Budget leaves realty with glass half full or half empty indecision

By: Ravi Sinha

Track2Realty Exclusive

The Union Budget 2012-13 has left the Indian real estate sector grope with the indecision yet again and everyone is wondering whether the Finance Minister’s offer is glass half full or half empty for them. While the industry body CREDAI and many other developers have completely rejected the budget as disappointing, there are others like professional body RICS who find the Finance Minister exceeding the expectations. Realty consultants like Jones Lang LaSalle India, Cushman & Wakefield, KPMG and DTZ India calls it a mixed budget with nothing much to cheer about.

However, an objective analysis of the budget reflects that despite of the compulsive economic and political climate, added with the fact that real estate is predominantly a state subject, this budget has at least shown intent to accept the real estate and infrastructure as a priority sector. Allowing of External Commercial Borrowing (ECB) for the affordable housing, extension of 1% tax subvention on home loans upto Rs. 15 lakhs and increased funding on highways and infrastructure are the steps that could go a long way in reviving the realty market.

On the flip side, the increase in the service tax rate from 10% to 12% will increase the cost of production for developers, thereby making house costlier. The postponement of a firm decision on FDI in multi-brand retail also reflects a regressive step. The increase in excise duty also has a snowball effect in cement prices going up by Rs. 4-5 per bag which will hurt profitability of construction companies and have a negative impact on affordability.

With this background of some gains and some pains, the realty sector has reacted on expected lines. Lalit Kumar Jain, National President of CREDAI says the Finance Minister has miserably failed in highlighting the importance the role of Housing in economy, employment generation, apart from the very need of housing.

“The announcements on ECB for affordable housing is a minor respite but still meaningless. The industry expected a big boost from the budget for affordable housing through special schemes, an interest subvention of 5 to 7% for LIG and EWS housing and promotion of rental housing through tax exemption. But none of these measures were taken note of. The Finance Minister has neglect of real estate sector despite its contribution of 6.5% to the GDP. The interest subsidy on home loans is not enough and cannot help either the EWS (Economically Weaker Sections) of the LIG segment,” says Jain.

Sachin Sandhir, Managing Director, RICS South Asia, on the contrary, asserts that for the real estate and housing sector, this years’ budget has exceeded expectations given the pressure on fiscal situation. According to him country needs infrastructure growth and the budget has not disappointed on this front as well. The doubling of allocation in infrastructure debt fund through allocation to NHDP, IIFCL, NHB and SIDBI coupled with full exemption from basic customs duty for equipment for road and highway construction are likely to boost infrastructure and construction sectors. Further measures such as credit guarantee & direct transfer of subsidy likely to change growth environment. One year extension of sun set clause on tax incentives for infra projects under 80 IA is also a welcome step.

“Most importantly, it has taken into account the crying need to focus on affordable housing sector by allowing ECB for low cost housing, road as well as construction. Withholding tax on ECBs for affordable housing has been reduced from 20% to 5% for 3 years and this move will help ease the liquidity in the sector.  Also, investment linked deduction of capital expenditure in affordable housing is proposed to be provided at 150% as opposed to 100%. All these measures will encourage supply of low cost housing,” says Sandhir.

Anuj Puri, Chairman & Country Head, Jones Lang LaSalle India prefers to call it a mixed budget. According to him exempting proceeds from the sale of a residential property from Capital Gains tax if they are invested in equity or equipment of an SME definitely provides home owners with more reinvestment options. “Previously, the only route for exemption was purchase of another property or tax saving bonds. At the same time, this move could also result in a lowering of sales volumes on the secondary sale market,” Puri says.

DTZ India also calls it an average budget with no significant changes that will impact the real estate sector – especially the housing sector. “The Union Budget along with the 75 bps cut in CRR cut last week do not lend any major cheer to the real estate sector. Although the CRR cut does lend liquidity to the market, however, if there are no takers, then there is little utility to such measures. Till such time the interest rates (repo rates) are cut, no major development can be expected in the real estate sector. After this month’s RBI Credit Policy, it may not be foregone conclusion that interest rates will be cut in April. This sector still needs at least a 100 bps reduction in rates to encourage home buyers and builders to approach banks to raise funds,” says Anshul Jain, CEO, DTZ India.

Anurag Mathur, Managing Director, Cushman & Wakefield India believes it has just been a token increase in tax exemptions, but the positive aspect of the budget is that it has increased support to affordable housing sector in the form of enhanced budgetary support and institutional support by creation a Credit Guarantee Trust Fund and allowance of ECB in affordable housing.

“The increase in allocation (and widened scope for private sector participation) in infrastructure implies a clear intent on enhancing the urbanization process as well as providing a support to the slowing industrial sector. This will mean an indirect impetus to real estate creation as well. At the same time the increase in the service tax from 10% to 12% would lead to additional burden on the tenants as the service tax on rentals has remained unchanged. The GST regime which is proposed to be implemented from August 2012, is a welcome step for modernizing the tax-system. Overall, the budget has carried forward the government’s cautious approach from the previous year,” says Mathur.

Nandita Tripathi, Director-Tax and Regulatory Services, KPMG agrees that budget aims to boost affordable housing by allowing ECBs at reduced TDS of 5%, enhancing capex deduction to 150% and extending 1% interest subvention scheme by a year. A key change is levy of TDS on immovable property transactions, with a clear intent to counter unaccounted money issues. On indirect tax front, increase in Service tax and Excise duty to 12% may prove to be detrimental for the sector.

Ravi Saund, COO, CHD Developers, however, is optimistic that infrastructure has taken a centre stage yet again in the reforms in the Union Budget 2012-2013.  “The steps to increase funding for roads, highways and other infrastructure will surely add more terrain on the Indian realty map taking tier 2 and tier 3 cities on new growth trajectory. The 1% tax rebate for home loans of upto Rs.15 lakh on homes costing upto Rs. 25 lakh will prove beneficial for developers in the category of residential sector.  Exempting proceeds from the sale of a residential property from Capital Gains tax if they are invested in equity or equipment of an SME definitely provides home owners with more reinvestment options. Allowing External Commercial Borrowing (ECB) for affordable housing is no doubt an admirable move,” says Saund.

With some indecision, some apprehension and very many sharp reactions, the realty sector is nevertheless sensing the first wave of change in the mindset of policy makers where the sector has not been completely ignored unlike many of the previous budgets. Though wishes are horses, everyone accepts that Finance Minister’s job was tough this time around considering the fiscal mismanagement at the economic level and pulls & pressures at the political level. As a sigh they just wish their long pending demand of industry status are met that, according to them, will automatically address many of the critical issues.