4 key challenges in Indian real estate segment
The demonetization move in November 2016 stunted the growth of the real estate sector and reduced the flow of investments. Additionally, the implementation of the Real Estate Regulation Act (RERA) passed by the Centre has resulted in a variety of projects arriving at a standstill. Similarly, there are other such policy and regulation challenges that have plagued the real estate sector in India:
Delayed Infrastructure Projects:
A lack of or irregular funding is one of the major hurdles for infrastructure developers that lead to delayed projects well before RERA. In addition to the complications faced to acquire funding for the project, the real estate developer has to pass through at least 40 different government regulations before commencing construction.
The time-lapsed in acquiring these permissions ranges between a few months to a year and increases the cost of the property by 10-20% for both consumers and developers. While RERA has succeeded in combating the issue with transparent usage of finances, the sector calls for a single-window clearance system to streamline and fasten the approval mechanism.
Another challenge that has affected the growth of the real estate sector and the developers is litigated land. According to a survey conducted by the MahaRERA, around 16% of projects and 31% of built-up spaces are, or have been, in legal disputes. In Mumbai, these figures tally to about 30% of the real estate projects and 50% of the built-up space; for Thane, the corresponding figures are 26% and 36% respectively.
Additionally, there is a large share of underutilized and vacant land parcels that need to be freed for development through land regulations, land readjustment, and pooling policies. These challenges call for a serious revision of the Land Acquisition Resettlement and Rehabilitation Act 2013 which grants compensation, rehabilitation, and resettlement to the affected persons in India.
Outdated building bye-laws:
With the current rate of population explosion, the demand for space is vital. Over 50% of the world’s population lives in cities, and the number is expected to rise by 2.5 billion by the year 2050. However, the current Floor Space Index (FSI) norms in the cities are not on par with the growing demands of the consumers. Reports state that the permitted FSI in Indian cities is currently at an all-time industry low, within the range of 1 to 1.5. These challenges call for state governments to revisit the FSI norms.
Tax and demand shifts:
In addition to the previous financial challenges, the implementation of the GST is another factor that haunts the real estate sector. Before the implementation of GST, a service tax of 4.5% was applicable in the case of an under-construction property. However, post-GST, the rate has risen sharply to 12%, stealing the attractiveness of the ordeal for property investors.
As buyers were paying registration charges and stamp duty on properties, the inclusion of GST has increased the statutory cost of the property of the investor by 20%.
The trends in the real estate sector demand for a revision in policies in multiple areas of the infrastructure development cycle. Additionally, the current economic slowdown is a culmination of the above factors, which often overlap. However, the slump in the real estate segment is not singularly a result of the hurdles for developers, but the ever-changing demands of the buyers.