Realty Sector in India

Table of Contents

Context: An expert committee led by the former NITI Aayog chief, has submitted its report to the central government, proposing measures to curb stress in India’s real estate or realty sector.

Key Highlights of the Report

The committee was set up in March 2023 to tackle the problem of incomplete real estate projects following a recommendation made by the Central Advisory Council under the Real Estate (Regulation and Development) Act, 2016.
According to the committee, the Indian Banks’ Association has estimated that 4.12 lakh stressed dwelling units involving ₹4.08 lakh crore are impacted in the stalled real estate projects.
According to the report, the primary reason for stress in real estate projects is lack of financial viability which has resulted in cost overruns and delays.
Measures suggested by the report:
- Improving Internal Rate of Return (IRR): There is a need to improve the Internal Rate of Return of real estate projects which would attract more funding.
- Use of IBC: Judicial interventions such as Insolvency and Bankruptcy Code (IBC)should be used only as a last resort.
- Subsidized Interest Rates Scheme: The panel recommended the formulation of a scheme offering subsidized interest rates for financial institutions to fund stalled projects. This scheme would be similar to the one available for Micro, Small, and Medium Enterprises (MSMEs).
- Guarantee Fund: The panel proposed the establishment of a guarantee fund similar to the MSME sector to support the finances of stalled real estate projects.
- Suspension of Interest and Penalties: To alleviate financial stress caused by extraordinary circumstances like the Covid pandemic, the committee recommended suspending interest and penalties. State governments could consider extending the zero-period based on local conditions.
- Allowing Co-Developers: The panel suggested allowing developers to bring in co-developers for either entire projects or specific parts without requiring permission from authorities.
- Excess Land Utilization: If a project has excess land, the committee recommended using it for purposes such as shopping centers to generate immediate resources for construction.

What is Realty Sector?

The realty sector, also known as the real estate sector, refers to the industry that deals with properties, land, buildings, and other physical structures.
It encompasses various activities related to buying, selling, renting, and developing properties, as well as the associated financial and legal aspects.

Real Estate in India

The real estate sector comprises four sub-sectors – housing, retail, hospitality, and commercial.
In India, the real estate sector is the second-highest employment generator, after the agriculture sector.
Real estate sector in India is expected to reach US$ 1 trillion in market size by 2030, up from US$ 200 billion in 2021.
It will contribute 13% to the country’s GDP by 2025.

Prospects of Real Estate in India

Robust demand: Organised retail real estate stock is expected to increase by 28% to 82 million sq. ft. by 2023.
Growing Urbanisation: urban areas currently face a shortage of nearly 10 million units. An additional 25 million units of affordable housing is required by 2030 to meet the future growth in the urban population.
Increasing Investments: Construction is the third-largest sector in terms of FDI inflow. FDI in the sector (including construction development & activities) stood at US$ 54.17 billion between April 2000-March 2022.
Policy support: Under Union Budget 2021-22, tax deduction up to Rs. 1.5 lakh on interest on housing loan, and tax holiday for affordable housing projects have been extended until the end of fiscal 2021-22.
- Also, ‘Housing for All’ initiative is expected to bring US$ 1.3 trillion investment in the housing sector by 2025.
- The residential sector is expected to grow significantly, as Pradhan Mantri Awas Yojana (PMAY) scheme is aiming to build 20 million affordable houses in urban areas by 2022.
Attractive opportunities: As per ICRA estimates, Indian firms are expected to raise >Rs. 3.5 trillion (US$ 48 billion) through infrastructure and real estate investment trusts (REITs) in 2022.

Major Issues Plaguing India’s Real Estate Sector

Unavailability of land: Land regulations, land readjustment and land pooling policies need to be promoted by reforming the Land Acquisition Resettlement and Rehabilitation Act of 2013.
Overpopulation: India will overtake China next year to become the world’s most populous nation with over 1.4 billion people. It is an immensely challenging task to accommodate the huge population, given the resource constraints.
Affordability concerns: The real estate market in urban areas is marked by high prices, making it difficult for the majority of Indians to purchase homes in major cities.
- The increase in global commodity prices has significantly raised construction costs.
- Combined with rising living costs and higher interest rates on home loans, affordability becomes a concern.
- Inflation and the unpredictable nature of financial markets further compound the challenges for the real estate sector.
Inadequate project management: The need for multiple clearances from various government departments, delays in obtaining approvals from civic authorities, a shortage of funding sources, and budget overruns due to extensive delays contribute to project setbacks.
- For instance, in the National Capital Region (NCR) alone, approximately 240,000 housing units face stalled construction due to these issues.
Outdated building techniques: The Indian real estate sector is still dependent on old building techniques and hence they are over-dependent on extensive human labour for construction activities.
Transparency gaps: Although real estate agents and projects are registered, not all of them undergo thorough verification. This reveals a gap in the proactive action of authorities.
Corruption: The real estate sector is marred by collusion between corrupt government officials, builders, and local political leaders.
- Frequently, laws and regulations related to land use, floor space index (FSI), fire and safety compliance, etc., are openly disregarded.
- An illustrative example is the Noida Supertech towers constructed on land initially designated for a public park. The initial plan was altered to allow for 9-storey towers, but the final result was towers with 40 floors. Later, the Supreme Court ordered for their demolition.

