Introduction to the Real Estate Sector in India
Team Leader: Marissa VaillantIndia has long been championed as an outsourcing mecca for the modern world’s corporate operations. As a cost-effective substitute in a burgeoning economy to its developed North American counterpart, India has become a key player in multinational corporation operations in terms of call centres, manufacturing, and office support. 2017 has brought an influx of foreign investment into India from institutional investors abroad, with Private Equity investments topping $3.16 billion USD this year to date. Investors and developers alike are now shifting to take advantage of the booming domestic economy and moving to finance office facilities and other real estate developments.
A series of fiscal reforms throughout 2017 have paved the way to a more prosperous real estate economy, specifically for commercial developments. After campaigning on a strongly driven push to revitalize the real estate sector through reforms,
GST Tax Reforms
Coming into effect July 1, 2017, the Goods and Services Tax (GST) was introduced to streamline the tax process on goods and services throughout the supply-chain. Prior to the introduction of the GST, taxation on the real estate sector was multi-layered and inefficiencies promoted location specific building for developers to capitalize on low tax rates. This harmonization of a common tax plan will serve as a catalyst to grow new developments in areas previously priced out of the optimal tax market. In addition to the GST, an Input Tax Credit (ITC) was also introduced. The ITC provides credits on GST payments against raw materials used during the building process and for any services rendered.
Overall this tax reform, in conjunction with the ITC, should promote the growth of the real estate sector across India as opposed to specific areas with advantageous tax rates as has previously been seen.
REITs
Real Estate Investment Trusts (REITs) prior to 2016 had long been under a strict set of rules restricting the formation and operation of the market listing. Previously, a tax on dividends was levied on REITs making it problematic to pay dividends to shareholders, which is required by law. In addition, Grade A commercial real estate buildings are expected to be the major driver for REIT’s portfolios due to their generally higher return on investments. The expansion of this sector will be dependent on increased efforts to ease regulations on REITs and the continuation of the demand for commercial properties in the urban arena.
Housing for All
Affordable housing has long been a challenge for the Indian economy, with estimates placing a shortage of approximately 20 million homes in urban areas. The ‘Housing for All by 2022 Mission’ coined by Modi’s government aims to diminish the supply shortage of housing to all those in urban areas by 2022, with specifically supplying a permanent and stable house to poor households. As the government provides an assortment of incentives, including attractive
These reforms along with the myriad of other reform developments are changing the investment landscape in the real estate sector. The implementation of these actions has come in a short time span and thus it is uncertain to expect how when layered together if they will continue to act efficiently. The entrance of foreign REITs into the Indian market could change the commercial real estate industry with a unified approach to property management that is tradeable on the Indian markets.