The cry for ‘industry status’ for real estate has been heard time and again for years now. This has been a long-standing demand by the sector, which was only partially fulfilled when the affordable housing segment received industry status in 2018. While the term ‘industry status’ gets thrown around often, and more so recently, what does it really mean?

Meaning of ‘industry status’

The term ‘industry status’ has not actually been specifically defined in any legislation in India. Conferring industry status basically entails an inclusion in the State/Central industrial policy.

Putting this issue in perspective, here are two instances of State governments conferring industry status reported recently.

In a bid to attract industries to the State, the Uttar Pradesh government (reported on May 12) has accorded ‘industry status’ to the warehousing and logistics sector. According to the UP Infrastructure and Industrial Development Commissioner, now industrial land-use charges will be applicable to warehousing and logistics sector parks in UP, thereby reducing the cost of setting up.

Soon after, on May 22, Mizoram became the first State to accord industry status to sports. The move is aimed at further bolstering sports activities by attracting investment. Also, henceforth, industrial benefits like subsidies and banking facilities will be extended to sports in the State.

With industry status, State and Central agencies comprehend and consider a sector as a separate and cohesive one, with special schemes and subsidies commensurate with its distinct demands and requirements. Broadly, sectors that have been conferred industry status are also privy to legal and procedural benefits such as capital and interest subsidies, single window/fast track clearance processes for licences, exemptions or relaxations from stamp duty, tariffs and other duties.

As for the real estate sector, the immediate benefits would be: (i) getting loans with less trouble at lower interest rates; (ii) enabling large investors to be financing partners; (iii) attracting equity investment in the sector; and (iv) enabling developers to refinance their existing debts.

Getting down to brass tacks, the biggest hurdle for real estate developers today is the cost of capital. Anything that contributes towards a reduction in the cost of capital would impact the overall project cost positively, and this benefit can in turn be passed on in part to the buyers.

Risks and realities

The potential for growth of the real estate sector in India is undeniable. However, the sector is plagued by shortcomings that may have thus far served as roadblocks to conferment of industry status and ultimately to its growth and contribution to the Indian economy.

Over the years, a common gripe with respect to the real estate industry, has been the lack of transparency in the system. Consumers were forced to place their trust in a builder and sometimes got their fingers burned in the process. In fact, to counter this, the real estate landscape has had many regulatory and procedural changes implemented in recent times.

For instance, the advent of the Real Estate Regulatory Authority (RERA), which has brought some much-needed transparency and aims to protect the interests of buyers. The lack of regulation and third party scrutiny had led to an opaque business model and the potential for malpractice was ripe. While steps have been taken in the right direction, there is still some way to go before these issues are resolved.

Another stumbling block are the systemic issues that arise when tracing title to a property in India. Due to the nature of our succession laws and the myriad ways in which missing links arise in the chain of transmission of property, investment in property is considered by many to be a risky venture. While the government has already put in place digital systems for recording transfers of property in most cities, the errors of the past still haunt us.

For example, even after obtaining an encumbrance certificate showing a clear path of transfer of property, it is not uncommon to find that some years ago a transfer took place without the concurrence of one or more sibling(s) in a family, who were legally co-owners at the time. A discovery like this, while not impossible to overcome, can certainly make the process more painful.

The issues of lack of transparency, a cumbersome approval process, and imperfect title issues hit both ends, with foreign investors at times shying away from the proposition and also dampening customer confidence in a project. Ultimately, it is arguable that issues like these prevent the sector from achieving its full potential and have the effect of blocking the industry recognition.

It’s a known fact that developers have been experiencing major cash flow problems for a few years now. While this is mainly due to unsold inventory piling up due to the skewed housing demand, the Covid-19 pandemic has also had its impact, making the situation far worse. Industry status at this point would provide relief that developers need and give them an opportunity to focus on increasing sales, offloading the existing unsold stock and breaking the cycle they are presently trapped in.

Sector overhaul or industry status ?

There really should not be any debating this. The decision to award ‘industry status’ should not be contingent on all of the above issues (and more) being set right first. It’s too late for that, all things considered, not to mention the blow delivered more recently by the pandemic. Instead, a hand-in-hand approach would be ideal, because while a sector overhaul may be required, the benefits of industry status are needed right now.

Conferment of industry status will give the real estate sector the boost it needs right now, with its recognition as a priority sector by the RBI. Couple this with a simplified approval process for residential projects and increased transparency in the sector and we would see a boost to the nation’s GDP, with a rise in job opportunities and fall in construction costs. This optimal result being a win-win-win situation for consumers, developers and the economy.

The writer is a partner with VB Legal, Advocates. Views are personal.

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