Sunday, May 21, 2017

RERA just what the doctor ordered for Indian real estate sector

Home buyers across the country have been at the receiving end of endless delays over delivery of projects or late possession of real estate projects over the years, leaving themselves ‘helpless’ at the hands of  developers. All that is set to change with the implementation of the Real Estate (Regulation and Development) Act (RERA) 2016. The RERA is poised to bring about a paradigm shift in India’s real estate sector, with the onus now on real estate developers and real estate agents to comply with RERA, which came into effect from May 1, 2017.

Touted as a consumer-centric Act, the RERA aims to drive transparency and accountability in the sector and enhance the confidence level of home buyers. More importantly, it will not only protect the interests of home buyers and developers but also ensure home buyers are not taken for granted by real estate developers and brokers. 

It may be worth mentioning that both houses of Parliament had passed the real estate bill in March 2016. It is important to point out that the onus is now on the states to draft and pass their own laws according to the guidelines since land is a state subject.

The effective implementation of RERA is expected to mitigate the pain points of the sector. Although real estate players have welcomed the new Act, industry watchers believe that there are still challenges that need to be overcome before the much-hyped Act is effectively implemented. Many states are not still adequate prepared with the desired infrastructure and resources to implement the Act. What’s more, most real estate developers and brokers have indicated that they are still in the process of understanding the regulations. The response from the states to the Union government’s April 30 deadline to notify the Act left a lot to be desired with only 13 states and union territories having notified the rules so far – only three states – Maharashtra, Madhya Pradesh and Rajasthan – have appointed a housing regulator. Significantly, barring Maharashtra no state has set up a website where developers and brokers can register or apply for new projects under the new Act. All these effectively mean that teething problems exist, which have to be resolved before the Act is implemented across the country. 

The Act makes it mandatory for all real estate developers and brokers to register with their respective state regulatory authorities by July 30 without which they cannot sell any project. It remains to be see whether all builders and agents meet the stipulated deadline. For now, it does appear a tall order simply because most states do not have a regulatory authority and nor have websites ready to apply, which mean no new registrations and project launches can take place in these states. It is only a few big states with major real estate activities that are in advanced stages of either having notified (the new rules) or are geared up to comply with RERA.

Real estate lobby group Confederation of Real Estate Developers Association of India (Credai) is aware of the challenges the new Act offers for developers. Credai feels that real estate developers will face teething problems, which will result in new project launches getting delayed and home sales getting impacted for the next few months.

According to industry experts, most developers would be need about six to eight weeks of work to make themselves RERA compliant. It will not be easy for developers and agents to be RERA-compliant in a sector, which has been under no regulation for so long. Despite all the initial challenges, the RERA is a win-win situation for buyers and developers. But there are areas that would pose concerns for real estate developers. Developers would be held responsible for any delays caused by other agencies or authorities. From this perspective it does appear that RERA will end up favouring home buyers at the cost of builders and developers.

On the positive front, the RERA will instil a sense of fiscal discipline – it ensures no developer can transfer funds meant for one project for another. This measure will ensure sufficient funds for timely completion of projects as well as for timely delivery of flats to the home buyers.

The smooth implementation of the RERA may take some months, but there is no doubt that the Act will change the way real estate developers operate across the country. RERA was just what the doctor ordered for the Indian real estate sector.

Saturday, May 20, 2017

European Banking Sector: Effective implementation of PDS2, MiFid II holds the key

The European banking sector has been under stress over the past few years owing to various factors such as low interest rates, massive fines and feeble earnings results. Further, high levels of bad loans continued to be a drag on the European banking system. According to top audit firm KPMG, the European banking sector has around €1.1trillion (£0.94tn) in non-performing loans, almost three times as much compared to the US.

Besides high volume of bad loans, banks are grappling with weak balance sheet strength and inadequate loan loss provisions – all these factors have collectively crimped the performance of European banks. Top banks such as HSBC Holdings, Deutsche Bank and Barclays have all come up with disappointing earnings results. This is in stark contrast to big-ticket U.S. banks such as J.P Morgan, Citi and Goldman Sachs that posted stronger-than-expected profits in 2016, supported by the contractionary monetary policy in the US.

