Monday, 16 February 2015

Challenges facing amended policies

Recent amendments to key regulatory policies in the real estate are welcome, but the sector needs a broad spectrum of deep reforms pertaining to land acquisition law, REITs, InvITs, etc, for lasting effect, says Anshuman Magazine says amending the land acquisition act is just the first step, as more amendments are still needed.

Despite the government of India ushering in quite a few amendments to key regulatory policies in the real estate sector, more needs to be done if these were to be adopted by serious market players across the country. Here is a brief discussion of the recent regulatory changes made in the sector, and the challenges these policies continue to face.

FDI restrictions were recently eased for the construction industry, where the minimum area and investment limits were almost halved.

Investments were also encouraged in serviced plots and affordable housing. The announcement came as a positive development for the sector, since it is anticipated that this would widen the base of investors, especially mid-sized financial institutions.

It will also encourage new development projects in prime areas of large cities, as well as in Tier II and III towns.

Since we require an injection of capital for infrastructure and development, whatever the government can do to increase capital flow into this area, will help the construction sector and the economy.

To further the case for investments in smaller towns and cities and encourage fund flows into these locations, it may be advisable to do away with the minimum FDI cap of $5 million within six months of the commencement of a project.

While it is often felt that the exit criteria for investors - which is permitted on completion of these projects or after three years from the date of final investment, subject to development of the trunk infrastructure - may be further relaxed, we are of the opinion that this clause will help safeguard our necessary housing and infrastructure projects from speculative players. [The Writer is CMD of CBRE South Asia Pvt Ltd] Land acquisition norms were eased, when social impact assessment (SIA) and mandatory approval from landowners were relaxed for five priority sectors, including urban infrastructure, PPP projects, and industrial corridors.

Although the ordinance with the latest amendments to the Land Acquisition, Rehabilitation and Resettlement Act, 2013, is yet to be finally passed in Parliament, one hopes that the new act will be implemented soon, together with more incentives for the low-cost and affordable-housing segment.

Once implemented, the amendments will likely have a positive impact on the infrastructure and real estate sector.

It is hoped that the new norms will help ease off the inordinate delays seen so far in the land acquisition process for large - scale infrastructure and affordable housing projects.

Moreover, to encourage foreign investments into the construction sector, the comfort of easier land acquisition processes must exist.

The infrastructure industry, in particular, is expected to gain much from these proposed changes to the act, as will housing for the poor.

More amendments are required to ease land acquisition procedures in India and the law could perhaps bring in more segments of core organized real estate - like IT parks, commercial office and retail development - within the ambit of such faster processing norms, which would be beneficial for construction activity across the country.

More clarity is also needed on the basis of calculating the compensation package for landowners. It is not clear whether the compensation will be calculated after the conversion of land use or on the basis of the original land use of the plot in question.

This is a significant point requiring clarification, since the key problem with the land acquisition process in India will remain unless this factor is addressed. Farmers and landowners will continue to feel short changed if they are compensated on the basis of mere agricultural land use, and the same land is later sold off to commercial end users at enormously inflated rates following land-use conversion.

REITs and InvITs: When the realty sector is struggling for alternate avenues of funding and private players are sourcing institutional capital, permitting Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) is expected to act as a key enabler for capital markets in the country-while providing investors with exit options.

Both REITs and InvITs have the potential to bring in nearly $50 billion over the next few years. To enable the formation of REITs and InvITs, however, the government must consider the tax issues raised by the industry.

Much needs to be done on the tax structures of these instruments for them to become more efficient for domestic as well as overseas investors.

For REITs and InvITs to become a success in India, important questions like coverage for these instruments in India, initial property valuations, and approvals of large bank loans for the holding trusts are just a few that need to be answered.

To begin with, the proposed tax structure for Indian REITs is biased towards overseas investors, and could potentially translate into multiple tax levels for domestic investors.

Ahead of the Budget, the Securities and Exchange Board of India (SEBI) has sought easing of taxation norms for REITs. It has recommended the abolition of capital gains tax and minimum alternate tax for REIT sponsors and investors. Although the ultimate objective of SEBI, and other advisory industry bodies, in formulating regulations for REITS and InvITs in India has ostensibly been investor protection, a few of these regulations need to be thought through at this early stage of their notification.

No comments:

Post a Comment