Crucial developments last week in the real estate sector
Authored by Arvind Nandan, Executive Director-Research, Knight Frank India
In the week gone by, the US Fed kept its interest rates flat and also indicated that this should be case for the remaining part of this year. This should give some relief to the sceptics that there was trouble brewing in short term. For Indian markets, even if not a direct and explicit benefit, it will still augur well, since a flat rates in the US should help fund flows from institutional investors. A positive climate for FII investments could be anticipated during the year, with a concurrence of other factors like Rupee’s own stability. The markets in India witnessed two key events during the week, both of which have been positive for real estate. These were the success of India’s first REIT IPO by Embassy Office Parks; and the 34th GST Council Meet which delivered a small respite to the supply side, without treading on the toes of the buyer.
These two developments are good omens for commercial and residential segments respectively. While commercial real estate has been on a dream-run over the last couple of years, the residential sector had found itself in a quicksand, reeling under one shock after another. From the commercial market standpoint, since the yields look to remain stable on the back of steady rentals, this is perhaps one of the better times for REITs. The major hurdle of Dividend Distribution Tax (DDT) was eliminated a couple of years ago, but several other forces still had to join hands. With the strong office markets in 2018, most of those forces seemed to have finally come together. The investors, after showing a shy approach on the initial two days of the IPO, finally came forward and the issue was oversubscribed on the final day. This should now help other REIT listings in near future. The investor can look forward to a diversified portfolio henceforth, with real estate being one of the options. The performance and the returns will now hold key to the future of REIT market.
At the same time, the residential sector had its own little joys too. This part of real estate in India has borne enormous pressures over the last few years. The real trouble, which came with the implementation of GST nearly two years ago, wiping off buyer-interest in under-construction projects, is now being progressively undone. The last GST Council Meet had done a remarkable job of radically scaling-down GST rates for buyers (1% in affordable housing and 5% in others, from 8% and 12% respectively), in an attempt to stimulate demand. That, however, had left the builder gasping, since Input Tax Credit (ITC) was taken off. The builders were left pondering if the input tax credits that they had availed would now add to their project costs, thereby eroding margins. In this week’s meet, the council decided to offer an olive branch to the builders, albeit within limitations. A one-time choice has been offered to builders to adopt either of the GST regimes: for projects that are under construction till 31-March 2019. This offers a suitable opportunity for the builders to use their judgments (avail ITC with higher GST rates charged to buyers, or new GST rates without ITC) and push aggressively for sales. It should help the revival of this stagnant sector. More importantly, it will not affect the buyer.
Overall, the week that just concluded, has managed to bring back lost smiles for real estate, just as FY 2018-19 draws to a close. Hopefully the New Year should witness the carrying forward of these changes.