Real Estate Bubble: Why Tax Sops for Housing Sector May Not Help
The real estate market remains sluggish and tax incentives for builders won’t help, writes Shishir Asthana.
Despite all efforts by the government, the real estate market in India refuses to look up, especially in the mega cities. Findings of the FICCI-Knight Frank Real Estate Sentiment Index for the quarter-ended September 2015 indicate that the current sentiment score, for the second quarter running, is negative.
Stakeholder sentiment, which has been on a decline since the fourth quarter of 2014, highlights the shaken confidence. The findings suggest that the current situation is worse than six months ago. Already home sales in India’s top eight property markets have declined by 4 per cent while unsold inventory has risen 18 per cent.
Recently, the government relaxed FDI rules for the real estate sector. But experts say this move is unlikely to bring in big money as the performance of foreign real estate fund managers has not been satisfactory. Some of these fund managers are holding assets bought at the previous peak and are now unable to sell them.
Domestic Funds Doing Well
On the other hand, domestic funds are doing
reasonably well. Apart from buying distressed projects at discounted prices,
domestic funds are willing to venture into Tier III cities, where a foreign fund is unlikely to venture. Cushman and Wakefield, a
property consultancy firm, pointed out that private equity investment last year
rose by 80 per cent to $2.4 billion, but only 30 per cent came through
the FDI route.
Two equity broking firms, Motilal Oswal and Edelweiss, relatively new entrants in the real estate financing field, are likely to pump in over $1 billion through the private equity route in the real estate market.
But this is clearly not enough, given the size of the domestic real estate market. To encourage more investment in the sector the government is considering more tax breaks. The National Housing Bank (NHB) is being entrusted the job of designing a programme to attract investments in the housing sector.
Real Estate Slowdown
- Government relaxed FDI rules for the real estate
sector but that is unlikely to bring in big money
- To encourage
more investment in the sector the government is considering more tax
- Providing tax incentives to builders to start construction might not help the situation unless prices are within the reach of the aam aadmi
The housing sector may receive a boost when the Seventh Pay Commission is implemented. But these benefits are unlikely to be seen in cities like Mumbai where the price of even a small one-bedroom house is upward of Rs 1 crore. In fact most cities are sitting on high levels of inventory. Mumbai alone has 45 months of unsold inventory, because few can afford the prices at which they are being sold.
The lack of sales has resulted in builders leaving their construction incomplete. According to the Confederation of Real Estate Developers Association of India (CREDAI) only 3.35 per cent of housing inventory in Mumbai is ready for sale, others are all in an unfinished condition.
Will a tax break help? Very unlikely.
Real Estate Glut
The need of the hour is to bring housing rates lower. In a recent report, research firm Ambit points out that exorbitant property prices coupled with higher interest rates and an insufficient rise in income levels is the main cause of a glut in the real estate market.
Prices are so high that rental yields in India, especially in Mumbai, are as low as 2 per cent. In a fairly priced real estate market, points out Ambit, rental yields are supposed to be somewhere close to the cost of borrowing. In other words, real estate market prices, especially in Mumbai, is nearly five times costlier (assuming a lending rate of 10 per cent) than in an ideal scenario.
It is nearly impossible for real estate rates to come down sharply. Increasing supply, especially at high rates, is unlikely to solve the situation. Providing tax breaks to builders to start construction may not help the situation unless prices are within the reach of the aam aadmi.
It is perhaps with this motive that the government is planning to give a tax incentive. The government needs investments in the real estate sector if it wants to build 20 million houses by 2022 to meet the demand for an urban population which is projected to increase from 377 million in 2011 to 600 million in 2031. To attract investment in its Housing For All scheme, which is yet to take off, the government will have to roll out the red carpet.
The only thing that can revive the housing sector is lower prices. There is enough demand for houses at reasonable prices. No amount of tax breaks and incentives for builders will help unless the buyer can afford a house.
(The writer is a Mumbai-based market analyst)
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