Budget 2012: Real estate sector remains optimistic and looks forward to reforms

While the 2011-12 budget offered a mixed bag to the realty sector, developers believe that very little was extended to them and customers and not enough steps were taken to improve the significance of the housing sector.

“Even today the Indian real estate sector has been facing its problems like slowing economy, delay in decision-making process, and hike in interest rates,” says Dhaval Ajmera, Director of Ajmera Realty & Infra India.

However, the real estate industry remains optimistic and looks forward to some reforms in the coming budget. The real estate sector is primarily looking forward to the RBI’s intervention to control the inflation which has adversely affected the industry. A sheer relief could be by bringing in affordable housing.

“We expect revision in tax for affordable housing projects in order address the acute housing shortage in the country,” says Shailesh Sanghvi, Director, Sanghvi Group of Companies. Affordable housing should be considered important with priority lending given to banks who could in return offer concessional costs to keep the cost of tenements within the reach of common man.

“The budget should look forward to extending the existing benefit of Section 80 IB(10) of the IT Act for developing affordable housing as the country is still in a huge shortage of tenement, adds Ajmera.

Last year, a 1% interest rate rebate was provided for affordable housing costing between Rs 10-15 lakh. Anuj Puri, Chairman & Country Head, Jones Lang LaSalle India is of the opinion that the scope of this rebate should be amplified and broadened to include a wider price band of budget housing so as to boost the flagging sentiments in the housing sector.

Additionally, Sanghvi is of the opinion that the interest subvention of 1% on home loans could be raised from Rs 20 lakh to 30 lakh due to increase in cost of raw materials and various taxes incurred during home buying. Additionally, allocating more funds to the Rajiv Gandhi Avaas Yojana will do well to the real estate sector.

The real estate industry is also hoping to get an industry status as the sector is a major driver for economic growth and generates countless jobs across its various verticals. As the second largest employer in the country contributing 5% to India’s GDP, Indian Realty deserves a preferred treatment to give a further boost to our economy. Industry status would help the sector to access debt lending at more competitive interest rates and lower collateral values.

“Granting the real estate sector an industry status should be acceded to in the forthcoming budget as this would enable it to have access to organised funds from banks and financial institutions. In addition to getting easier and cheaper finance, the industry status would bring in a much deserved discipline in this sector, especially when the government is giving priority to mass and affordable housing projects,” says Manju Yagnik, Vice-Chairperson of Nahar Group.

There is a severe shortage of finance and whatever finance is available is coming in at a huge rate which is fuelling the realty prices and also many a times makes developers scrap the launch of new projects. The real estate industry also expects the Finance Ministry to relax the norms on FDI and ECB, especially for township projects which will give developers source funds at a much reasonable cost.

“Relaxing norms for repatriation of FDI in real estate is the need of the hour. Currently, it is not possible for foreign investors to repatriate real estate investment proceeds for a period of three years, which is hampering investment flow into India. The market environment needs to be rendered more investment-friendly,” says Puri.

Meanwhile, an increase in infrastructure spending in urban areas with a view to unlock the value of neglected and hidden land assets in suburban and peripheral districts is expected.

“With growing urbanisation in metros, the real estate sector is seeing huge opportunity for creating newer townships. It is vital that the government promotes townships alongside industrial belts and give developers fiscal benefits to township development to entice developers in this segment, says Ajmera. Additionally, clear guidelines should be announced by government in order to avoid any kind of ambiguity on point of levying Service Tax on under construction projects.

Finally, Yagnik concludes that considering that nearly 35% of sale value of a home consists of various taxes such as excise, VAT, service tax, stamp duty among other things, “we hope that the Budget 2012-13 would bring about appropriate reductions in their tax rates, to the delight of home-buyers who are already burdened with high interest rate for housing loans”. Source: Economic Times

India plans debt fund to finance infrastructure

New Delhi: India will soon set up a debt fund to facilitate financing of long-term infrastructure projects. The government said on Friday it has finalised the broad structure of the fund that would be set up either as a trust or a company.

"Infrastructure debt fund is a novel attempt to address the issue of sourcing long-term debt for infrastructure projects," the Finance Ministry said in a statement, reports IANS.

After consultations with potential investors, infrastructure companies, regulators and experts, the Finance Ministry has finalised the broad structure.

As per its draft, the proposed fund would be set up either as a trust or as a company.

A trust based infrastructure debt fund (IDF) would normally be a Mutual Fund that would issue units while a company based fund would normally be a form of non-banking financial company that would issue bonds.

Finance Minister Pranab Mukherjee had on February 28 announced in the budget for this fiscal (2011-12) the setting up of debt funds through special purpose vehicles to attract foreign investments in various infrastructure projects.

To attract off-shore funds into IDFs, Mukherjee had also announced that tax on withheld interest payments on the borrowings by the IDFs would be reduced from 20 per cent to 5 per cent. Income from the IDFs is also proposed to be exempted from income tax.

