The union budget provided a significant boost for affordable housing, by granting it an industry status and all the listed real estate stocks reacted positively. However, whether these incentives will entice the developers enough, to build affordable houses and be bullish towards this segment, remains to be seen. So far, despite high demand and incentives, the affordable segment has yet to become a popular investment avenue for investors and developers. The reason behind this, was that it did not make much financial sense, due high land prices, lack of infrastructure in the peripheral areas, increasing construction costs and the high cost of capital. Having said that, the infrastructure status to affordable housing was a long-standing demand and it will boost the sector, by reducing the borrowing costs and tax liabilities.
After demonetisation, developers were expecting a budget that encourages ‘demand’, especially in the residential real estate sector.
With affordable housing receiving a push, a few developers may shift to this segment. However, the issues of unsold inventory in the residential asset class and regaining the investors’ interest, are likely to remain concerns for many. The Real Estate (Regulation & Development) Act 2016 (RERA), will improve the buyers’ trust to a certain extent, but it will only be effective if the government provides an enabling environment for developers to deliver projects on time.
The real estate sector is burdened by ambiguities and uncertainties in the approval processes, leading to delays. These delays increase the cost of projects by 10% to 30%, thereby, eroding margins completely and leading to inelasticity of pricing with the actual demand. Thus, technology- enabled single-window clearance is the need of the hour. Unfortunately, this was not talked about much in Budget 2017.
In the previous budget, there was a specific allocation for digitisation of land records. However, how much has been implemented on the ground, is still unclear. Similarly, developers are still waiting for clarity on tax credits under the Goods and Services Tax (GST).
The increasing cost of housing and consistent delays in projects, are the primary concerns for retail purchasers. With affordable housing getting a push, we may see more such projects in the near future. However, the market sentiments will only revive, with proper implementation of RERA that ensures quality and timely delivery of projects.
The government has provided up to Rs 12,500 income tax benefit for individuals. This is insufficient to boost demand in the sector. Moreover, changes such as the rationalisation of deduction on home loan interest for rented houses with owner-occupied homes by limiting the deduction to Rs 2 lakhs for rented houses and tax on notional rents, are likely to keep individual investors away from buying residential properties for rental purpose.
There were several announcements in the budget, aimed at improving the ease of doing business, ease in Foreign Direct Investment (FDI) norms and fewer entry barriers, which will help boost investors’ confidence. In the past two years, the government has implemented several reforms, to encourage FDI in India. As more than 90% of the total FDI inflows currently take place through an automatic route, the government has decided to do away with the FIPB in FY 2017-18. The abolishment of FIPB is in conjunction with the government’s view to further liberalise FDI norms and attract foreign investors. Under the automatic route for FDI, the foreign investors will not require any prior approval from the FIPB and will only be subject to laws defined for each sector. Although the Securities and Exchange Board of India (SEBI) has removed most of the hurdles in the listing of real estate investment trusts, the budget remained silent on REITs.
This year, as well, a large share has been allocated for infrastructure development. Timely delivery of infrastructure, is something that the government should focus on. Delays in infrastructure, disrupt the entire ‘risk and return’ dynamics, for all stakeholders. The technology sector was one of the major contributors to burgeoning office demand, in the past couple of years. Removal of Minimum Alternate Tax (MAT) levied on Special Economic Zones (SEZ), was one of the long-standing demand from these occupiers.
Although MAT has not been removed, its carry-forward period has been increased to 15 years. Besides this, the reduction in corporate tax for medium and small-scale enterprises (MSMEs) to 25%, is a positive move.
Overall, the budget gives hopes for economic revival, via reforms, control over inflation and prudent fiscal management. This should be followed by a well thought-out plan, with effective implementation of reforms at the ground level. The cost of borrowing has already come down and there is a supply side push. However, demand for properties will only revive, with the growth of the economy, creation of jobs and greater disposable incomes.
(The writer is senior associate director, research, Colliers International India)