Making the Year Right For Real Estate Investments

With its substantial contribution to the Indian economy and growing positive sentiments, the real estate sector will be a strong pillar to support India's dream of becoming a $5 trillion economy in the coming years

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In the late 1800s, economist Henry George observed a very peculiar 18-year cycle that real estate markets seem to move through. Except for a few periods of extreme social turmoil such as the World War 2, hyper inflationary which was witnessed in the 1970s, this cycle has shown remarkable consistency for over 200 years now. According to him, real estate goes through these 4 distinct cycles:

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Phase 1-Recovery: Vacancies start to drop, demand increases, with lower investment costs companies expand and hence employment goes up driving demand for residential homes, not so many new constructions, prices of existing inventories go up. Generally fueled by government intervention in the form of low interest rates.

Phase 2-Expansion: Occupancy begins to exceed the long-term average. Rents go up, more investors start coming in as they want a piece of the profit pie. Newer projects enter the market.

Phase 3-Hypersupply: Increase in unsold inventories

Phase 4-Recession: Occupancy rate falls below long-term average. Rents and property prices go down. Vacancies climb up.

The pandemic has acted like a major turmoil which has affected this cycle. But looking at the phases, currently, we’re in the recovery phase and hence, 2022 seems to be the opportune time to invest. The year 2021 has been a challenging and turbulent phase for the real estate sector fueled by the pandemic. It was predicted that 2021 would be the year which would have the greatest fall for real estate sector owing to labor migration and apprehensive buyer behavior. However, the real estate sector showed signs of healthy recovery backed by strong economic growth despite the devastating second wave.

Looking at the overall performance of the Indian residential real estate market in 2021, there was a significant upswing. Between January and September 2021, 1.63 lakh new residential units were constructed in top seven major cities in India; 27 per cent higher than 2020. Also, commercial real estate witnessed massive growth as office leasing operations reached 13.5 million square meters in Q3 2021, growing at 140 per cent q-o-q.

The residential sector is set to expand dramatically, with the central government intending to build twenty million affordable dwellings in metropolitan areas across the country by 2022 under the Union Ministry of Housing and Urban Affairs' Pradhan Mantri Awas Yojana (PMAY) scheme. As we continue to adjust to the new normal, the demand for commercial and retail office spaces is expected to skyrocket with corporates devising expansion plans to bring back their employees to offices, affordable rentals, and increased vaccinations.

In the previous budget, the government had granted TDS relaxation, allowed foreign player participation in real estate via REITs and InvITs, and recently removed the regulatory hurdle of RBI permissions for investing in residential and commercial properties by NRIs. Even the SWAMIH fund has been a great blessing to the sector. It is a government-backed last-mile fund to support the completion of stalled mid-income, affordable housing projects, reducing the burden on homebuyers who have invested their hard-earned savings.

2021 turned out to be a momentous year for the real estate sector, but would the same momentum be maintained in 2022? The industry stakeholders have a positive outlook as trends combined with low-interest rates, stamp duty reduction, rising demand for bigger homes, affordability, etc. continue to transform housing decisions which will drive robust growth in the sector in 2022.

We need following government policies to further fuel the recovery phase:

1) Concession to be availed in Income tax up to 2 lakh as interests paid on home loans, this limit must be revised and increased to 5 lakh under section 24.

2) Reduction in GST paid on input materials helping developers withhold rental/lease assets which would then be better by offsetting GST on rent from the completed property.

3) The status of the infrastructure industry needs to be given to the realty sector, for it to raise funds from financial institutions i.e., enable debt refinancing for developers, raise capital at a lower rate and attract equity investments.

4) Affordable housing needs to be defined inclusive of the cost of construction and cost of land, as per the city. For example, in a city like Mumbai, affordable housing should go up to 85 lacs, since land price and construction costs are higher.

5) Extend the benefits of affordable housing, such as tax reimbursements beyond 2022.

6) Bringing coworking spaces into a 2 per cent TDS slab as in the case of services from the present 10 per cent. This will immensely help the co-working spaces in the management of their cashflows.

The time is opportune for a further upward revision, but the government may not have a cushion for incorporating points 1, 2, and 6. The government should focus on providing incentives to MSMEs and SMEs struggling post-pandemic as this will have an impact on fiscal deficit, which will eventually help in increasing GDP. With its substantial contribution to the Indian economy and growing positive sentiments, the real estate sector will be a strong pillar to support India's dream of becoming a $5 trillion economy in the coming years.