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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)
By Una Galani
MUMBAI, June 22 (Reuters Breakingviews) - Indian developers are going downmarket. Luxury homebuilders are shifting their attention to cheap housing. Demand is strong thanks to a raft of government incentives. A boom could provide a big fillip to the economy, creating demand for everything from cement to home furnishings.
Prime Minister Narendra Modi has promised "Housing for All" by 2022. The scheme aims to create 50 million new low-cost homes in a country where an estimated one quarter of urban dwellers live in slums and other informal housing. Demand for small homes is growing with the population, and as young families favour living as nuclear units, rather than with many of their relatives.
Graphic: India's real estate boom has a solid frame: reut.rs/2sJhR58
Several initiatives have created a frenzy over the sector. India is offering subsidies to first-time buyers, which substantially lowers the effective interest on mortgages. Borrowers can effectively pay just 3.4 percent instead of 8.3 percent on a 20-year loan worth 2.5 million rupees ($39,000).
Rising incomes and stable prices mean the affordability of a one or two-bedroom house is the best in almost two decades, according to CLSA analysts. They foresee a $1.3 trillion industry-wide boom over the next seven years.
It gives lenders reliable borrowers just as corporate credit is contracting. Meanwhile, developers like Indiabulls Real Estate and Godrej Properties get tax benefits, which makes up for the lower margins from selling cheaper units.
New national laws increase accountability, too. These put the onus on developers to deliver projects and make them liable for criminal prosecution if things go wrong. Previously, it was too easy for unscrupulous outfits to take big deposits and dawdle for years before completion. That should make more people confident of investing their savings into real estate – and lead to consolidation of the country’s 12,000-plus property development companies.
This all helps explain why the Thomson Reuters sector index is up almost 60 percent this year, more than three times the benchmark Nifty Index. And why Shankara Building Products , a newly listed midcap, is touted by one hedge fund as potentially India’s answer to Home Depot, the $190 billion U.S. DIY giant. Politicians just need to play their part and keep the supply of land coming.
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- The Thomson Reuters India Real Estate Development and Operations Index has risen almost 60 percent in the year to date, more than three times the local benchmark Nifty Index.
- On June 7, the Reserve Bank of India reduced the loan-to-value ratios for some home loans and the risk weighting lenders must apply.
- India's Real Estate (Regulation and Development Act) came into effect on May 1. It aims to protect consumers by making real-estate developers more transparent and accountable.
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Editing by Quentin Webb, Kathy Gao and Katrina Hamlin