Finished goods prices depend upon the cost of raw materials used in manufacturing them. Similarly, the prices of property depend upon the prices of steel, cement, labour, etc.
The wavering prices of cement and steel are likely to break all the future plans of real estate businessmen, when they are expecting a revival from the last year’s lapse.

The prices of cement are dynamic and deviating regularly, which will have an adverse effect on the cost of real estate projects. As per statement passed by chairman of CREDAI (Confederation of Real Estate Developers’ Association of India), the post budget announcements was a hope for us to get a hike in an affordable segment, but the rise in construction raw material prices will ruin our presumptions.

As per industry participants, in city’s market a cement bag of 50 kg is available at the prices of Rs.230 Rs.260. Steel is priced between Rs.33,500 and Rs.36,000 for a ton. The rise in cement prices has inflated the budget of the project resulting in narrowing the margins of developers.

The prices of cement and steel rise almost every year after monsoon as construction activities speed up, but due to fall in  it was not increased just after monsoon this year.real estate market,

Now, with the increase in infrastructure and residential projects, the prices of cement will see a rise.

Also, the government has increased the budget for infrastructure projects i.e. highways, railways. As these projects are the largest consumers of cement, the real estate developers and cement dealers are expecting a hike in cement prices in future months.

The government’s supportive policies in the budget give a positive sign to real estate developers in terms of improving property demand in the next fiscal year especially from the service class. We are optimistic for the recovery in the sector as new projects will be initiated by March, said Vijay Gandhi CREDAI Indore chapter president.

Yet another move under the scheme of Pradhan Mantri Awas Yojna (PMAY) by DDA (Delhi Development Authority). 7 locations in the city to be flourished with 50,000 new housing units by 2018 end. This will cover the urban areas where the agenda is to provide the shelter to the people under economically weaker section (EWS) and lower-income group (LIG) through affordable housing scheme.

Kathputli Colony, Kalkaji, and Jailorwala Bagh, are the three locations of the decided 7 locations where in situ construction will take place while Dwarka, Vasant Kunj, Sultan Garhi, and Narela are the other four locations for the housing scheme.

Out of 50,000 units, over 24,000 houses will be launched for people falling under EWS category, i.e., people whose annual income is less than Rs. 3 lakh, which was Rs. 1 lakh per annum earlier.

Further, over 25,000 of DDA flats will be constructed for the people belonging to the LIG category that includes the households with an income between Rs. 3 lakh and Rs. 6 lakh approximately.

As per a source, total cost of this project carries the estimate figure of Rs. 15 lakh per unit at the current rate. However, as the cost of the land is not to be recovered by the buyers, the housing will be subsidised by the government.

The authority, on the other hand, is also trying to ensure that the project is not merely about the houses but the comfort as well.  And thus, they are trying to encompass the basic amenities like shops and other civic infrastructures surrounding the colonies where people will be living.

PMAY was previously known as “housing for all” project and was relaunched in June 2015. Under the scheme, around 2 crore houses are to be launched by the end of 2022. The aim is also to provide housing benefits to women, Scheduled Castes and Scheduled Tribes.

With the introduction of ‘Thin Capitalization’ concept under Union Budget 2017-18, the realty players are expected to see further fall in their profit margins. Under this new rule, interest paid on foreign debt above 30% of their EBITDA (earnings before interest, tax, depreciation and amortisation) cannot be claimed for tax deduction purposes.

Realty Sector was already struggling with the shrinking profit margins over last few years and the situation was worsened with the announcement of demonetization. Infrastructure companies with large chunk of international debt at project level or in their special purpose vehicles (SPVs) are expected to bear the brunt majorly with this new announcement under budget.

Investment through non-convertible debentures and the interest paid on them are also expected to be considered as debt investments by government. By April 2017, this ‘new’ concept shall come into effect in line with the Base Erosion and Profit Shifting (BEPS) framework. BEPS framework is basically a global agreement where 15 action points are taken care of in order to check tax avoidance by multinationals.

With thin profit margins, infrastructure segment was getting most of its debt investment through Cyprus. But effective April 2017, an additional tax shall be levied on all investments coming within country through Cyprus as the government renegotiated the treaty with Cyprus in 2016.

Infrastructure and real estate companies were highly leveraged as they receive significant funding from off-shore parties and benefited with the interest payments made to subsidiaries or SPVs in the form of tax deductions. Now under the new scheme, this tax deduction has been restricted to the 30% of EBITDA (profit before any deductions).

Hence, this scheme will bring down the profit margins in realty segment but it is expected that the companies with higher profit margins will recover this within a couple of years. They will carry forward the unabsorbed interest.

