India’s real estate sector fights back to life

///India’s real estate sector fights back to life

India’s real estate sector fights back to life

India’s real estate sector fights back to life

New home sales are rising in Mumbai and NCR riding on reduced stamp duties and falling interest rates. Then, the proposed Model Tenancy Law is expected to further boost investment in rental housing stock.

India’s real estate sector fights back to lifeThere’s good news coming from yet another important sector of the Indian economy. The real estate sector, which has been lying dormant for several months stretching back to the period before Covid crippled the Indian (and global) economy, is once again showing signs of life.

A recent report by Crisil India, the domestic arm of global ratings agency Standard & Poor’s (S&P’s), said in a recent report: “New home sales have seen a surprise surge in the last couple of months, making the pandemic-led disruption look like a mere blip. Indeed, units sold in Mumbai and the rest of Maharashtra are 1.1-1.3 times higher compared with January this year.” Mumbai is India’s most important real estate market, accounting for 29 per cent of all-India sales by value.

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The second-most important market, the Delhi-National Capital Region (NCR), too has reported a dramatic 40 per cent improvement in sales in the July-September quarter compared to the previous sequential quarter, which was badly hit by the nationwide lockdown, according to a leading property brokerage portal.

India’s real estate sector fights back to lifeCautiously optimistic

These two markets are often used as proxies for the Indian realty sector. “We are feeling cautiously optimistic about the residential market, driven by sales volumes in Mumbai and Delhi. A combination of favourable factors such as low mortgage rates, attractive prices combined with developers’ lucrative payment plans together reinforce the longer-term potential of the sector. For end users, the next 12 months are ideal to buy a house,” said Ramesh Nair, CEO and Country Head, India, JLL, a leading property consultancy firm.

Stamp duty cut helps revive sentiment

This improvement in market sentiment is largely due to the reduction of stamp in key markets across the country. For example, the Maharashtra government has cut stamp duty on property sales from 5 per cent to 2 per cent up to December 31, 2020 and 3 per cent between January and March 2021, to provide a fillip to property sales. Mumbai is the capital of the state.

Likewise, Karnataka, in which India’s Silicon Valley Bangalore is located, has reduced stamp duty from to 3 per cent for properties priced between $28,000 and $48,000. The stamp duty was 5 per cent earlier.

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High stamp duties – i.e., the amount the state government collects as taxes on the purchase and sale of property – are one of the factors inhibiting the growth of the real estate market in India. It is also responsible for generating massive amounts of unaccounted money in real estate transactions as buyers and sellers declare artificially low prices for the purpose of registrations and pay/receive the rest in cash.

Interest rates at multi-year lows

India’s real estate sector fights back to life

Adding more buoyancy to the prospect of property sales has been the competitive interest rates offered by banks. In addition, realtors, who are sitting on huge unsold inventories, are offering 3-7 per cent discounts, in addition to across the board price cuts, deferred payment plans and other freebies to attract buyers.

Another factor that is helping the sentiment is falling interest rates. Mortgage rates charged by most lenders have fallen below 7 per cent for the first time in more than one-and-a-half decades. It was in double digits till the middle of last year. A Crisil study estimates that a 1 per cent decline in mortgage interest rates improves affordability by 6 per cent.

Then, realtors, who are sitting on huge unsold inventories, are offering 3-7 per cent discounts, in addition to across the board price cuts, deferred payment plans and other freebies to attract buyers.

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Affordability has improved 35 per cent

As a result, affordability across India’s Top-10 cities has improved by up to 35 per cent over the past five years. “A favourable, buyer-centric market has created an opportunity for first-time homebuyers and fence-sitters as well as resale flat buyers. Renewed interest of non-resident Indians in sales is also being observed,” says the Crisil report.

Model tenancy law on the anvil

India’s real estate sector fights back to lifeIn further good news for the real estate sector, India’s Housing and Urban Affairs Secretary Durga Shanker Mishra told the media that the government will soon come out with a Model Tenancy Law to boost the sector.

At present, many house owners are reluctant to rent out their houses as rental laws in most states are stacked heavily in favour of tenants, making it difficult for landlords to retrieve possession of rented houses if their tenants go to court.

Not surprisingly, people are reluctant to invest in rental housing. As a result, about 11 million housing units are lying vacant across the country.

Balancing landlord-tenant interests

The new tenancy law will balance the interests of tenants and landlords by removing the skew in the former’s favour. The removal of these anomalies is expected to provide a boost to investment in housing for rental purposes and further improve the reviving fortunes of the real estate sector.

India’s real estate sector fights back to life

Labourers work inside a steel factory. A real estate revival in India will ensure that industries like steel, cement, paints, electricity cables and fittings, furniture and furnishings, glass, home décor, transport begin to follow suit.

– Courtesy: Reuters

Rising tide lifts all boats

This will come as good news to an Indian economy that is showing signs of life after a bruising first couple of quarters this financial year. The real estate industry has backward and forward linkages with more than 250 upstream and downstream sectors such as steel, cement, paints, electricity cables and fittings, furniture and furnishings, glass, home décor, transport, etc.

Just as a rising tide lifts all boats, a revival in the real estate sector will improve the growth prospects at all these sectors, thus, setting in motion the virtuous cycle of demand, consumption and growth across the economy.

About the Author: Arnab Mitra