Budget 2012: What's in it for the real estate sector

The real estate sector has contributed only 5% of India's overall GDP this year as compared to a contribution of 10.6% in FY 2010-11. With the lack of cheap credit and increased debt servicing levels and with the declining rate of foreign direct investment in the real estate sector, the Union Budget 2012 was the only aspiring ray of hope for the sector to get back on track. Some of the key highlights are: External Commercial Borrowing (ECB') doors are proposed to be made open for specified low cost affordable housing projects which could potentially provide the much needed liquidity to the housing sector. Further, the interest to be paid on the ECB loan availed from the period July 2012 to June 2015 by the real estate developer is proposed to be subjected to a lower rate of deduction of tax at source of 5% from the existing rate of 20%. -One lakh dwelling units for paramilitary forces to be built Interest subsidy for home loans up to Rs 1 lakh Rs 2,000 cr for rural housing fund under National Housing Bank Indira Awaas Yojna hiked by 63% to Rs 8,883 cr Housing allocation hiked under Rajiv Awaas Yojana Hiked public invetsment in infrastructure Fund allocation for urban poor accommodation is 3,973,000 cr JNNURM (Jawaharlal Nehru National Urban Renewal Mission) allocation hiked by 87 per cent NHAI allocation up by 23 per cent Hike infrastructure investment to over 9% of GDP by 2014

ANALYSIS OF BUDGET IN REAL ESTATE

Overall this budget does not have much to look forward to. With reference to the real estate sector, there is an absence of any intent to address the issues concerning the sector. High property prices and low demand coupled with tight lending scenario has further postponed the ambition of owning a house. Amongst other challenges for the sector, unprecedented rise in urbanization is a challenge as well as an opportunity;

however, the lack of road map will prolong the problems of the urban centers. Mr. Pranab Mukherjee has said that, the residential segment has got some attention in terms of fund allocation to rural housing and ECB window for affordable housing projects. Higher allocation for infrastructure and rural oriented scheme should have a positive cascading effect on the economy. Thankfully, residential leases have been kept out of the ambit of service tax." Another lost opportunity by our Finance Minister, who could have done significant lot to drive the consumer demand for real estate and turn the fortunes of the sector and in turn give a fillip to GDP growth in 2012-13. Our reaction to Union Budget 2012-13 is mixed at best. It seems fair to state that the Indian real estate sector does not have much to cheer about. To begin with, it is difficult to see the raising of the personal income tax exemption limit from Rs 1.8 lakh to Rs. 2 lakh as anything more than tokenism. It is certainly not relevant for the aspiring Indian middle-class home buyer. The expected exemption limit of Rs. 3 lakh would have had some significance. That said, 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 this segment. 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. The increase in the service tax rate from 10% to 12% will increase the cost of production for developers, who are already reeling under high input costs. It follows that this increased burden will be passed on to end users. Allowing External Commercial Borrowing (ECB) for affordable housing is, without doubt, an excellent move. It will ensure better capital availability for developers of low-cost housing. This sector is typified by low margins, and it becomes attractive only if developers are enabled to produce greater volumes. Better capital availability will help in timely project execution, which will result in higher volumes. The postponement of a firm decision on FDI in multi-brand retail came as a disappointment. We seem to have missed yet another opportunity to boost the Indian economy by ways of significant foreign capital inflows. On the other hand, the increased spend on warehousing will certainly help the retail real estate sector, since more storage capabilities will help retailers to expand into more cities and towns. Likewise, the measures to increase funding for highways and other infrastructure will help put more territories on the real estate map. While he mentioned that the objective of the budget was to create conditions for growth and to focus on domestic demand driven growth recovery, however he gave the real estate sector , which could have helped him meet these objectives, a miss.

The real estate sector holds significant prominence as its contribution to the Indian GDP is bound to grow beyond 6%. Housing sector has linkages to more than 250 ancillary industries and employs more than 10% of our workforce. Having said that, industry, which is undergoing stress, was in immediate need of several concessions and support measures on easing of liquidity, relaxation of high tax structures and policy stimuli to facilitate a more congenial regulatory and development environment. High costs of inflation and financing has choked demand and supply situation that is leading to a significant demand glut and impacting the social living conditions especially in fast growing geographies. Nonetheless, a positive step forwards has been to allow foreign debt funding in affordable housing. Thankfully, which has been acknowledged by the government as housing is as much a critical need as food and education, two areas where government is quite proactive otherwise. By not rolling back the 1% interest subsidy government has again upheld the need for state intervention in the affordable segment. Well it does miss the point of how inflation has taken that slab from 10 lakhs to somewhere close to at least 50% higher than that. This also happens to be a segment which gets easily impacted by interest rate fluctuations. So a wider scope and a stronger support mechanism could have been much appreciated. Hike in indirect taxes will definitely impact the cost of delivery of real estate impacting overall demand. Further, shifts in tax slabs are too small to influence incremental demand. No other positive measure to lend higher vibrancy into this sector was introduced or mentioned by Mr. Pranab Mukherjee. Any step towards attracting more FDI into the sector through relaxation of investment and exit norms providing a conducive environment for exits could have gone a long way in getting international interest back into Indian realty.

CONCLUSION
Investment linked deduction available for low cost affordable housing projects increased from 100% to 150%. This amendment may provide a much needed fillip to the affordable housing segment by way of getting a higher rate of deduction on capital expenditure though cost of land (which constitutes majority portion of cost) is excluded. Venture Capital Funds (VCF') focussed on real estate sector can now breathe a sigh of relief with the reinforcement of tax pass through status for all types of VCFs. By virtue of this amendment, the VCF making investment in a real estate SPV will not be subject to tax and the tax will be levied at the investor level.

This amendment does away with the age old controversy surrounding taxation of trusts and will result in reduction of litigation. One of the major proposal which may have a huge impact to the real estate sector relates to the requirement of deduction of tax at source @ 1% on payment of consideration for purchase of an immovable property having value in excess of Rs. 25 lakhs (Rs. 50 lakhs for immovable property situated in specified urban areas). This proposal may have an immediate cash flow impact for the real estate developers selling their projects to innumerable buyers. Also, this proposal may result in increasing the compliances for the buyers in case the payments for the property are proposed to be made in various instalments. Increase in Service Tax rate from 10% to 12% coupled with increase in the excise duty rate for inputs and materials used in the real estate sector may lead to an increase in the property prices for the ultimate buyers. This may increase non-affordability of properties in a market where pricing concerns have been prevailing since a while. While the industry players were hoping for a strong regulatory and effective policy framework which would have helped in boosting the real estate sector, the Union Budget 2012 falls short of expectations. Hopefully, with increase in liquidity through availability of ECBs and availability of higher deduction for affordable housing, the real estate sector may get some respite from an otherwise stagnant growth pattern.