The banking sector clearly has a tough road ahead, but structurally, it is poised for a massive overhaul with the European Commission moving toward implementing the revised Payment Services Directive (PSD2) by January 13, 2018. What is the PSD2 all about and why it has generated so much buzz in the European banking sector? Well, PSD2 is widely seen as a ‘game-changing’ directive that is poised to bring an end to banks’ control over their customers’ account information and payment services and offer third party providers access to customers’ accounts through open application program interfaces (APIs).

This eyeball-grabbing directive is set to transform the payments landscape across the European Union. PSD2, once implemented, will pave the way for bank customers (both consumers and businesses) to use third-party providers to manage their finances. A likely scenario could be that of customers using Facebook or Google to pay their bills, making person-to-person payments (P2P) transfers with their money safely parked in their respective bank accounts.

PSD2 – administered by the European Commission – aims to ensure every EU bank is digitally optimized. In a nutshell, this directive will create cut-throat competition in the payment services market in Europe between banks and new payment service providers (PSPs) as well as drive innovation in the European Fintech industry. More importantly, it will eliminate hidden fees charged by banks. It is seen that banks find it convenient to add transaction fees but now with the market becoming more crowded, banks will have to put their ‘rethinking’ caps on. All these factors will go a long way in ensuring an improved customer experience. In fact, the perceived fierce competition in the banking sector is a big worry for most European banks. According to some estimates, 20-25% of banks could be at risk from the new competitors owing to PSD2.

The advent of PSD2 has triggered talk about whether PSD2 would mark the end of banks’ monopoly over customers’ accounts. Delving deep, it is reasonable to assume that banks are unlikely to lose their significance as far as catering to customer needs are concerned, while granting third party providers access to customers’ account information. The need of the hour for banks is to walk down the ‘reinvent’ path and come up with robust differentiators to stay competitive.

The host of regulatory approvals and licenses required to enter the banking space means that it is never an easy proposition for new entrants. But non-banking FinTech companies, by virtue of PSD2, could find it a lot easier to foray into the market and play a significant role in the future financial landscape.


The European banking sector is also bracing up for the second installment of the Markets in Financial Instruments Directive — better known as Mifid II – considered one of European Union’s most ambitious financial reforms. The challenges of complying with Mifid II – which will come into force in 2018 – lie in ‘how prepared’ asset managers are for so-called unbundling. Under Mifid II, asset managers are required to budget separately for broker research costs and trading costs – a significant departure from decades-old practice of asset managers bundling together trading and broker research costs into a single fee, often receiving research from an investment bank or broker in exchange for using them to carry out trades. Asset managers have two options – either they absorb their research costs or set up a research payment account.


A research conducted by Electronic Research Interchange (ERIC) revealed that 74% of asset managers foresee a reduction in investment bank research. MiFid II is expected to improve quality of research. For instance, if there are more than 400 reports generated for a particular stock, we can end up having a scenario of 50 reports or even less for that stock. This will further enhance requirements for in-depth bespoke research.


It is fair to assume that the effective implementation of PDS2 and MiFid II is of crucial interest to the European banking sector. Effective implementation of these directives will crank up competition in the banking sector, which in turn, will drive consolidation across the European Union and improve customer journey. For sure, PDS2 and MiFid II might pan out to be a short-term pain but would pay rich dividends in the long run.  

India's construction industry will look to build on gains of 2016

The country's construction industry will be looking to build on the strong momentum gained in 2016. The year 2016 undoubtedly has been a hit year for the $126 billion construction industry, which is a major contributor towards India’s GDP (both directly and indirectly). The construction industry, which is the second largest employer, next only to agriculture, staged a strong comeback in 2016 after witnessing de-growth for four years owing to a sustained slowdown in the sector. In fact, the growth of the country's construction equipment industry can draw a parallel to the high growth it recorded in 2011.

The revival of the construction industry can be attributed to the Union government’s high focus on infrastructure funding. Clearly, the government’s stress on infrastructure funding in two successive budgets would seem like music to the ears of construction companies. It may be worth recalling that Union government had initially earmarked Rs 57,976 crore for construction and maintenance of roads and highways in the 2016-17 fiscal, up 24% over the actual spending in the previous financial year. This was subsequently revised down to Rs 52,447 crore. The government has set aside Rs 64,900 crore for construction of roads and highways
for the next fiscal.

A close look at the sales numbers of India’s leading earth moving and construction equipment maker, JCB India would only provide a seal of confirmation of where the industry is heading. The company’s revenue grew by over 40% to Rs 8,000 crore in 2016 over 2015, of which exports accounted for around 20%. It sold about 26,500 machines in 2016, which is close to the sales numbers it achieved in 2011 when it sold 27,000 such machines.

