While RERA sucked customer funding of developers through pre-launched projects, their liquidity got hit by customers staying away from purchases due to a large number of stalled projects. The NBFC crisis further accentuated the problem. In the backdrop of this, the government has come up with a number of initiatives, including a proposed cut in GST on under-construction homes to boost the liquidity of developers and affordability for home buyers.
Working on financial metrics
In view of the crisis, NBFCs had increased their rates across the board, impacting the margins of developers and affecting their over all operations. According to Vamshi K.K Nakirckanti, ED & Head, Valuation Services, India, CBRE, the slowdown in lending to the ongoing projects by some NBFCs, if continued for long, will affect construction activity, though it provides some opportunity to private banks and funds to step in. Shishir Baijal, MD, Knight Frank believes that NBFC crisis has impacted real estate recovery. This can be gauged from the fact that home sales that saw a good pace in H1 2018, slowed down in H2 to end at a tepid 6 per cent in 2018. Going forward, this negative impact may well spill over to the next few quarters.
This scenario can be well understood in view of increasing role of NBFCs in funding developers. In 2012, the NBFCs share to developers was 36 per cent while that of banks was 64 per cent but in 2017-18, it grew to 42 per cent.
The bank funding has been going down, especially due to NPA crisis. But this bank funding may well pick up due to NPA burden getting lighter with government measures like recapitalisation of banks. As per the latest RBI data, the gross NPA of all scheduled commercial banks has declined to 10.8 per cent in September 2018 from 11.5 per cent in March 2018. Going forward, it is likely to decline to 10.3 per cent in March 2019.
Assocham has put forward a recipe to boost NBFCs and improve liquidity of developers. This includes changing MUDRA norms for refinancing NBFCs to make them viable and acceptable, allowing systematically important NBFCs to accept public deposits, providing liquidity window for NBFCs/HFCs against the sale of secured loans, providing access to all HFCs to NHB refinancing facility, reducing risk weightage of NBFCs, enhancing sectoral cap of MFs investing in NBFCs to 35 per cent and restoring the arrangement of treating bank funding to NBFCs and HFCs for on-lending to priority sector be treated as privately sector lending for banks.
Mastering the GST equation
The government’s move to reduce GST on under-construction homes, is being seen as a major booster dose to drive home sales. With the GST Council’s proposed move to cut GST on under-construction homes, these homes will no more be at disadvantage vis a vis ready homes. The GST rate cut expectation has already seen rally in the realty stocks. Vamshi of CBRE, says, “As vast majority of housing projects are under construction, GST cut on these is expected to spur greater activity in the residential sector and in turn ease developers liquidity position”. Currently the GST council has set up a seven-member committee to study the issue of GST cut on under construction homes. The government wants to reduce the GST from 12 to 5 per cent and abolish the input tax credit as it feels that developers were not passing on input tax credit to buyers which would have reduced the overall GST burden by 5-6 per cent.
Sushil Mittal, Chairman of Association of Certified Realtors of India (ACRI) believes that removing input tax credit goes against the principle of GST. Moreover, it will lead to tax evasion on the purchase of construction material. The best way to move forward, according to him, is to reduce GST from 12 to 8 per cent on standard housing and from 8 to 5 per cent on affordable housing, without taking away the benefit of input tax credit. Whichever way the GST Council decides, the industry experts believe that the cut in GST on under-construction homes along with other policy measures taken by the government to improve liquidity of developers and affordability of home buyers will give a push to housing sector.
Saying it with subsidy
Niranjan Hiranandani, President, Naredco believes that the move to extend CLSS to mid-segment housing will create a positive impact for the 'Housing for All' scheme. MIG beneficiaries with annual income of above Rs 6 lakh and up to Rs 12 lakh get an interest subsidy of 4 per cent for loan of Rs 9 lakh with tenure of 20 years. Those with annual income exceeding 12 lakh and up to 18 lakh, get interest subsidy of 3 per cent.
Vamshi of CBRE thinks it will result in better end-user and developer participation.” Maximum impact will be felt in the peripheral locations in tier 1 and tier 2-3 cities This will not only bolster home buyers’ sentiment but also propel construction activity in the affordable segment”. Vivek Soin of Westcourt Fund, is, however, skeptical about CLSS extension on HIG housing, driving demand for affordable and mid-segment housing as loan book of most HFCs is driven by HIG and premium housing and not by affordable and mid segment. “Only easy access to mortgages may not drive housing demand especially as consumer confidence is low due to the solution to the problem of stalled projects nowhere in sight”.
Measures that matter
It’s not just about easing liquidity of developers, government’s initiatives like hiking the re-finance limit of HFCs, extending CLSS to MIG category of housing till March 2020 and proposed cut in GST on under-construction housing units is also meant to provide relief to home buyers.
— The writer is founder, Ground Real(i)ty Media