Real Estate Sector

Budget 2012-13: Implications for the real estate sector

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Budget 2012-13: Implications for the real estate sector



The much-anticipated Budget 2012 seems to provide no major relief to the ailing real estate sector. Finance minister Pranab Mukherjee has allowed external commercial borrowings (ECB) for low cost affordable housing projects. This will lower interest cost for developers. Last year, a 1 per cent interest rate subsidy was provided for loans towards affordable housing. That continues. However, the FM has disappointed the real estate sector by not widening interest rate subsidy scope. 

The list of disappointments is quiet long for the sector. It is as follows:

The finance minister has not granted industry status to the sector. It has been a long pending demand now. It would have made bank financing easier and cheaper for realty companies.

The government has not relaxed norms for repatriation of FDI in real estate. This would have made market environment more investment-friendly.

The FM has also not enacted legislation on real estate investment trust (REITs). This would have promoted investment in the sector.

No development on setting up of a real estate regulator has disappointed the sector. This would have ensured fair play and transparency in the industry and protection of consumer interests.

The FM has also not implemented revised Direct Taxes Code (DTC). That would have had strong implications on special economic zones (SEZs). The industry required clarity on the issues that may emerge, and how businesses would be promoted in SEZs.

Unfulfilled wish-list:


Since the sector is a major driver for economic growth and generates countless jobs across its various verticals and associated industries, the sector wanted industry status.

The sector wanted the government to relax norms for repatriation of FDI in real estate.

In addition to that, the sector was expecting the FM to enact legislation on Real Estate Investment Trust (REIT). While a draft policy for REIT was issued a couple of years back, no further developments had been made in this regard. Promoting REIT would also enable pension fund investors and insurance companies to invest into real estate assets providing stabilised revenues to meet their return obligations.

Last year, 1 per cent interest rate subsidy was provided for loans towards affordable housing. Realty sector wanted the scope of this subsidy to be amplified and broadened to include a wider price band of budget housing to benefit home buyers, especially in lower income groups.

The sector wanted the government to set-up a real estate regulator to ensure fair play and transparency in the industry and protection of consumer interests. The implementation of the revised DTC would have had strong implications on SEZs. The industry required clarity on various issues related to SEZs.

A timid tango of pros and cons: Anuj Puri, chairman, Jones LaSalle India

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 per cent 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 per cent to 12 per cent 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.  

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