Real estate segment observing the stagnation for last few years, was further jolted with the announcement of demonetization on November 8. The sector was already experiencing lower transaction volumes and lack of consumer confidence which lead to pile-up of inventory with real estate players. The Union Budget 2017 brought some relief to the industry by giving various concessions.

It is worth notable that in spite of fall in the demand for real estate inventory, the secondary market remained active in realty segment. Inventory sold by the real estate developers is actually coming back into large numbers within market.

Resale segment forms a sizeable component of realty segment markets which historically have had high investor to end-user ratio corresponding much higher percentage of ‘Resale options’. Places like Noida and Gurgaon reflect this trend while south Indian cities have high end-user participation. Cities like Bengaluru, Chennai and Hyderabad have fresh bookings more than double of resale options thus showing a reverse trend.

Resale segment is continued to build a downward pressure on prices on both fresh as well as resale properties as more and more investor are looking upon to exit the market due to its stagnancy. As these investors are quite flexible with their pricing, hence the prices quoted under RM (Ready-to-Move) market may be lower than the pricing expected by the developers for their launches. These will in-turn upswing the resale turnover as well as inventory of fresh launches. Cities like Gurgaon and Noida experiences more impact on real estate inventory pricing as they have higher number of resale options over Hyderabad and Bengaluru. As the quantum of resale options are inversely proportional to the pricing in primary market, the pricing of the newly constructed inventory is expected be under pressure in NCR region.

Not just the ‘resale options’ put pressure on unsold property prices, it also adversely impact the unsold inventory by aggravating it further. With considerable resale options in RM projects, the demand of UC (Under Construction) projects dips, ultimately putting pressure on the primary market.

As the sector was experiencing lack of customer confidence which is further fueled up with delay in the projects, the customers are now willing to pay more for RM over UC Properties. Instead of exposing themselves to the risk involved in the delivery of projects on time, they are willing to pay a premium on the completed projects. Even the price differential between these two properties reflect the same trend that RM properties secures an average 7% premium over UC options.

Transaction activity in resale segment allows investors to book profit and unlocks their capital but under current scenario as the transaction volumes are quite low, it is actually putting pressure on the primary market with dipping prices and higher inventory holdings.

A two-page letter to all the Chief Ministers of States has been sent by Venkatesh Naidu, Minister of Housing and Urban Poverty Alleviation (HUPA) stating a serious situation of vacuum shall arise out in case these states shall not be able to implement Real Estate Act on or by the deadline of May 1, 2017.

So far, four states including Madhya Pradesh, Gujarat, Uttar Pradesh, Maharashtra and Six Union territories have implemented the Real Estate Act and notified the final rules. This act is considered as one of the very important reforms that will bring more transparency to the realty segment and stakeholders shall be able to derive benefits with its implementation. As the Act will get in its full operation from May 1, 2017, all the states are expected to notify for the final rules including the agreement for sale rules, general rules and establish the appellate tribunals as well as rules & regulatory authority latest by April 30th 2017.

All the rules notified by the states have been forwarded by the central government to a parliamentary committee for examination. Ministry of HUPA also organised a workshop to review the progress last month. Andhra Pradesh, Jharkhand, Arunachal Pradesh, Chhattisgarh, Karnataka, Haryana, Himachal Pradesh, Kerala, Mizoram, Rajasthan, Tamil Nadu and Pondicherry are expected  to notify their real estate rule in February. However Uttarakhand and Punjab said that they shall only be able to notify the rules after assembly elections.

The HUPA minister also clarified that in the absence of rules and regulatory authority as well as appellate tribunal, there shall be a vacuum in the realty sector as the Regulatory Act shall get affected in these states.

What Is Real Estate Act?
The real estate act was brought in consideration with regulating the properties  and is considered as the biggest reform in the real estate sector till date. The RERA (Real Estate Regulatory and Development  Act) 2016, was proposed way back in January 2009 but it got its date of operation as 1 May 2016.

Important Clause of Real Estate Act 2016
• Compulsory Registration of all Residential Real Estate Projects of plot size more than 500 sq. meters.
• Written agreement for sale or builder-buyer agreement.
The agreement must be offered to the home buyer for signing before accepting 10% of property value as advance.
• Developer can sell the property only on the basis of carpet area and NOT the super built-up area.
• Before bringing any change in the structure of the property under construction, promotors are to have consent of two-thirds (66%) buyers.

Penalty Clauses
• Penalty of 5% of project cost on incomplete disclosure of the property.
• Cancellation of the running project in case the rules are regularly flouted.
• The  association of allottees can claim their money back if the project is left half-way for any reason.
• A demand for completion of project by another developer can also be raised from the  authority by the allottees.

RERA Aims At:
• Fast process of judgment.
• Relief to home buyers in case of disputes
• Proposal of 644 district-level consumer courts
• Shielding the interest of home buyers in the primary real estate market.