No positives,but no negatives either

In the past few months,sluggish demand and tight liquidity conditions have played havoc with the real estate sector.

Written by Praveen K Singh | Published: July 11, 2009 12:52 am

In the past few months,sluggish demand and tight liquidity conditions have played havoc with the real estate sector. Developers have been forced to offer large discounts,which in turn has caused profit margins to deteriorate. The sector,therefore,had high expectations that the Union Budget would have provisions that would provide a stimulus to the sector and help revive it. In the event,the Budget has proved to be a disappointment. While the government did announce an increase in expenditure on rural housing and housing for the poor,it did not offer any benefit to home buyers or to real estate developers.


One positive measure in the Budget for the salaried class was the raising of exemption limits on income tax. However,according to Anuj Puri,country head of real estate consultancy Jones Lang Lasalle Meghraj (JLLM),“The increase in exemption limits is not sufficient to make a significant difference in buyers’ purchasing power.”One measure that could have boosted the demand for housing was increase in tax exemption on housing loans — on principal and interest repayment. It was widely anticipated that the current exemption limit of Rs 1.5 lakh on interest repayment would be hiked to Rs 2.5 lakh. “We are disappointed that this did not happen,” says Puri.

Further,the Budget had nothing to say on opening up the real estate sector further to foreign direct investment (FDI),nor did it mention any steps regarding operationalising Real Estate Investment Trusts (REITs) and Real Estate Mutual Funds (REMFs).

In a similar vein,Ajit Krishnan of Ernst & Young says: “The sector was expecting that more incentives would be offered for developing affordable housing. Measures that would boost the flow of funds and liquidity into the sector,such as clarification on taxation of REMFs,have been given the miss. These would have given the industry the much-needed impetus for growth.”

There were high hopes that the Budget would come up with provisions that would boost budget housing. Says Mayur Shah of Maharashtra Chamber of Housing Industry (MCHI): “We were expecting measures such as reintroduction of Section 80 I B that would have given a boost to affordable housing. But nothing along these lines happened.”

Developers too are dissatisfied with the Budget. Says Navin M Raheja,MD of Raheja Developers: “Even if the government tries to implement JNNURM,it will not work out as allied services and activities are not supportive,such as availability of funds at cheaper rates,fiscal incentives such as restoration of Section 80 I B,and treating integrated townships that have at least 25 per cent low-cost housing units as infrastructure projects.”

Adds Devindra Gupta,CMD of Century 21,an international real estate brokerage firm: “The FM should have considered some of the crucial issues like interest subvention of at least 3 per cent on loans for budget housing,incentives for construction activities,and reduction of excise duty on cement and steel.”

Another negative in the Budget is that Software Technology Parks of India (STPI) units will have to bear a higher burden of Minimum Alternate Tax (MAT). According to Puri of JLLM,“This is an indirect endorsement of special economic zones (SEZs),and in line with the government’s stance of phasing out the benefits to STPI projects,thereby encouraging migration to SEZs. However,the government is silent on the cost implications on commercial use of STPI units that have hitherto enjoyed higher FSI (floor space index) at no extra charge.”

Further,the Budget did nothing to boost the rental market. Says Puri: “The Budget failed to improve the status of commercial and retail leasing. No mention was made of undoing the service tax on rentals introduced in the previous Budget.”


On the positive side,100 per cent deduction for capital expenditure incurred on setting up and operating warehouses for storage of agricultural produce,reduction of tax deduction at source (TDS) on rental payments from 20 per cent to 10 per cent,and excise duty exemption to prefabricated structures should bring some cheer to the sector.

Stakeholders within the real estate sector are also hopeful that the government’s higher spending on infrastructure will have a positive spin-off effect on the real estate sector. Says Pranav Ansal MD of Ansal API: “Real estate and infrastructure are directly related. Any increase in spending on infrastructure results in an increase in the value of real estate developments. This also bodes well for the future: with improved infrastructure,India’s potential as an investment destination will improve significantly.” Shah of MCHI concurs. “Increase in spending on infrastructure will create more supply of developable land for developers,” he says.

The Finance Minister has allocated Rs 39.7 billion in 2009-10 to the Jawaharlal Nehru National Urban Renewal Mission (JNNURM),which will improve housing for the poor and also provide basic amenities. This includes the provision for a new scheme called Rajiv Awas Yojana (RAY) which is expected to enhance the prospects of urban slum dwellers getting better quality housing. This scheme comes under JNNURM and is intended to promote and support the property rights of people living in urban slums. Allocation to the Indira Awaas Yojana has been increased by 63 per cent to Rs 88 billion. In addition,to boost rural housing,Rs 20 billion has been provided to the Rural Housing Fund. National Housing Bank will use this fund to refinance scheduled commercial banks. Although this will help bring about an improvement in rural housing,the organised housing sector will remain unaffected.

To sum up,the Budget appears to have followed the Hippocratic Oath vis-à-vis the real estate sector: “First do no harm.” Says Ashutosh Limaye,associate director-strategic consulting,JLLM: “All said and done,the Budget did not introduce any negative notes for the real estate sector,though there was definitely a shortfall of good news. The accent on infrastructure development is definitely a plus,and offers many opportunities for developers to get involved in the real estate component that many of the larger infrastructure projects encompass.” The downward spiral that the sector was witnessing earlier had,in any case,been arrested prior to the Budget,while the opportunities that have presented themselves by way of increasing demand and liquidity remain intact. “Developers who were hoping for additional incentives from the Budget can still optimally leverage the existing demand by concentrating on rational pricing and committed delivery of their projects,” says Limaye.

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