Updated: Jan 31, 2018, 06.36 PM IST
2017 was a year of change. GST, RERA and interest subsidy for affordable homes up to 4 percent came into effect. Affordable housing got a major boost being granted the infrastructure status. But a lot has to be done for the real estate sector. ET caught up with Mr Abhishek Lodha, MD, Lodha Developers, to throw some more light on this.
Q1: Real estate sector is currently facing problems like large unsold inventory, high land costs, compressed margins, and so on. What is the most important aspect that should be addressed in Budget 2018? Are you happy with the 12 percent GST rate, despite the input credit being passed on to the customer?
Mr Abhishek Lodha: The 2018-19 Union Budget comes at a very pivotal time for the Indian real estate sector post the implementation of national and sectoral policy reforms like GST and RERA. Housing and construction have always played critical roles in the economy, with construction now the largest employer in the Indian economy. Progressive and developed nations like the U.S.A. , China, and U.K. are some examples, which demonstrate that no economy has grown sustainably without housing growth. We saw how Indian employment and investment grew significantly on the back of the ‘positive wealth’ effect created by housing growth in 2004-2010.
In order to boost the overall economy, generate employment and create growth in consumption, it is necessary that real estate is given a thrust in upcoming government policy measures, including the budget. The recent reduction in effective GST rate to 8% from 12% on affordable housing is good news for the entire economy as it will increase employment and consumption at the national level. However, the scope of such tax rates should widen and include houses that do not fall under the ambit of affordable housing. The transaction costs for buying under construction real estate are 17 percent+ (12 percent GST + 5 percent or higher stamp duty) – the highest transaction cost level in any major economy in the world. And, so are the mortgage rates of around 8.5 percent. The PMAY subsidy for low and mid income household is a significant step in reducing the effective mortgage rate but should be increased from Rs 2.5 lakh to Rs 4 lakh which will bring mortgage costs in line with global standards. Even a rich country like UK offers help to first time home buyers and this budget is a great opportunity to build on the early success of the PMAY.
Q2: Real estate is one of the largest employment generators and a major contributor to GDP. What are the possible steps for immediate revival to help the overall economy?
Mr Abhishek Lodha: At a macro level, the key challenge that the nation faces today is the lack of good quality employment opportunities. This can only be addressed by much higher levels of economic activity and private sector investment – in order to enable this, it is necessary to have a paradigm shift where all sections of society and decision makers come together to say ‘Respect and support for all those who create employment’ – all decisions, policy measures and societal support should be owards those who create employment – their success and their profits should be welcome because only then will employment be created. We have to move away from the mentality that ‘profit is bad’ and move to ‘all activity which leads to employment generation is good and we welcome the profit and success associated with successful enterprise.’
Q3: Many experts believe demand-supply to be the single largest problem faced by developers? Would you agree? What are the other challenges faced by the industry?
Mr Abhishek Lodha: There was significant oversupply in the market due to heavy over investment and misallocation of capital between 2005 and 2012. However, for last 3 years, inspite of demand slowdown, new construction starts have been only about 50 percent of sales. The supply overhang has been worked out to a large extent and we expect that supply and demand forces will come into long-term balance from 2019 onwards, leading to gradual price appreciation. The fact is that formal real estate production in India is less than 3 lakh units per annum whereas it is more than 20 lakh units p.a. in China – so India is missing out on all the home ownership and employment creation opportunities which would arise if our real estate sector was much larger.
I am hopeful that home ownership demand and the positive benefit of home ownership will drive the Indian economy in the next decade and serve as India’s sunrise sector, just as it has powered the growth of the economy in China, USA, UK and many other countries.
Q4: Time taken for various approvals cause delays in projects, further putting pressure on developer margins, more so with the current high cost of capital. How can the government make the approval process smoother?
Mr Abhishek Lodha: Yes, the process is a bit tedious but nothing changes overnight and the current government understands the components or elements of ease of doing business and has been focusing on enhancing the same for the country. Real estate specifically has witnessed a drastic change where the government has been working towards implementing reforms and regulations that have introduced transparency and consolidation in the industry, since 3-4 years. Micro steps like ensuring availability of all the information to the consumers through RERA, upgradation of all approvals online by the municipal corporation, when unified, are a big step towards fostering a transparent ecosystem for the entire country. The government has directed all its energies in ensuring that all these efforts lead towards betterment of the nation, benefits of which will trickle down to all the segments/businesses.
Q5: Reduction in income tax slab to 5 percent from 10 percent for income between 2.5-5 lakh created a sizeable disposable income. Do you think the interest subvention for housing loans up to Rs 12 lakh should be extended to benefit a larger section and boost sales volumes? Are we expecting a further cut in slabs or increase in tax deductions to cover larger middle class consumers to boost investments?
Mr Abhishek Lodha: With the benefit under PMAY, the effective interest rate of families with annual income <= 18 L is now about 6 percent p.a. – this is still high by global standards and if the government can increase the benefit amount from Rs. 2.5 L to 4 L, it will enable the cost of financing of be <5 percent p.a. which would be in line with China. Also, the qualification cut-off thresholds and benefit amount should be linked to inflation so that the limits increase gradually each year and the benefits are not eroded. The government is rightly focussed on benefiting families with income < 18 L p.a. – however, even if a family is not taking a mortgage, but qualifies as per income cut-off, the benefit should be available for them.
Q6: Last two years’ budget have been focussing more on first-time home buyers. Do you think this has kept investors away from the real estate market? Would you say equity is the new property now?
Mr Abhishek Lodha: Yes, over last 3-4 years investors have kept away from residential real estate. This has enabled more end users to buy their homes and raised quality standards in the market. In the medium term, real estate is a key part of any savings portfolio – in addition to equity and fixed income asset classes. As real estate prices move towards appreciation in the next 12-18 months, investment interest will also grow – the smart buyer is one who buys before this.
Q7: Most of the taxpayers lose out on the deduction of interest paid on under-construction properties since this is allowed to be claimed in five years from the year of completion of the property. (Deduction for pre-construction interest amount is currently included in the overall limit of Rs 2 lakh). Is there a need for increase in cap on interest and principle deductions or may be a separate/additional deduction on the same?
Mr Abhishek Lodha: Given the benefits to the economy from under construction real estate, it would be progressive for the government to remove this cap and allow the interest deduction even during the construction period. This will have positive impact on under construction activity leading to employment creation.