Too feeble a boost

Extension of deadline for availing tax concessions. In his Budget speech,finance minister Pranab Mukherjee announced the continuation of concessions offered to the sector earlier. He said that he was providing this one-time interim relief to the housing and real estate sector that is reeling under the impact of the global recession. I propose to allow pending projects to be completed within a period of five years instead of four years for claiming a deduction on their profits, he said in his speech. Projects that received approval between April 1,2007 and March 31,2008 have been exempted from paying any tax on their profits. However,the caveat earlier was that these projects had to be completed by March 2012 to avail of this tax holiday. This deadline has now been extended to March 2013.  

Extension of interest subvention. The governments decision to extend the provision of 1 per cent interest subsidy on home loans up to Rs 10 lakh for buying houses costing up to Rs 20 lakh is expected to help middle- and lower-middle class buyers. The subsidy will translate into a saving of Rs 28,920 on interest payment in case of a five-year loan and up to Rs 1.51 lakh in case of a 20-year loan. The interest rate subvention will be delivered through scheduled commercial banks and housing finance companies registered with National Housing Bank.

According to Prof PSN Rao,head of housing at New Delhi-based School of Planning and Architecture,the governments measures will help minimise the growing gap between demand and supply. In India,demand far outstrips supply. In order that the wheel of real estate moves and carries the economy forward,demand and supply both have to be fuelled. The government has attempted exactly that. By continuing with the 1 per cent interest subsidy for sub-Rs 20 lakh housing units,it has

fuelled demand, he says.

This measure is especially expected to boost demand in smaller cities where housing costing less than Rs 20 lakh is mostly available. There will be a significant perk-up in transaction volumes in tier II and tier III markets. These markets were perceived to be losing steam of late, says Anuj Puri,country head,Jones Lang LaSalle Meghraj.

Relaxation of norms for shops in residential areas. The FM has also announced relaxation of norms for built-up area of shops and other commercial establishments within housing projects,so that basic shopping becomes available within residential colonies. This will make facilities available close at hand, says a real estate expert.

INDIRECT BENEFITS

Revision of tax slabs. One positive measure in the Budget was the raising of exemption limits on income tax for the salaried class. By putting more money in the hands of consumers,this measure is expected to fuel demand. Along with other sectors,real estate is also expected to benefit from augmented demand.

Infrastructure boost. Stakeholders are also hopeful that the governments proposal to spend more on infrastructure will have a positive spin-off effect on the real estate sector. Says Pranab Datta,vice chairman,Knight Frank India: 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,Indias potential as an investment destination will improve significantly. Avinash Narvekar,tax partner-real estate,Ernst amp;Young agrees. Increase in spending on infrastructure will create more supply of develop-able land for developers, he says.

Higher allocation for urban development. Taking note of the increase in cost of construction,the Finance Minister has increased the allocation for urban development by more than 75 per cent from Rs 3,060 crore to Rs 5,400 crore for the year 2010-11. This is expected to have a positive,albeit indirect,impact on real estate.  

Higher allocation to Rajiv Awas Yojana. The Rajiv Awas Yojana RAY for slum dwellers and urban poor,which was announced last year,extends support to states that are willing to provide property rights to slum dwellers. The FM said that the scheme is now ready to take off and allocated Rs 1,270 crore for 2010-11 as compared to Rs 150 crore last year. This amounts to an over 700 per cent increase in the Budget of this scheme. The FM said that the government8217;s efforts while implementing RAY would be to encourage states to create a slum-free India at the earliest. This scheme will help bring about an improvement in rural housing,though the organised housing sector will remain unaffected by it.

THE NEGATIVES

Service tax bug. The biggest worry of developers is the re-introduction of service taxes. According to the Finance Bill,service tax will be levied on renting of immovable property or any other service with retrospective effect from June 1,2007. The service tax rate is 10 per cent now. Buildings under construction and leasing of vacant land will also attract service tax,it says.

Says Pranab Datta,MD of Knight Frank India: The inclusion of rent from immovable property under the service tax net will have a negative impact on the sector. The levy of service tax will impact rented commercial property especially. In cases where the developer takes land on lease and pays lease rent,the lease rent will attract service tax.

According to Confederation of Real Estate Developers Associations of India Credai,the applicability of service tax to all under-construction flats and houses being booked prior to completion will increase the end cost and impact the buyer8217;s affordability.

Additionally value-added services like floor rise,preferential view,better spaces,etc will also attract service tax.

Developers are unmoved. We will transfer the service tax to home buyers. To that extent there will not be any additional liability on us, says Mohit Arora,director of Supertech Builders,a Noida-based developer.

Hike in excise duty on inputs. The hike in excise duty on cement,steel and other inputs will pinch developers at a time when demand is sluggish as the industry could find it hard to pass on this cost to buyers.

DEVELOPERS ANGST

Experts believe that true to the overall orientation of the Budget,only the needs of the rural housing segment have been addressed. Says Puri: The problems faced by the sector are not limited to rural housing only; the mid-income housing segment is also languishing. The effect of the interest subvention scheme will only be noticeable in smaller cities. In larger cities such as Mumbai,there wont be much of an impact as housing of Rs 20 lakh and below is hard to develop here.

In view of the fact that the cost of land and of construction have both gone up resulting in higher cost of real estate,Credai feels that the proposed interest subsidy of 1 per cent to home loan borrowers on loans taken for housing costing up to Rs 20 lakh is not sufficient. We had proposed to the central government that the subsidy on home loan interest rates should be increased by another 1 per cent to 2 per cent and that this scheme should be extended to houses costing up to Rs 30 lakh from the currently proposed valuation of Rs 20 lakh, says Santosh Rungta,president,Credai.

Pradeep Jain,CMD of Parsvnath Developers,has a similar view. Extending the interest subvention scheme to housing that costs up to Rs 30 lakh would encourage developers to give more importance to this segment,8221; he says.

GLASS HALF FULL

On many counts,stakeholders within the real estate sector were disappointed. Says Puri: We would have been grateful for the re-introduction of the 80 IB 10 tax benefit scheme,first implemented in 2001,which provided a boost to builders developing affordable housing.

Another area where the sector expected greater clarity was the extension of tax benefits to Software Technologies Parks of India STPI. The IT-ITES industry is still struggling to find its post-slowdown footing,and is in a nascent stage of recovery. The sector requires more incentives to ensure that its existing expansion plans continue, says Puri.

Some experts feel that while the renewed focus on infrastructure is definitely positive,what was conspicuous by its absence was the formal inclusion of townships under the infrastructure umbrella. In areas where the availability of infrastructure is a challenge,townships are a boon because they bring their own infrastructure along with them. This leads to faster real estate growth in such areas.

Further,the Budget was silent 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. 

BOTTOMLINE

To sum up,the Budget appears to have followed a middle-of-the-road approach vis-à-vis the real estate sector: First do no harm, appears to have been its prime motto. Says Puri of 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 positives. 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 existing demand by concentrating on rational pricing and committed delivery of their projects, says Puri. l

praveen.singh expressindia.com

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