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Elections are the backbone of democracy.
Often regarded as the ‘Festival of Democracy’, elections hold enough power to turn today’s king into tomorrow’s commoner, and vice versa.
With the Karnataka state elections knocking on the door, Bengaluru, one of the busiest real estate markets of the country (and where I live) needs to keep its ears and eyes open.
From investor sentiment to policy changes and from infrastructure development to economic growth, an election holds immense power. The decisions concerning all these metrics rely solely on whether a new party will come in power or will the existing party’s rule prevail.
Whenever the power of the state shifts from one party to the other, changes in policies and regulations are inevitable. Especially in a country like India, where each political party has its own ideology and is quick to fulfil at least some of its promises as soon as it comes to power.
Unsurprisingly, some of these promises lead to making changes to the policies implemented by its predecessor government. This is where commercial sectors including real estate either brace for impact or burst out of joy.
If I have to convey my feelings about elections in one word, it would be uncertainty.
Elections bring a wave of uncertainty; it is similar to a thick layer of mist where you are unsure whether to move forward or hold your ground. Moving ahead I will assist in you how to better navigate in these uncertain times.
Firstly, this festival of democracy keeps all stakeholders involved in real estate on their toes. This includes the developer of a project, the broker involved, the channel partners, and the ultimate home buyers.
But:
Why do elections affect the real estate business?
Land is one resource that does not expand or increase with time and is fixed in nature, owing to which its demand graph is always on the rise. With an ever-rising demand graph, the price rise is inevitable.
With all these conditions in play, real estate becomes one of the highest revenue generating sectors for a state government. Keeping this monetary value in mind, each new government brings in some new real estate policy of its own that tends to benefit its big plan.
These policies now affect all the stakeholders of the land and buildings industry. Let us first look at the scenario from the perspective of a promoter or a developer.
How do elections affect a real estate developer?
Suppose, Mr. Ranjan Kapoor, a developer who has spent the last 3 years constructing and promoting a new residential tower in Bengaluru’s Koramangala, now is in a fix due to the dark clouds of election. But how?
Upsettingly for Mr. Ranjan, the prevailing sentiment is that there might be a shift in the local government, which can lead to a wave of retrospective policy changes. For instance, the government could introduce reformed:
- FSI Laws
- New stamp duty laws, and
- Taxation changes affecting the buyer’s budget.
Mr. Ranjan is worried that this will not only have an impact on how fast he can deliver the homes to his customers, but also if he will be allowed to finish the pending work, knowing that there might be changes in FSI Laws.
Before moving ahead, let me first explain:
What exactly are FSI Laws?
FSI Laws primarily govern the ratio of floor area covered to the available land area. This is regulated by the local state authorities and can be a headache for promoters whenever the power changes hands.
The only way out now for Mr. Ranjan is to stay patient and wait for the elections to pass, to assess the changes introduced, if any and move ahead accordingly. But despite adopting this safe approach, Mr. Ranjan has had to extend the promised deadline to his customers which has had a negative impact on his market reputation.
But at the same time, it might so happen that the existing government prevails its rule or as a new party replaces it, there aren’t any major changes and so life goes on as usual for Mr. Ranjan, but he isn’t to know this, and thus the uncertainty.
Now, let us look at the flip side of the coin:
The impact of the elections and the potential policy changes it brings on the customers
The customers of the real estate industry also comprise the majority voter group of the political party in power, so formulating policies becomes much trickier.
Owing to this dilemma, the changes brought in are often small. But small changes can also have big impact on the budget of an average middle-class citizen. In this position, the consumer is unsure whether to make decisions before the elections are underway or should he rather wait for the storm to pass.
Whether the post-election home-buying scenario turns out to be favourable for the consumer or not, it is uncertain. At times the newly elected government looks to give some relief to its consumers and introduces tax rebates, while on some other occasions, it introduces policies that aren’t the best for the middle-class home buyers.
The one-word solution here is Caution.
Times are tricky. And so, you must tread with extra caution, you never know if you will stumble upon coal or diamond covered in ash.
Constructing buildings and delivering it to people often take more than one election cycle, and that is the risk in real estate. On numerous occasions, promoters have had to halt their work after 80% of the work is done, as the newly elected government has brought in some retrospective changes in land laws.
On the contrary, we have witnessed times when developers have had no impact on their work due to elections or have enjoyed policies brought in by newly elected governments.
Now, decisions like these can impact both the promoter and the home buyer. The amount of money involved in this industry has led to it being affected from numerous fronts.
Some of the key factors impacting the real estate industry include:
- Land acquisition
- Land laws
- Taxes
- Legalities and clearances concerning the construction
- Consumer Activism – Environmental Laws, and others
Getting clearances in this industry is difficult, and with changing governments, it becomes a different ball game altogether.
But amidst all this uncertainty, RERA has been a ray of sunshine. The impact SEBI had in the past on the stock market, RERA has tried to imitate the same on the functioning of the real estate industry. But unfortunately, while SEBI is a national level subject, RERA is state governed.
In states like Maharashtra and Karnataka, RERA has been pretty stable despite changes in government over the past 5 years. While most of the other Indian states are getting up to speed now in making RERA a much more formidable regulatory body on the state level.
Whenever there is a change in the political party heading a state, all governing bodies at the state level, undergo some change or the other.
Now the penultimate question is:
What should you do during these uncertain times?
Well, if I am to be honest with you, every decision you take during this time, you will have to be twice as cautious as you ever were, because you never know what is going to happen. Caution is the sole remedy to uncertainty.
And as the old legend goes - It is better to be safe than sorry.
Folks, that’s a wrap for this edition of Open House, I believe this piece will calm you down if you were baffled about whether to make a home-purchasing decision during this election season or not.
For now, let us just fold our hands and cross our legs, and wait for the Karnataka state elections to play out. And until the next issue of Open House, remember:
Patience is bitter, but its fruit is sweet.
Disclaimer: This newsletter is intended for informational purposes only and should not be construed as professional advice.
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