"The structure of IDFs would be closely reviewed for its efficacy and further refinement. RBI will issue regulations for setting up of IDFs on the company route," the statement said.

India aims to invest over US $1 trillion on infrastructure projects during the 12th Plan period (2012-17) as against the estimated US $500 billion during the current plan period.

Infrastructure projects, given their long pay-back period, require long-term financing in order to be sustainable and cost effective. However, banks which have been the main source of funding these projects are unable to provide long-term funding given their asset-liability mismatch.

IDFs through innovative means of credit enhancement is expected to provide long-term low-cost debt for infrastructure projects by tapping into source of savings like Insurance and pension funds which have hitherto played a comparatively limited role in financing infrastructure.

Budget 2011-12 nothing special about real estate: DG, NIREM

“Today’s budget has not addressed the core issues that have been affecting the Indian real estate sector. However, enhanced housing loan limit of Rs 25 lakh for priority sector lending is a welcome move. It will definitely benefit a particular segment of home buyers as well as developers”, says, Director General of IDS National Institute of Real Estate Management (NIREM), New Delhi.

The DG further says that this budget also shows that though affordable housing is a concern for the Union Government, it is more concerned with LIG and lower level housing. Few of the most important core issues that have not been touched upon in the budget are:

·         Rationalization of stamp duty,

·         Introduction of REMFs,

·         Industry status to real estate sector,

·         Availability of land at concessional rates instead of auctioning at skyrocketing prices

·         Introduction of a system of timely master/city development plans,

·         Guidelines on private participation in rural housing,

·         80-IB renewal etc.

·         Human resource development for real estate and housing sector.

While industry status brings several advantages to the sector, introduction and promotion of REMFs/REITs enables various funds such as pension funds, insurance companies etc invest in real estate assets which in turn brings liquidity.

Special economic zones under the purview of MAT would reduce the benefits that developer used to get from SEZ. Infact, the additional benefits that SEZ offers had attracted developers but with new policy the level of attraction will reduce to some extent.

On the other hand, DG NIREM further adds, enhanced priority home loan limit of Rs. 2.5 million would do no good to the tight affordable housing situation in bigger cities, though it would definitely benefit the LIG segment in general to some extent. However,  interest subversion of 1% on home loan by including loans upto 15 lakh for houses that cost upto Rs 25 lakh for one year will come as a major relief to home loan borrowers from the low income group segment.’’ 

India Budget 2010-11, a mixed bag for real estate sector: NIREM

Release by Chief Economist, IDS NIREM*

28 February 2010

IDS National Institute of Real Estate Management (IDS NIREM) believes that contrary to the popular demand of and expectation for huge impetus to the housing and real estate sector, the India budget 2010-11 has brought a mixed bag for this sector. Though, some benefits have been extended to housing and real estate sector, the burden imposed will definitely undermine the benefits. The burdens and benefits for the real estate sector are as follows:

The burden:

·   Widening of Service Tax net:

Real Estate Developers will have to pay service tax on transactions where consideration is collected from prospective buyers prior to completion of construction. However, it seems service tax will not be applicable if the full payment is made after completion of the construction.

In addition, other services provided by the builders to prospective buyers such as providing preferential location or external or internal development charges (excluding vehicle-parking space) etc. shall also be covered.

Renting of immovable properties is also under service tax net and the definition of ‘renting of immovable property service’ has been clarified as well as widened to cover rent of vacant land under contract for undertaking construction of buildings or structures for business purposes. This may have negative effect on to the properties bought or to be bought solely for investment purpose.

Excise Duty on Cement:

Excise duty ion cement has been increased which will increase the cost of construction and it is expected that per unit cost for prospective buyers will also increase.

The benefits:

Some emphasis has been given to promote housing in general such as:

·   Extension of Interest subvention scheme upto March 31, 2011,

·   Extension of deadline for completion of pending housing projects by one year without losing tax holiday u/s 80-IB. However, MAT may affect the companies executing such projects.

·   Extension of 1% interest subsidy on housing loans upto Rs. 10 lakhs and where the cost of the property is under Rs. 20 Lakhs. This along with along with increase in the tax slab rates for individuals should provide the necessary demand boost for low-cost housing. 

·   Relaxation in norms for built-up area of shops and other commercial establishments in such eligible housing projects and

·   Increased budgetary allocations for urban development and housing schemes.

·   extension of investment linked deduction benefit to convention centres located in the NCR of Delhi extended from the present 31st March, 2010 to 31st July, 2010 (for purposes of deduction u/s Section 80-ID of the Income-tax Act).

Overall, this budget will have mixed affect on the Indian real estate sector. However, looking at the overall economic scenario, we also need to consider that the budget was presented against mutually conflicting objectives, where-in it is not possible to meet the demands of each individual sector. Another important aspect is that very clearly the Finance Minister took pragmatic approach instead of populist measures, which is a good sign of a growth orientated government.