Proposed regulation, pending reforms, to bring back growth
Apr 03, 2014
Source : The Times of India


AHMEDABAD: With the upcoming general elections in May this year, the country’s political fate would be decided. As the political scenario in the country will get a direction, the newly-elected government can also decide on some of the pending bills that will bring some policy framework to the country. There are a number of key draft legislations pending before the parliament. Industry estimates suggest that more than 120 bills are pending to be passed by the parliament.

From the point of the real estate sector too, a number of bills and policy reforms haven’t seen the light of day. While some are at the presentment stage, others are at the consultation stage. Significant among them are the real estate regulation and the recently discussed, draft SEBI (Real Estate Investment Trust) Regulation 2013. As these regulations have the potential to change the fate of the sector, the newly-elected government should consider bringing these soon. If implemented, these will not just bring greater transparency in the sector but will also help boost investments in the sector.

The country and the market will immensely benefit from these policies. Over the last decade, the real estate sector is in a constant state of evolution and subject to change due to newly notified laws such as the Land Acquisition Act. The remaining year could prove to be a milestone for the Indian property market, in terms of setting up a regulatory body. If implemented, it is expected to make the market better, which is currently burdened with problems such as high retail inflation, rising cost of labour and construction materials, shortage of skilled workforce and lack of professionalism, high degree of fragmentation, irregularities in property transactions, poor sales and construction delays, due to regulatory bottlenecks during the sanctioning of projects.

Need streamlining of the approval process

The biggest of all the problems, is the presence of hundreds of unfinished projects that have been delayed by one to two years. The real estate regulation proposes to register projects before their actual implementation. This would streamline the construction of projects by providing a timeframe.

Involvement of the government machinery registering and sanctioning projects is thus crucial, which can at least help reduce the cost by quicker sanctioning of projects. At present, developers have to take more than 40 different types of sanctions before the start of the project, which increases the overall cost of the project and results in the delay. The additional cost incurred due to the regulatory bottlenecks, is passed on to the buyers. To counter this, there is an urgent need for a single window system for approvals process in the country. The industry is already in consultation with the government to bring a single-window clearance mechanism for the real estate sector but the nationwide implementation will take time. The SAPREP Committee appointed by the Ministry of Housing and Urban Poverty Alleviation (MoHUPA) that worked to understand key issues contributing to slow approval processes, has already recommended corrective actions. Starting with key cities, the newly formed government should implement the mechanism soon.

Need additional sops to push sales

Since the last one or two years, real estate sales too, have been a problem for the industry. A slump in economic growth to 4.5 per cent in the last fiscal year, the slowest pace in a decade, and high borrowing costs, have hurt the consumer sentiment and affected the sales. Economic growth is also forecasted to stay below 5 per cent for the second year in a row. Thus, it is imperative to provide relief to millions of home buyers. A general observation suggests that most home buyers either fall in the category of first time home buyers or have a budget of Rs 25 lakh or less. Only metros have properties priced above this range.

Providing relief to this category of buyers, the government had announced a sop to give an additional tax deduction of Rs 1 lakh to persons taking a home loan of up to Rs 25 lakhs on their first property purchase but the provision is applicable till March 31, 2014. The provision has the potential to promote housing in the country by enabling first time home buyers to enter the market.

Additionally, to bring more transparency in property transactions, the government had also introduced the provision of tax deduction at source (TDS) at a rate of 1 per cent on transfer of immovable properties priced Rs 50 or more. It is, therefore, the need of the hour, that tax deduction for first time home buyers should be extended by another year and should be levied on properties priced Rs 1 crore and above.

Need correct valuations and uniform measurement techniques

Inaccurate valuations can undermine effective asset allocation for investors, risk management and performance reporting. This often is in the case of land deals, where there is no reference point. Despite the fact that the Land Act has been notified, land valuation remains a concern.

Inconsistencies in measurement practices have also led to ambiguity in property transactions. Stipulation of the ‘carpet area’ as the only measurement unit, will limit fraudulent practices. Thankfully, the proposed real estate regulation has included the term carpet area!

The provision will protect customer interest and create transparency in property transactions. However, a bigger concern that remains unaddressed is the measurement standards for carpet area. The new government should think about adapting to uniform property measurement standards and bringing in professionally qualified valuers in the market. Then the buyers will pay for the space they would use.

While the government needs to bring these reforms, the industry too needs to change. Embracing innovative construction technologies will help. Recent technological advances in information and communication technology, have the potential of improving construction productivity while reducing waste and improving inventory levels, project cycles and budgets.

While the basic problems of economy continue to remain elevated; a lot has to be done on the fiscal front, as revival remains a challenge. The next government will have their hands full as the list is long!

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