Government Initiatives

Real Estate (Regulation and Development) Act, 2016 (RERA): It was enacted to regulate the real estate industry, protect buyers’ interests, and encourage developers to provide more professional and timely services.
- The salient provisions of RERA, 2016 include:

Regulatory Authorities	The Act provides for State Governments to create regulatory authorities with a mandate to register and maintain a database of real estate projects; and to protect the interest of buyers. All projects with plot size of minimum 500 sq.mt or eight apartments need to be registered with Regulatory Authorities. Real Estate Agents also need to register with the Authority.
Grievance Redressal	Regulatory Authorities have power to address grievances of buyers. If buyer is not satisfied with the decision, they can challenge it to the Appellate Tribunal established in each State.
Penal Provisions	The Authorities can send show cause notices to developers, brokers and promoters if they violate their obligations under the RERA. If they are unable to justify their acts or omissions, they can be subjected to heavy fines. There are provisions of imprisonment of up to 3 years for developers and up to 1 year in case of agents and buyers for violation of orders of Appellate Tribunals and Regulatory Authorities.
Timely Completion	70% of the funds collected from buyers need to be deposited in a separate dedicated account (escrow account) meant for that project only. The deposited money can be used only for the construction of that project. The provisions have been added to prevent diversion of funds by developer to some other project as was the common practice earlier. It will ensure timely construction. In case of delays, builders have to refund buyers or pay interest on their money for delays.
Transparency	At the time of registration of project, the developer has to furnish specific details related to project like the Sanctioned plan, time period or completion etc. The Act defines terms like Carpet Area, Common Area etc. Buyers will be charged for the carpet area and not super built-up area. Developers can’t do alteration or addition in the sanctioned plans and specifications of project layout, without the written consent of 2/3rd of allottees/homebuyers.
Protecting Buyer’s Interest	The developer is liable to repair any structural defects that occur within 5 years of purchase. Similarly, a builder cannot take more than 10% of the cost of the project from the buyer as advance or application fees.
Performance of RERA According to a 2021 report by Boston Consulting Group and Omidyar Network India. About 70% of consumers are aware of RERA, however, awareness is limited to its top few benefits. 77% of projects are RERA registered. There is higher compliance in metros and tier-I cities. Nearly 70% of the states have a basic RERA setup. 7 states contribute to over 90% of the total number of complaints resolved by RERA authorities with top 3 being Uttar Pradesh, Haryana, and Maharashtra. To enable transparency and reduce information asymmetries, 27 states have set up web portals. However, awareness of the websites continues to be low. States like Meghalaya, Nagaland and West Bengal are yet to establish their RERA Authority. Challenges to RERA Developers complain lack of mechanism to ensure timely approvals from local government/sanctioning authorities (single-window mechanism). There is also a lack of consumer awareness, which leads to a lack of use of RERA website portals. Continued lack of clarity regarding the role of state RERAs in case of stalled projects. Lengthy complaint resolution timelines leading to high consumer and developer dissatisfaction.

SWAMIH Fund: In 2019, the central government launched the ‘Special Window for Funding Stalled Affordable and Middle-Income Housing Projects’ or ‘SWAMIH’ Fund Scheme.
- The objective of the scheme is to provide priority debt financing for the completion of stalled housing projects falling under the affordable and middle-income housing categories.
- This ‘last mile financing’ of stalled projects will be extended through a Category-II AIF (Alternate Investment Fund or AIF) debt fund registered with the Securities and Exchange Board of India (SEBI).
- The Fund is sponsored by the Ministry of Finance, Government of India, and is managed by SBICAP Ventures Ltd., a State Bank Group company.
The Smart City Project: With a plan to build 100 smart cities, is a prime opportunity for real estate companies.
- It was launched in 2015 as a Centrally Sponsored Scheme by the Union Housing and Urban Affairs Ministry.
- The main objective of the Mission is to promote cities that provide core infrastructure, clean and sustainable environment and give a decent quality of life to their citizens through the application of ‘smart solutions’.
The Atmanirbhar Bharat 3.0 package included income tax relief measures for real estate developers and homebuyers for primary purchase/sale of residential units of value up to Rs. 2 crores.
- The Ministry of Housing and Urban Affairs has recommended all the states to consider reducing stamp duty of property transactions in a bid to push real estate activity.
Government has created an Affordable Housing Fund (AHF) with an initial corpus of Rs. 10,000 crores for micro financing of the HFCs.
- A scheme for Affordable Rental Housing Complexes (AHRCs) for urban migrants and poor has been approved in 2020 as a sub-scheme under Pradhan Mantri Awas Yojana – Urban (PMAY-U).
Indian Institute of Architects (IIA) and CII-Indian Green Building Council (IGBC) signed a MoU to boost green building movement in the area of architectural design and planning.
Investments: Government has allowed FDI of up to 100% for townships and settlements development projects.
- The Union Cabinet has approved the setting up of Rs. 25,000 crore alternative investment fund (AIF) to revive around 1,600 stalled housing projects across top cities.

Way Forward

Technology would pave the way for new-age constructions. The increased awareness will lead to greater utilization of advanced technology to create world-class products in India. Prefab construction, driven by cutting-edge technology, could help to solve the housing shortage in the country.
Sustainable homes would be in demand. With this, zero energy homes are expected to be the next big wave in Indian real estate.
Market consolidation would come forward on the back of a series of structural reforms in the form of Real Estate (Regulation and Development) Act (RERA), GST, and AIF.
India’s Global Real Estate Transparency Index ranking improved by five notches from 39 to 34 since the past six years from 2014 until 2020 on the back of regulatory reforms, better market data and green initiatives.
The demand for co-working spaces will uptick. The financial distress caused by COVID-19 has offered a great opportunity to co-working space companies to generate revenue from the agility-demanding businesses.