The interim budget presented last week has been termed as a positive exercise as far as the real estate sector is concerned. Developers, home buyers and investors have got some demand and supply sops. But does it mean that the slowdown plagued sector will now have a change in fortune? To answer this one will have to look into the different provisions lined up for the next fiscal and gauge what these exactly mean and what would be their likely impact on the realty sector.
Considering that of late the residential real estate market has turned end-user driven with bulk of the demand coming from affordable housing, the interim budget has given developers of affordable housing a boost with tax deduction (under Section 80 1BA of Income Tax Act), equal to 100 per cent of projects from the gross total income extended for projects registered till March 2020. This will help boost supply, encouraging new launches, especially as about 55 per cent of sales between Q2 FY 18 and Q2 FY 19 were for units priced below Rs 50 lakh across top eight cities. However, leading rating agency CRISIL maintains that this may not help boost luxury housing supply as the new launches in this segment (priced Rs one crore and above) had declined by about 50 per cent, with a share of 10-15 per cent of overall supply between 2017 and 2018.
A favourable step
The twin measures of extending capital gains benefit of up to Rs 2 crore from just one home to purchase of two residential properties once in life time and increasing the tax deduction threshold limit at source by Rs 60,000 to Rs 2.40 lakh for tenants, will give a fillip to the residential real estate, prompting investors to invest in second homes.
The exemption from paying tax on notional income on unsold inventory with developers for two years after project completion, has also been welcomed by the Industry as it would result in double benefit for developers in terms of lesser holding cost of inventory and more time to liquidate it, which would improve developers’ margins. Pankaj Kapoor, MD, Liases Foras sees it as a relief for developers, especially as unsold inventory had shot up by 2.5 times between 2014 and 2018. Anarock Property Consultancy puts the current unsold housing units across top seven cities at 6.73 lakh.
Fiscal woes to stay
On the demand side, various direct tax incentives offered in the interim budget including tax exemption up to Rs 5 lakh income, Rs 10,000 hike in standard deduction to push up disposable income besides interest on home loan deduction up to Rs 2 lakh, according to J C Sharma, Vice Chairman & Managing Director Sobha Developers, will boost demand. Shishir Baijal, CMD, Knight Frank, India, adds that with better liquidity and lower tax burden would boost both primary and secondary market sales. CRISIL, however, does not see much impact in terms of demand revival with relaxation of tax on notional rent of unsold housing units as ready-to-move unsold units form a small part of the overall unsold inventory. The industry players see real demand revival by way of improvement in affordability for both developers and home buyers through easy funding at affordable rates by easing liquidity of banks and NBFCs. The developer community has been demanding industry status for real estate to ensure cheaper bank funding since long. However, this demand remains unmet. As such NBFCs have been catering to about 50 per cent financing needs of developers. But the recent crisis in NBFCs has had an adverse impact.
A niggling concern unaddressed
Due to funding crisis faced by the developers, they have been unable to complete hundreds of stalled projects. And since budget has taken no steps to create stressed asset fund to complete the stalled projects, the confidence of home buyers is likely to remain low, thereby adversely impacting demand.
Notwithstanding the sops extended, low home loan interest rates and low transaction costs hold key to revival of housing demand. The proposed reduction of high transaction cost (12 per cent GST on standard homes and 8 per cent on affordable homes along with 6-7 per cent stamp duty) and bringing down GST on key construction materials is seen as a measure to boost housing demand.
Repo rate cut is good news for home buyers
Lowering of home loan interest rates to boost home affordability is also seen as a significant booster of housing demand. In this context the 25 bps rate cut affected by RBI immediately after the budget, comes as a good news for home buyers. It is for the first time in FY 2018-19 that RBI has cut key policy rates. Earlier, the apex bank had hiked the rates twice in June and August 2018, while keeping these unchanged in October and December 2018. Last time the central bank cut rates was in August 2017. According to Anshuman Magazine, Chairman & CEO, India, South East Asia, Middle East & Africa, CBRE, “This was rate cut was expected, given the backdrop of low inflation and rising growth concerns in the economy. It will spur investment and boost demand. The rate cut coupled with the budget stimulus for the economy, and the real estate sector in particular, will impact consumer sentiment positively.”