Published Editorial

Vote on Account 2014: Indian real estate embracing change in the time of economic revival

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Gaurav Karnik
Tax Partner - Real Estate practice, EY

Contributed by:

Tarika Kumar
Senior Professional-Real Estate Practice, EY

The past decade has seen the Indian real estate industry ride on a roller coaster ride through many highs and lows. This period has seen the expansion fury which gripped the sector with the market peaking in 2006 -2007 characterized by a growth in demand, substantial development and increased foreign investments. By mid-2008, this fervor was replaced by cautious evaluation of business models and plans, which was the key agenda of the business houses when the market loomed large with uncertainty in 2008. The real estate industry world-wide entered 2010 with a renewed sense of optimism with economic recovery mitigating the adversities that the recession had generated.

This time-period of Indian real estate history got more exciting with the sector having already witnessed a boom to bust cycle. The optimism of 2010 seemed short-lived with things gradually moving towards uncertainty yet again. In 2013, India recorded the lowest growth since 2009, increasing concerns about the Country's economic performance. The year has seen a significant fall in the value of the currency, increased inflation, political uncertainty with impeding elections and a highly volatile stock market. The sector is currently at an inflection point in the cycle, where there has been a strong focus from the government to recognize some of the omnipresent challenges that have been plaguing the real estate industry.

In recent times, the real estate sector estimated to be approximately US$78.5 billion in FY13 and expected to grow to approximately US$140 billion in FY17 has been at the forefront of the Government of India's (GoI's) agenda on account of its potential to propel economic growth significantly. Within real estate, the housing sector currently contributes around 5% of India's GDP and in the next three to five years, its contribution to GDP is likely to increase to 6%.

The past year marked the acknowledgement of the Indian Government to some of these issues and brought in the beginning of change, perhaps more than any in the past.

These policy revisions seem to range across all aspects of the real estate business from land acquisition with the introduction of The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013, to regulating the industry and taking care of customer interests with the Real Estate Regulation and Development Bill, 2013, to re-considering liberalization of the foreign direct investment (FDI) after a decade of first introduction of the FDI policy in 2005, and finally the introduction of the concept of real estate investment trusts (REITs).

While the debate on the impact of these policies rages strong, it is encouraging to know that there is a momentum for change. It is now imperative to look at these changes holistically; the development of a REIT regime is a positive step, however for the Indian real estate market to reap its full benefit it would be crucial to address impending issues such as clarifying the permissibility of FDI in REITs so as to be able to successfully compete with the developed markets like the Singapore REIT market. A holistic approach to policy needs to also be substantiated with infrastructure development.   The capital intensive real estate sector faces a severe constraint in terms of adequate and structured financing options. According to EY's estimates, the investments required in the Indian real estate market by the year 2015 is approximately US$42 billion (excluding EWS housing) and approximately US$257 billion (including EWS housing). Residential real estate alone will require an investment of US$29 billion.

One of the important sources of funding after 2005 has been foreign direct investment (FDI). In the period from April 2011 to July 2013 the sector attracted FDI of approximately INR100,000 crores. However, the volume of FDI into the sector has been on a declining trend, owing to the unattractiveness of the decade old policy that has outlived its useful life. Given the lack of options the Indian economy is ready to experiment with advanced funding options such as REITs and provide industry players with a globally competitive edge.

As the Western property markets emerge from crisis, emerging markets such as India are likely to lose some of their attractiveness. It is imperative for India to rise to some of these challenges and demonstrate utmost commitment in implementing appropriate and timely policy measures to create an investor-friendly environment with associated ease of operation can be created.

Views expressed are personal