Modi 2.0 government in its first year took multiple long term initiatives to boost growth trajectory. Post first term of the Modi led-government, the real estate sector witnessed muted growth due to subdued demand, high inventory level, frail affordability, and prevalent liquidity crisis. To revive demand the central bank cuts interest rates and government push for affordable housing and created alternate investment fund (AIF) of INR 25,000 crore as last-mile funding for the completion of stalled projects took sector on the path of recovery. Unfortunately, coronavirus pandemic derails this recovery process.
In the first term, the Modi government took some bold structural reforms such as RERA, GST, IBC, PMAY scheme for affordable housing, regarded as long term initiatives in the direction of formalizing the real estate sector. Modi government’s second term reforms are mostly focussed on liquidity boosting.
In the year 2019, the central bank (RBI) lowered repo rates by a total of 135 basis points (bps) to elevate economic growth and ease liquidity pressure. Measures like Credit Linked Subsidy Scheme (CLSS) and other policies keep the affordable housing market steady and encouraging in 2019. The government introduced tax deduction benefits (up to INR 3.5 lakh in a year) on interest amount of home loans less than INR 45 lakh availed during FY 2020 for the first time home buyers.
In the commercial real estate segment, India witnessed the successful listing of the first Real Estate Investment Trust (REIT) and seek robust attention for rental yielding assets by several foreign investment funds. Overall, commercial real estate remained the most favorite among foreign investors for investment due to the high demand for office space during FY 2019-20.
Modi 2.0 reforms amidst the COVID-19 pandemic
- Modi 2.0 government gave urgent relief to all real estate developers by providing an extension of six months for completion and registration of new projects. During coronavirus induced lockdown almost all the construction activities were halted, so to de-stress developers this measure will be beneficial.
- Under the COVID-19 special economic package, the government had announced a dedicated fund of INR 30,000 crore for NBFCs/HFCs and MFIs to address widespread liquidity stress in the industry. According to a real estate consulting firm, around 56 percent of total lending to real estate is driven by NBFCs and HFCs in India. This fund will ease the severe liquidity crunch and it will help to speed up lending activity for the real estate sector.
- Credit Linked Subsidy Scheme (CLSS) was extended by one year up to March 2021. CLSS was first implemented in 2017 and to date, it has benefitted about 3.3 lakh home buyers and expected to benefit another 2.5 lakh middle-class families. Under this financial subsidy scheme, middle-income groups get subsidy on home loan interests (3-4 percent). It will stimulate the demand for affordable housing projects.
- Several businesses are hugely impacted by the coronavirus pandemic, to provide subsistence to companies defaulting on the loan the government has announced no fresh insolvency for the next one year under IBC. This measure will help real estate developers to recover from COVID-19 shock, a slowing economy, and subdued demand. It will buy some time for developers to avoid any legal insolvency and repay their debts.
- The RBI slashed the repo rate by 40 basis points to 4 percent and reverse repo rate to 3.35 percent. Amid lockdown, the central bank has reduced about 115 basis points and this is expected to make new home loans cheaper.
Despite several measures taken to boost liquidity, various industry experts feel that much more needs to be done to revive demand. Steps like lowering existing home loan rates to 5% and reduction of GST rates of mid-segment properties on the par with affordable homes will incentivize the new home buyers and stimulate the demand.