS scheme Pradhan Mantri Awas Yojana
The CLSS or Credit Linked Subsidy Scheme is designed to make it easier for the EWS, LIG, and MIG sections to own a home under the Pradhan Mantri Awas Yojana. If the government wants to boost the real estate sector, then expanding the reach of this scheme could work significantly.
What the government should do?
⦿ Increase the slab of MIG II from 18 lacs to 24 lacs and allow them to avail loan subsidies on properties up to 1.2 crores.
⦿ Enable concerned sections to avail the scheme for a second home if they are living in structures in poor condition and/or 20+ years old.
⦿ Increase carpet area ceiling in tier-2 and tier-3 cities to help developers unload unsold inventories.
Pros
⦿ Will act as an encouragement to buy homes for all sections of the society
⦿ Takes into consideration realistic reasons of buying a second home and leads to development in overall urban infrastructure in the long run.
⦿ Helps developers sell off inventories faster.
5. Incentives and schemes for commercial enterprises moving to satellite cities
With the technological revolution and the booming IT industry, satellite smart cities are already a reality for major metropolitan cities. Since the main metropolis is already high priced and crowded, the government can use incentive schemes for commercial enterprises which chose to relocate to these extensions.
What the government should do?
⦿ Offer tax benefits or introduce flexible payment schemes that will encourage startups to move out of small rented offices within the city into better facilities in these extensions.
⦿ Give developers who are building commercial real estate industry stimulus or finance schemes to encourage more such projects.
Pros
⦿ In the long run, these schemes will be the reason for rapid development of urban infrastructure and soon create independent pockets of urban settlement.
6. Allow increase in floor space index, keeping in mind structural integrity
Increasing floor space index for RERA-registered under-construction projects after making technical considerations and allowing builders to use more of the plot will bring down property prices.
Pros
⦿ It’s a quick fix and requires no government expenditure.
⦿ It will bring down property prices because developers will be able to use more of the land, thus boosting inventory sales.
Cons
⦿ However, in the short run, the FSI increase would bring down the value of properties and challenge the Loan-to-Value ratio of properties.
7. Reorganize payment schemes to avoid price cuts
Implementing price cuts on real estate properties can devalue property of the masses and end up becoming a defaulter and repurchase cycle for homebuyers looking to make savings in the economic slowdown.
To avoid all of this from happening and repeating the 2008 crisis, banks and real estate industry must work closely together. There are more ways to encourage homebuyers than price cuts.
What the government should do?
⦿ Use flat area-based incentives for investments in affordable housing rather than price-based to boost sales in tier-1 cities.
What real estate developers should do?
⦿ Banks and developers can come together to offer buyers a price guarantee period of 6-12 months to encourage more sales.
⦿ To curb the immediate liquidity crisis, real estate developers can start a low-cost rent plan for unsold inventories on a two-month notice basis for moving out.
Warning: Recent Amendments to the SEBI Act pertaining to the definition of “Collective Investment Scheme” prevents the real state sector from launching projects with assured returns.
8. Remove inventory holding tax amendment
The amendment states that when developers hold back inventory as stock for over a year, they are liable to be taxed on its value. This scheme was introduced in 2017 to curb the practice of developers who would hold on to inventories and load off after price increase, thus manipulating the market.
What the government should do:
⦿ Given the slowdown in the market in the last few years, unsold inventories have piled up and are bleeding developers regularly. Withdrawing this taxation until the market reaches equilibrium will be a positive step towards the real estate sector.
9. Introduce a single–window project approval system online
One of the major hurdles for the real estate industry is the tedious approval system that takes weeks, months, and years before starting to materialise. This becomes a breeding ground for corruption and leads to unnecessary delays in new infrastructure.
What the government should do?
⦿ Introduce a single-window project approval system that is regulated by RERA and cut out the unnecessary documentation process.
⦿ Ensure that the process is carried out online as far as possible to reduce corruption and save time.
Taking an analytical point of view regarding these suggested changes could go a long way in instilling the developer with faith. Most of the reforms in the real estate industry so far have been directed towards buyer confidence and it is important that the government now take steps to help the sector back on its feet and use the newfound confidence of buyers to push the economy ahead.
