Realty sector needs last mile funding to bounce back stronger

September 2, 2020: After demonetization, GST and RERA, the sector was dealt another blow from Covid-19. The real estate sector contracted 5.3% in the June quarter compared to 6% growth in the year-ago period, the construction industry witnessed a contraction of 50.3% according to a report.

The sector needs last-mile funding as many projects are stuck in the rut. The sector’s stimulus requirement is now ₹1.5 trillion. A lot of financial institutions and funds which are ready to invest in the sector. So, lack of liquidity available in the system needs to be addressed. Around 70% of the financing used to come from NBFCs (non-banking financial companies) which do not have liquidity now. Therefore, alternative investments are required to bring in money.

The taxation in the sector is very heavy, both at the central and state levels. In fact, almost 35% of the cost of housing is in taxes. Therefore, a reduction in GST rates, stamp duty, land under construction charges, besides other charges is anticipated. It would make residential buying a lucrative offer for the buyer. The ideal level of taxation for the sector should be around 15%. Recently, Maharashtra reduced stamp duty to 2% till December. This is the first time in India that the demand side has been incentivized. If GST could be reduced, at least temporarily, similar to what has been done to stamp duty by the Maharashtra government, it would boost sales.

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With people working from home, the demand for ready apartments has witnessed a surge. This coupled with lower interest rates, people are taking the benefit of that. In the first quarter of 2021, a shift could be seen and people will be back to working from office, hopefully.

Only when you rationalize taxes do your collections go up. For instance, if you reduce stamp duty, the transactions will increase and collections will go up.

The labourers are coming back to construction sites. This is quite a relief for stalled projects. Almost 15% of India’s workforce is part of the real estate sector. This should not be neglected as it would adversely affect poverty ratio.

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