Under-construction sector needs help

One of the major failures of this government, as pointed out repeatedly by opposition parties, is the inability to generate adequate employment opportunities for the one million workers added to the workforce every month. Therefore, it is a surprise that the government hasn’t considered giving more fillip to the residential construction industry due to its potential to create employment for unskilled and semi-skilled labour.

In fact, most steps taken by the government till now, notably the Goods and Services Tax and Real Estate Regulation Act (Rera) – have only dampened the progress of the real estate sector. Rera’s haphazard implementation across the country hasn’t helped matters. At best, the Act has provided a redressal avenue for existing buyers. Till their issues are seen as being demonstrably settled, it will hardly add confidence to new buyers. And to be truthful, we are still years away from any such demonstration of intent across the country. Hence, we are unlikely to see a spurt in buyer confidence for under-construction property anytime soon.

The new instrument of Real Estate Investment Trusts or Reits has also not fully taken off. Even Reits are unlikely to immediately spur demand for under-construction properties since they can only invest up to 20 per cent in under-construction property. And they are most likely to concentrate on commercial properties because the rentals yields are significantly higher at five-six per cent vis a vis one-two per cent in residential properties. Even individual buyers and investors are moving towards ready-to-move-in properties and capital gains bonds.

The only way out of this conundrum is to provide incentives to individual buyers to purchase under-construction properties. The government can notify a specialised fund that will only invest in such properties. This specialised fund can collect money from investors and spread their risk over a large number of properties. Like mutual funds, this will also allow professional managers to come into the sector. This will only work if the investment is treated as investment in residential real estate for all purposes, including capital gains exemption under Section 54. The structure could be treated similarly as a Reit or an alternative investment fund.

These specialised funds should be required to liquidate the investments in a fixed time frame of five years or less. Effectively, these will become tax-efficient, but relatively lower risk investments that will spur the under-construction industry. Like the mutual fund industry, investors will seek right kind of fund, according to their risk-taking ability. The fund should also be protected by Rera. Rules for diversification of risks across projects and promoters including investment ceilings will be needed. Stamp duty reliefs would be a welcome addition from the state government side. It may not involve a revenue sacrifice from the states since the flats to be bought by the funds are not selling today in any case. Also, the stamp duty revenue will eventually be realised as the fund would eventually sell to final buyers. If such a fund structure is successful, it can lead to a spurt in employment generation especially in tier II or III cities that is so essential in an election year.

The writer is a Sebi-registered investment advisor.