Real estate market in India growing due to favourable policies

03 December 2018

As government initiatives surrounding property development become increasingly pro-development, India’s real estate market is not only becoming more diverse in its scope, but is also expected to grow from its value of $120 billion last year to $180 million by 2020, according to a KPMG report.

India’s middle class is growing at a rapid rate, resulting in the substantial expansion of the country’s urban population and, consequently, the rapid expansion of its real estate market. Several analysts in recent months have predicted high numbers in revenues and assets for the sector in the near future.

Alongside the increase in demand from the residential real estate sector, a growing consumer market has also boosted India’s retail and hospitality sectors, which has resulted in the growth of the retail and hospitality real estate space. Real estate consultancy JLL predicted earlier this year that India’s retail real estate market would surpass 100 million square feet in the near future.

Urban population in India

A similar story is visible in the hospitality real estate market, as hotel occupancy rates increase rapidly. According to a new report from Big Four accounting and advisory firm KPMG, a combination of growing demand and conducive government initiatives have made this year a crucial one in the development of India’s real estate market.

This year, the government has demonstrated an interest in developing affordable housing across the country, and has launched targeted initiatives to promote the same. Alongside positive policies, the administration has also looked to relax the regulatory environment around real estate development.

The private sector has been equally active in bringing about this new boom. As per the report, private equity investments in the country’s real estate sector grew by 15% year-on-year for the first quarter of this year, having increased to a value of $3 billion.

Housing New launches

By 2026, this value is expected to reach as high as $100 billion, driven primarily by development in tier 1 and tier 2 cities. Outside of private equity, the overall market size of the real estate sector stood at $120 billion last year, and is expected to grow to $180 billion by 2020.

The report predicts that this number will register a further increase to $650 billion by 2025 and $850 billion by 2028. Currently, real estate contributes up to 7% of India’s GDP, which will increase to approximately 13% by 2025. The report also predicts that India’s real estate sector will become the third largest in the world by 2030, growing to a value of $1 trillion.

The sector also appears to be moving towards greater diversity, with a representative mix of residential and commercial real estate. Sales in the residential real estate space, for instance, reached a total of 288,000 last year, and had already reached 124,000 in the first half of this year.

Office space trends

In the commercial space, on the other hand, the supply and net absorption appeared to fall over the last two years, but is expected to recover this year. As a result, the supply last year fell to 27 million sq ft, down from its 2016 value of 35 million sq ft, while net absorption fell from 33 million sq ft to 29 million over the same period.

This year, supply is expected to register a significant jump to 42 million sq ft while net absorption will jump to 34 million sq ft. “Commercial assets have been the most preferred asset classes in real estate by investors over the last couple of years. It has attracted about 80% of the total investments between 2016 and YTD-2018,” said the report.

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Tax consultants warn against danger of ITC withdrawal for real estate

05 March 2019

Alongside an overall cut in the goods and services tax (GST) for the real estate sector recently, the Government of India has also announced the retraction of input tax credit (ITC) for the sector, a policy that has drawn criticism from consultants at PwC, Deloitte and EY for its shortcomings in terms of black money.

As a minimum amount available on all transactions, the ITC is a benefit of sorts available to firms that also acts as a mechanism by which transactions can be tracked and audited. Nevertheless, in light of a reduced GST rate to 5%, the government has deemed the ITC unnecessary for the real estate sector in India.

Real estate is expanding rapidly in India, with some placing annual growth in the sector at 9%. A number of causes have been proposed for this growth, including an overall increase in prosperity and an increase in foreign investment, which is creating demand for residential and retail real estate respectively.

Others have argued that the introduction of the GST, among other government policies that focus on development in tier 1 and tier 2 cities across the country, are the drivers of growth in the sector. According to consultants from some of the Big Four accounting and advisory firms, this latest policy could prove detrimental to the sector.

Tax consultants warn against danger of ITC withdrawal for real estate

At a macro-economic level, the removal of a mechanism that allows the tracking of money creates room for rampant tax evasion, particularly in a sector such as real estate where large sums of money change hands. For the real estate sector specifically, the policy could drive the sector down the wrong path. 

“It does go against the very spirit of GST. Restricting input is not a good idea for any sector, and particularly for real estate, which needs to be formalised more. It's more in the direction that it (government) wanted to give relief to the common man. But it is obviously not a good idea from a policy standpoint,” said Pratik Jain, Partner and Leader for Indirect Tax at PwC India.

Mahesh Jaising, Partner at Deloitte India added, “The government's standpoint was that in the first couple of months, even though all the credit was being granted to restaurants, the base price of a menu was not declining. From the optics of customer, 18 per cent GST also felt high.”

The Big Four alongside a number of other firms in India have been invested in ensuring the smooth entry of GST into the Indian economy, given its potential benefits to a number of varying sectors across the country. Consultants are helping firms comply with the new tax regime.