Vascon Engineers Ltd

Monday, April 4, 2011

Role of Government in developing the Indian real estate sector

The government's recently announced stimulus package, coupled with the Reserve Bank of India's move allowing banks to provide special treatment to the real estate sector, is likely to have a positive effect. These are:

·    Banks have announced a package for home loan borrowers in various categories. Subsequent to RBI permission to restructure loans to real estate developers, these developers have rolled over nearly US$1.8 billion debt. 

·   The government has allowed external commercial borrowings (ECB) for integrated townships development and has dispensed with the requirement of all-in-cost ceilings limits for ECB until June 2009, which is expected to increase borrowings and in turn boost the sector. 

·    Moreover, recent excise duty cuts on cement and steel will bring down construction costs and the most recent exemption for real estate developers from service tax in relation to construction of a residential complex will reduce prices further for homebuyers.

·    The recent government initiatives have already increased liquidity in the market and brought down the interest rates to a more realistic level. Supporting the government's initiatives, many developers have also lowered property prices by up to 20 to 25 per cent and customers are once again interested in buying a house for themselves.

With the election of a stable central government, the real estate market is expected to get a boost, as improved economic sentiment and rallying stock markets are bringing back confidence into the real estate sector. The new government is expected to stimulate the economy by introducing favourable policies for all industries and sectors, which would help the country forge ahead. This obviously will have a direct impact on the real estate sector.

Some proposed plans

Various reforms to streamline the real estate sector with Real Estate Management (Regulation and Control) Bill, which is expected to establish a regulatory agency is due for introduction in the system. The government is also expected to address the longstanding issues of grant of industry status, 

·    tax-breaks and exemptions,
·    streamlining and increased harmonisation of registration and stamp duty rates across the country,
·    liberalisation of the economy to allow foreign investment, allowing REIT and REMF structures to channel investment into real estate and permitting even small investors to participate in property development.

The Securities Exchange Board of India, the stock market regulator, is reported to have initiated discussions with experts to set up a framework for REITs. These measures will go a long way to building up overall confidence and creating an environment conducive for a substantial increase in foreign investment into the real estate sector.

Three major developers DLF, Unitech and Indiabulls Real Estate have raised around US$1.6 billion through the financial markets, indicating the beginning of a revival of investor confidence. These funds are largely being used to complete ongoing projects and lowering of debt obligations, which would improve the companies' balance sheets and their stock performance and ultimately strengthen the whole sector.


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