Future Prospects of the Real Estate Sector in India

By | May 8, 2020
Real Estate Sector in India

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Future Prospects of the Real Estate Sector in India Overview

Introduction

Real estate sector has been considered as a vital productive driver for economic growth. The Indian real estate market was highly unorganized and fragmented with several issues during the early 1990s. There was no institutional funding support to Indian real estate developers. The sector was grappled with the absence of world-class developers, lack of consumer demand, unavailability of easy financing options and lack of transparency in the market.

Meaning and Definition

The term ‘real estate’ refers to immovable properties such as land, and everything else that is permanently attached to it such as residential and commercial buildings, trading and entertainment facilities like retail outlets, theatres, hotels, industrial factories and government buildings. It involves activities such as property development, purchase and sale of land and buildings.

It also involves the commitments of funds to property with an aim to generate income and to achieve capital appreciation. When a person buys real estate, he also acquires a set of rights, including possession, control and transfer rights. The landlords, builders, buyers, sellers, property consultants, developers, real estate agents, vendors, tenants, etc. are the main players in the real estate market.

Prospects of the Real State Sector

Indian real estate sector witnessed tremendous improvement in the new era of globalization and liberalization. The business opportunities improved along with economic fundamentals. This, in turn, led to increased demand for real estate in retail, hospitality and entertainment industries, economic and social infrastructure and IT-enabled services. The concept of ‘sustainable development’ is getting priority in all walks of life, and the real estate sector is not an exception. Nowadays sustainability, green design and renewable energy are the major themes and these concepts became an integral part of the real estate system.

Real estate sector is characterized by the strong presence of forward and backward linkage effects.[1] About 250 ancillary industries such as cement, steel, brick, timber, building materials etc. are dependent on the real estate industry.[2] Again, the sector is highly influenced by macroeconomic variables like national income and the performance of various segments of the economy. For example, a recession in the IT-enabled services in the economy will drastically reduce the demand for real estate. India is experiencing a growth rate of urbanisation in recent times. This is inevitable in the economic development process and will bring significant demand for real estate, and therefore the growth of the real estate sector is intact.

Indian realty sector has benefited out of the turnaround in the business environment in the country in the past couple of decades. It has also widened the career opportunities in the realty sector. Corporate expansion in IT, Banking and financial services, Insurance, hospitality, media and entertainment have given resurgence to commercial properties.

The new liberalized regime has created several opportunities in the various fields such as residential and commercial brokerage, industrial and office consultancy, property management, land development, property appraising, real estate counselling and research, town planning etc.

Challenges Ahead

Property investment in India involves a lot of risks such as business risk, financial risk, technical risk, liquidity risk, regulatory risk, inflation risk and interest rate risk. Indian realty sector is characterized by liquidity risk, that is, investors are struggling to find an appropriate investment product. Property market transparency is very low in India. There are also several regulatory risks related to property ownership, transfer, capital repatriation etc. Real estate market often fails in informational efficiency and market transparency, especially in developing counties like India.

Some of the main reasons for this informational inefficiency are decentralized markets, liquidity constraints and high transactions costs. The lack of liquidity and the upward pressure of pricing remains the main concern within the market.[3]

Macroeconomic risks which consist of interest rates, inflation and exchange rate remain important, although volatility in these indicators has decreased significantly in recent years. These risk factors are not likely to disappear in the near future and should be taken into account. Nonetheless, the Indian property market does offer remarkable investment opportunities.[4]

The biggest flaw affecting the sector is the delay in project completion; diversion of funds collected from buyers; one-sided contracts in the absence of adequate supply; revoking contractual commitments by both the developers and the buyers; and constraints in financing and investment options available to the sector.[5]

Indian real estate sector is subject to multiple taxes imposed by the government such as Corporate Tax, Service Tax, minimum alternate tax and value-added tax, stamp duty, property tax etc. Tax disputes are common due to the lack of transparency in tax assessment, especially in case of property tax.

The GST regime and RERA regulations

The recently introduced Goods and Service Tax (GST) and Real Estate Regulatory Act (RERA) will certainly bring more confidence among the prospective property buyers. Construction of flats or apartments had a high incidence of taxes during the pre-GST scenario.

The Value Added Tax (VAT) and service tax alone aggregated to 10 per cent of the total value excluding the cost of land. The rate of tax on apartments or flats under GST is 12 per cent after considering the value of the land to be one-third of the total consideration payable by the buyer to the builder. Thus, there is a provision of a marginal reduction in prices from a buyer’s point of view.[6] The Real Estate Regulatory Act (RERA) covers almost the entire aspect of real estate purchases and project implementations which ensures better clarity in deals between real estate developers and buyers.


[1] https://essays.pw/essay/the-real-estate-sector-in-india-92418  accessed on 7 May 2020

[2] Bansal, A., et al. (2011), A Review on Indian Real Estate: Trends, Challenges and Prospectus, KKIMRC IJRHRM Vol-01: No-01 Sep- Nov. 2011.

[3]https://internationalrealestateinvestment.wordpress.com/2008/04/28/indian-real-estate-marketbooming/ accessed on 7 May 2020

[4] Deutsche Bank Research: Building Up India – Outlook for India’s Real Estate Markets.

[5] Misra, A. K. and Goel, N. (2014), Legislation for the Real Estate Sector, EPW, Vol. XLIX No.25, pp. 54-61.

[6] Veeramani, P. M. (2017), The Gist of GST, Times of India, special edition on Kerala real estate, dated 20.10.2017.


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