By: Ravi Sinha
Track2Realty Exclusive: There is no denying that the Union Budget 2014-15 has incentivised the eco system of the Indian real estate both for the developers as well as the buyers. Many of the announcements by the Union Finance Minister Arun Jaitley may not have any direct bearing on the fortunes of the real estate developers in this fiscal year, yet the symbolic sops are enough to silence the otherwise overtly critical sector for some time now.
It would be too early to assess the impact of lofty claims and promises, yet the sector has carried home the positives with the spirit of a glass that has been half full. They maintain that the budget holds promise for the long term revival of the fortunes of the Indian economy in general and the sector in particular.
Beyond the populist rhetoric of ‘housing for all’ there are certain tangible measures in the budget that makes the sector look positive with the intent of the government. Investment conditions have been relaxed for FDI in real estate. The minimum built-up requirement for FDI in real estate brought down from 50,000 sq. mts. to 20,000 sq. mts. Investment quantum required for FDI also brought down from USD 10 million to USD 5 million. Real Estate Investment Trusts (REITs) is to be introduced which will give access to developers a major source of funding and also give the investors an exit options on their investment in commercial offices.
To promote infrastructure projects it is proposed to attract more investment into infrastructure projects would invariably help the real estate sector in the projects’ influence areas. The government’s intention to promote a number of industrial corridors augurs well for the real estate sector as hubs along the corridors would get developed. The government intends to develop 100 satellite towns of existing urban centres to help ease the pressures faced by the cities from urban majors from rural-urban migration with the allocation of Rs. 7,060 crore.
A beginning has also been made in the area of low cost housing with the budget setting aside 4,000 crore rupees under National Housing Bank. Slum Rehabilitation coming under CSR is going to have significant impact in the metro cities like Mumbai as it will encourage more SRA housing.
Moreover, there is something to encourage home buyers as well. Personal income tax limits raised from Rs. 200,000 to Rs. 250,000. The income tax exemption given to the interest payment on home loans rose from Rs. 150,000 per year to Rs. 200,000 per year. This will help incentivise people to invest in homes as a way to save on tax payouts and also have the capacity to push up the take-home pay of the assessee.
Anish Sanghvi, Associate Director, PwC India maintains that an enabling tax pass through structure for REITs/InvITs formed as business trusts (BTs) have been proposed to encourage investors, having stabilised yield expectation, to invest in REITs/InvITs. While a pass through structure to facilitate one layer taxation is a welcome change, no relief has been granted on the DDT leviable on the SPVs (holding real estate assets) distributing dividends to REIT/InvIT – this could potentially be a big dent in the BT economics, since the SPVs are unlikely to be levered substantially and would therefore need to distribute dividends rather than pay interest.
“Real estate and Infra developers would be encouraged to sponsor BTs, since the transfer of the SPV shares to BT in consideration of the BT units would be deferred till they eventually sell the BT units. In the endeavour of developing 100 smart cities, FDI norms for construction developments projects have been relaxed. Requirements of minimum development area reduced to 20,000 sq metres and the minimum capitalisation requirements for wholly owned subsidiaries reduced to USD 5 mn. Additionally, projects with at least 30 percent cost allocated to low cost affordable housing projects should not be subjected to the limitations of capitalisation, minimum area requirement and lock-ins,” says Sanghvi.
Manju Yagnik, Vice Chairperson, Nahar Group calls it a mixed budget. According to her, allocation of funds for creating housing stock through development of new cities, national housing program, low cost housing through National housing bank is sure to create massive opportunities for construction across the country.
Introduction of Real Estate Investment Trust is another decision to welcome as this will safeguard the interest of the investors and help in creating transparency in real estate transactions. The limit of rebate on interest on Housing loans has been increased to Rs 2 Lakh from Rs 1.5 Lakh is also one of the positive aspect of the budget. While, these announcements are sure to bring in some positivity in the sector, the industry was expecting more than this from the budget. Important long pending decisions such as infrastructure status to the real estate sector and providing for single window clearance scheme were some of the most awaited announcements. However a silence on these facts has been a disappointment,” says Yagnik.
R.K Arora CMD, Supertech feels that while presenting the Union Budget, the Finance Minster has tried to maintain the balance and aim to bring fiscal deficit low to 3.6 for FY15-16 and retaining it to 4.1% for current FY14. An incentive for affordable housing loans of Rs 4000 crore was announced for urban poor and weaker sections of society through National Housing Bank (NHB), this will certainly set momentum in real estate activities. Also, the aim to bring new 100 smart cities, a budget of Rs 7060crore was allocated; this will provide opportunity to developers to start set up projects in new locations where land is available at reasonable costs.
“A special incentive introduction to REITs will resolve issues of taxation, long term financing and liquidity for infra project. The opening routes for FDI will bring new investment opportunities, which is a welcome step in the real estate market. The proposed increase in personal income tax exemption and the exemption for housing loan interest will provide relief in tax liability to middle income group which will translate into demand in real estate properties. Further, the proposal to provide investment allowance to small scale industry will help setting up many small scale units all of which improve the employment market and bring more money in markets,” says Arora.
A S Bakshi, Managing Director, Central Park hopes that the budget will revive clause under section 80IB of income tax act for encouraging small sized apartments (Under Rs. 30 Lakh), appoint a regulator, FDI, Single window clearance and complete deduction of interest as expense on home loan.
“Recently few state governments have started charging VAT. VAT should be avoided since it would increase the overall cut for buyer and the developer ends up giving service tax, registration tax and now VAT as well. And at the same time, we feel that that the buyers will also get benefit, if tax deduction under section 24 of the IT Act can be increased to at least Rs 5 lakh per annum,” says Bakshi.
Geetamber Anand, CMD, ATS Group says the industry overall appreciates the Finance Minister for presenting a very comprehensive budget wherein the FM has tried to address to the needs of varied sectors along with the measures to control the fiscal deficit. “For the real estate industry, we specifically appreciate his efforts to increasing the limit of income tax rebate on the housing loan from Rs 1.5 lakh to 2 lakh. Foreign Direct Investment in real estate will become more robust with the limit of construction being decreased. Incentives for REITs will pass on, means it will avoid double taxation of both corporate tax and dividend distribution tax.
“The best part of this budget is however, the promise of Finance Minister (FM) that he will look into various recommendations of the housing industry which is very encouraging because even after what has been done till date, there are pending requirements to achieve ‘Housing for all by 2022’. We hope the FM will once again engage the industry with him in the discussion on what can be done to achieve this figure,” says Anand.
The sector seems to be unanimous that the Finance Minister has done a decent job and justice with the needs of the sector; if not with the wants. The sector is ready with a number of wish list, including Single Window Clearance, Industry Status and Infrastructure Status to Housing among others. But for now the Union Budget 2014-15 seems to have given enough sops to the sector to silence.
