Can the Real Estate Sector Revive India's Economy Post Lockdown?

The growth of the Indian real estate holds significance as it is the economy's third-largest employer, after agriculture and manufacturing
Can the Real Estate Sector Revive India's Economy Post Lockdown?
Image credit: Pexels
Representational

Grow Your Business, Not Your Inbox

Stay informed and join our daily newsletter now!
Founder and CEO, SquareYards
6 min read
Opinions expressed by Entrepreneur contributors are their own.

You're reading Entrepreneur India, an international franchise of Entrepreneur Media.

The sudden breakout of the COVID-19 pandemic in 2020 has taken the world by storm and had the global population reeling under its vice-like grip, while plunging the global economy into a severe recession. This change in the status quo has made certain that most businesses are struggling to find secure footholds, while fiscal and monetary policymakers are working without a playbook, improvising as time passes instead. Though most governments are trying to resuscitate their economies with stunning bailout packages (that could collectively top $10 trillion), the unfathomable question beckons—how will we get the Indian economy back on the recovery path?

India’s economic revival will be based on the resurgence of core sectors that power it. While infrastructure and defence contracts are making headway, real estate, as an economic reviver cannot be ignored. In 2017-18, the real estate sector contributed around 6-7 per cent to India's GDP but with urbanization levels slated to cross 55 per cent from the present 34 per cent in the next decade, the sector is expected to touch $1 trillion by 2030, becoming the third largest globally. The growth of Indian real estate also holds significance as it is the economy’s third-largest employer, after agriculture and manufacturing, and presently employs over 50 million people.

Despite the huge potential of the industry, here are some top impediments whose removal could swiftly bring about economic revival for the sector, and as a direct result, resurgence in the Indian economy.

Stamp duty waiver

After the lockdown began in March, the real estate market took a hard knock as sales bottomed out and construction workers abandoned most project sites. While the real estate sector needs some desperate measures to survive the present onslaught, the initial push must come from the government in the form of stamp duty reduction. The recent reduction of stamp duty by the Maharashtra government from 5 per cent to 2 per cent till December 31 is a move in the right direction and other states could follow suit soon, creating a much-needed demand boost today.

The waiver of stamp duty for extended periods for affordable housing can be a potent pill to boost the real estate sector. Though stamp duty is a source of revenue for the government, many state governments have hiked stamp duties to the point of 6-7 per cent in the past, something that is not in sync with the market realities. A quick look at this chart shows that stamp duty collection from property registrations small a very negligible portion of the government’s general revenues and the GDP and the pros of a downward revision in stamp duty at this point far outweigh the cons.

If we look at global economies such as Australia or Europe, they have been proactive in reducing stamp duties and provide housing subsidies.

Need for a secondary market regulator

The introduction of RERA in primary residential real estate was a watershed chapter in the history of India’s primary real estate market. On the flip side, the secondary market as an institution is highly disaggregated and given the lack of information, product standardization and trust, it is necessary to ensure that any transaction is in itself well-defined and any breach of contract on account of misbehaviour can be deterred.

Most developed regulated real estate markets today work on the agency-agent model for transactions. Transactional players are mostly offline agency players, working on variable cost agent model wherein the agency gets a fee for handling compliance and infrastructure on behalf of agents. Typically, a handful of large compliant agencies control most of the market share and agents work on pure commission model with a regulator ensuring that each agent in the industry is under an umbrella agency and is accountable for their actions. A similar structure is the need of the hour in our country today to enhance investor confidence and thus, transactional volumes, leading to a sure-footed revival.

Digitisation of land records and online property registrations

Rapid urbanisation is a key indicator of economic growth but in India, urbanization has progressed at a snail’s pace, thanks to ancient land laws and the unnecessary romanticizing of land by real estate developers. While land policies must be stable and less susceptible to politics, bureaucratic turbulence, and enforcement regulations; the ancient and highly unreliable land records system itself needs a complete overhaul. Digitization of land records is a hallmark of a developed real estate market should be an Indian priority as this would the biggest factor in building credibility to enable glitch-free investments into the sector, both national and international. This will further facilitate large-scale developments of satellite towns by private sector players, create direct and indirect employment and surge the country’s GDP.

The other stress point should be online property registration, enabling Indians to register a property from anywhere in the world. Today, at best the online option is available at the first point of sale, that is, between a builder and the first buyer. It is easier to verify property-related information for first sale transactions and it gets more complicated thereafter, in the absence of credible land records.

Infusion and access of funds through FDI and trusts

The real estate sector is a highly capital-intensive business and only well-capitalized realty players can stand out in this unforeseen situation, which is paramount for consumer confidence. Infusion of proper funds through private equity channels, foreign funding and trusts can prop up the real estate sector. Smooth and direct access to foreign funds should be encouraged through relaxation of FEMA laws. Though the opening of 100 per cent FDI in completed RERA projects with over 100 apartments is a welcome move, similar measures must be taken for other real estate assets as well.

More emphasis is also required for real estate investment trusts (REITs)—which were launched in the US in 1961—and today constitute 96 per cent of the real estate sector’s total market capitalization. In organized markets such as Singapore, Japan and Malaysia, where trusts were introduced over the past two decades, they account for 55 per cent, 51per cent and 42 per cent, respectively, of the total real estate market cap. In India, however, the share of REITs is just over 15 per cent and a massive opportunity awaits to be unlocked with the right reforms.

It is time we realized that throttling real estate has a cascading effect on about 270 allied and core industries like iron, steel, wood, cement and more, and it is high time that sunshine sector be empowered with such critical transformations, to lead India’s post pandemic economic revival holistically.

Latest on Entrepreneur