Too small a boost

HOW IT WILL IMPACT

Between 2003 and 2007,when the industry was witnessing a boom,developers had launched a slew of projects,mostly targeting middle-rich and affluent customers. Once the crisis started,many of these projects ran into rough weather due to the liquidity crunch that hit most developers. Though the real-estate market in most cities has corrected by as much as 15 to 30 per cent,sales have not picked up to the desired extent. The government’s measures,experts believe,could provide a fillip to affordable housing and thus boost overall demand.

According to Prof Dr PSN Rao,head of housing at School of Planning and Architecture,the government’s measures will help minimise the growing gap between demand and supply. “The real-estate sector is all about demand and supply. When the demand-supply equation is balanced,there is near equilibrium and markets are stable. But this does not always happen. 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 introducing the 1 per cent interest subsidy for sub-Rs 20 lakh housing units,demand has been fuelled,” he says.

These measures are 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. This is significant because these markets were perceived to be losing steam of late. Therefore,we are once again looking at the prospect of a balanced growth pattern,” says Anuj Puri,country head,Jones Lang LaSalle Meghraj.

The tax holiday to housing projects,according to experts,will aid developers and fuel the supply side. “If all goes well,this manoeuvre of the government will help put the industry back on track.”

TOO LITTLE

Industry experts believe that true to the overall orientation of the Budget,the credit policy has only addressed the needs of the lower income group (LIG) housing segment. Puri says,“The problems faced by the real-estate sector are not limited to budget housing only; the mid-income housing segment is also languishing. The overall effect of the announced provisions will only be noticeable in smaller cities. In larger cities such as Mumbai,there won’t be much of an impact as housing of Rs 20 lakh and below is hard to develop.”

Navin M Raheja,chairman of Raheja Developers,makes a similar point. “Due to the high cost of land and of construction,developers may not be in a position to provide housing below Rs 20 lakh in the larger cities.”

Experts think absorption of existing supply would have been boosted if interest rates had been brought down in the first quarter monetary policy review of the Reserve Bank of India. This would have encouraged more buyers. And by generating much-needed funds,it would have enabled developers to launch more low-budget housing projects in future. “Developers need liquidity to complete their ongoing projects that have got stalled. A reduced repo rate and lower cash reserve ratio (CRR),by helping bring down loan rates and making more funds available to banks,would have benefited small-to-medium-sized developers. Apart from debt,other sources of funding have almost dried up for builders whose project sizes do not qualify for foreign direct investment. The credit policy could have taken into account the plight of this class of developers and made provisions for them,” says Puri. “The credit policy has failed to address the larger needs of the sector by ignoring the mid-income segment and the plight of developers catering to it.”

Developers too were expecting more from the government. “In the present scenario,the government’s announcement will not be of much help to the industry. This tax holiday would have given a boost to the industry had the government extended its scope to projects getting approval till March 2010 instead of March 2008,” says Raheja. “The interest subsidy would also have been more effective if the tax holiday on smaller housing units was extended up to March 2010,” he adds.

Expressing his disappointment,Santosh Rungta,president,Confederation of Real Estate Developer’s Associations of India (Credai),says,“One must understand that extending the tax holiday under Section 80 I B (10) for a mere one year to projects approved by March 2008 will fail to create a significant positive impact on real estate. It will only benefit a few micro markets and a handful of projects. Moreover it will create an unequal playing field among developers,since projects approved after March 2008 will not be entitled to the benefits of this incentive scheme,which is essential for pulling real estate out of its current troubles.”

He adds that Credai is planning to convey to the Central government that it should consider extending the tax holiday to all projects that are completed by March 2012,irrespective of their date of approval. This,according to Rungta,would encourage developers to take up new projects and expedite ongoing projects as well.

Since 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 propose to the Central government to increase the subsidy on home loan interest rates by another 1 per cent to 2 per cent and extend this scheme to houses costing up to Rs 30 lakh from the currently proposed valuation of Rs 20 lakh,” says Rungta.

Since real estate is at best at a stage of slow,weak recovery,more positive measures could have been considered by policymakers. “The realty sector of any country is globally considered as a benchmark of that country’s overall economic health. The government needs to take a larger view of this important market and address the liquidity issues faced by all players. The establishment of a real-estate regulator can ensure that the freed funds are utilised in the desired manner,” says Puri.

praveen.singh@expressindia.com