Amidst this growth journey, the industry has surmounted various challenges along the way. Acute shortage of skilled workforce and paucity of construction sand, raw materials, and political disturbances continue to serve as headwinds. On the positive front, technological advancements and international infrastructure players foraying into the Indian market augur well for the industry.
The construction industry will hope to thrive on big-tickets projects such as the Smart Cities Project, the Government's ‘Housing for All by 2022’, Atal Mission for Rejuvenation and Urban Transformation (AMRUT). There is also talk that the Union government is keen to further open up the construction sector. There is a possibility that the government might allow Indian companies to bring FDI even for undeveloped plots in any project. The further opening of FDI to the construction sector coupled with the roll-out of the much-hyped GST, which is expected to ease tax-related complexities,  will accelerate overall growth.

India’s construction industry is poised to maintain the strong momentum in 2017 and beyond, but will find it hard to sustain its growth journey purely on the back of a strong performance of the roads and highways sector going forward. Infrastructure funding will continue to aid the industry but overall the construction industry needs to see growth in other segments such as real estate, mining and irrigation. ‘Not much growth is happening in these sectors. It is imperative for these sectors to contribute to the growth of the construction industry,” said a top construction company official.

The construction sector has indeed walked down the growth path and a much-needed revival of the real estate, mining and irrigation sectors will make its growth journey a complete success.



Sunday, May 7, 2017

Is the Oasis of Tax Free Income drying out?

The Gulf region has been a big draw for the expatriate population for many decades now. Expats have been enjoying tax-free salary – surely a motivating factor for foreign workers to flock to the Gulf region. Tax-free salary provides an opportunity to save more, leading to an increase in the disposable income per capita. Hence it is no surprise that the Gulf region is home to a large foreign workforce. The expats comprise around 30 million of the 50 million GCC populations.

Oil export revenues constitute a major income source for Gulf countries. However, since its highs of approximately USD100 a barrel in 2014, the oil prices saw a significant drop. Oil prices have nosedived to around USD29 a barrel in January 2016 and recently recovered to hover around just USD50-55. The prolonged oil price slump since the summer of 2014 has hugely dented oil export revenues. Consequently,  the price slump prompted the GCC governments to explore new revenue-earning avenues.

The jitters grew within the expat population when Saudi Finance Minister Ibrahim Al-Assaf made a statement in mid-2016 that his ministry is intending to introduce an income tax on foreign workers, only to subsequently clarify that it was only a ‘proposal’.

According to the IMF, Saudi Arabia had introduced a personal income tax on both nationals and non-nationals in 1950. Subsequently, the Kingdom had excluded the Saudi nationals within six months of its introduction. Later, the personal income tax on foreign workers was suspended in 1975 amid high oil revenues and the need to recruit expatriates to help build the Kingdom’s infrastructure as well as develop the economy.

The 1980s saw GCC countries introduce a personal income tax on foreign workers during the low oil price period. However, GCC governments had to back down as livid foreign workers, including military contractors, raised the banner of ‘strike’ grounding air force planes.

Due to its unpopularity, imposing personal income tax in the GCC region may be off the table for now. Nonetheless, GCC governments have realized the importance of looking for alternative revenue streams. GCC economies are feeling the pinch over the prolonged dip in oil prices. One has to take into consideration the fact that GCC governments are bracing up to impose a value-added tax (VAT) from 2018 onward in their bid to diversify their revenue base. However, the introduction of VAT is no guarantee that personal income tax will not be introduced in future.

So, what could be the likely ramifications if GCC governments indeed impose a personal income tax on both foreign workers as well as locals? As learned from history, the most immediate consequence might be that foreign workers may just pack up. Such a move can precipitate a labor crunch. This is because foreign workers are still a ‘must-have’ for certain jobs in the GCC region largely for two reasons. Firstly, the local population in the GCC region do not appear to be keen on taking up menial jobs. Secondly, the local population at times, lack requisite skills required for various semi-skilled and skilled jobs performed by expats.

It is pretty clear that a lot will hinge on how oil prices shape up in coming years and how successful GCC governments are enhancing their non-oil revenues that will eventually determine whether expats can continue enjoying tax-free salary in the Gulf region.