The real estate industry expected more from finance minister (FM) P Chidambaram in the Budget. But, the industry did not have much to cheer about. Neither did individual investors. In fact, individual investors will be paying more for buying assets, as the prices, at least in the metros, have been moving northwards.
However, a couple of indirect benefits such as better quality of housing is on the anvil. There were hardly any major announcements. The industry feels that a couple of positive announcements would have given an impetus to the sector to make it more progressive.
The Budget did not have any direct measures for individuals. It has not touched individuals, said Mymakan.com managing director Sorabh Jain. He added that the announcement to allow redevelopment on plots measuring less than one acre, will see more supply of quality homes. But will it lead to lower prices? “It is unlikely” says Mr Jain. He further added that there has not been any fall in the interest rate on housing loans.
In fact, the 4 per cent increase in steel prices is going to increase cost of construction, which may subsequently increase real estate prices by Rs 50 -Rs 100 per sq ft, said Maharashtra Chamber of Housing Industry (MCHI) secretary Sunil Mantri.
Being the second largest employer of manpower, the industry feels that the sector should have received more attention. Though the FM did touch upon a couple of issues, there are no major policy decisions that would bring about visible changes in the sector. Here’s a relook at some of the announcements that will have a direct impact on the sector:
The FM has extended the date as March 31, 2007 as the proposed date for large housing projects, to qualify for benefit under section 80-1B
The industry, while welcoming the decision, said that this respite from the FM was anticipated. A large number of representations were made to the FM on this issue.
Along with the metros, smaller cities and towns are also witnessing large housing projects. This move will benefit the developers and in the turn, may be passed on to the consumers. This move will encourage developers to go in for bigger projects, with increase in demand for better infrastructure in housing colonies.
The Budget has proposed to remove restrictions at the Central government level, on redevelopment of housing projects on land measuring, less than one acre
This, according to the industry, is a very important decision especially in metro cities, which are facing a space crisis. According to Knightfrank, head - Advisory Services & Asia Pacific Region, Tariq Vaidya, for cities like Mumbai, the minimum requirement concerning the size of the plot may be dispensed with and the housing project area in Mumbai, could be on a land area of less than one acre.
The industry added that this announcement will add more supply into the metro markets. This will not directly affect market prices though, as the demand for residential property has picked up over the course of the last 12 months, on account of low interest rates and increased competition amongst lenders.
Indira Awas Yojana
According to Mr Vaidya, the announcement regarding Indira Awas Yojana concerning subsidiary up to Rs 10,000 and the loan of Rs 40,000, is a welcome development. This will continue to increase rural housing under which, over 10 lakh houses are already created, since the start of the programme. It is likely to pick upto 2,50,000 dwelling units per year, with the incentives provided. Also, the reduction in the interest rate offered by National Housing Bank would support the cause.
However, he questioned whether there is need to make housing more affordable in the metros. “Making housing even more affordable through redevelopment schemes in big cities will only serve to increase traffic bottlenecks,” he reasoned.
Profits from farmland not liable to tax
Farmers owning agricultural land within the periphery of the city limits, were hitherto required to pay capital gain tax. It has now been clarified that profit received by farmers, for some of the farmlands within city limits will not attract capital gain tax.
There are some other announcements that could have an indirect impact on the sector.
The increase in FDI limit in the insurance sector to 49 per cent will aid consolidation of foreign holdings in insurance companies and will lead to expansion of private players in the industry. This in turn is expected to have a positive impact on real estate demand in the medium term and also pave the way for expansion of the capital markets, said Cushman & Wakefield India joint managing director Sanjay Verma.
Similarly, the increase in FDI in the telecom sector is likely to attract an increased amount of foreign capital in the technology centre. This should help enhance India as the destination for offshore operations and would also provide impetus to real estate growth in secondary and tertiary cities.
According to Colliers International (India) Property Services Pvt Ltd chief operation officer (CEO) Akshaya Kumar, the budget has a couple of announcements for the developers.
However, not much has been done as regards to the housing stock, which would have had a multiplier effect.
“Nothing has been done to increase house buying or the rental system,” he said. What is happening today is that people are buying houses for their own use. Unless the Rent Control Act is modified, the demand for rentals will increase as the metros have a large migrant population which prefer to stay in rented homes.
The rent received by home owners should be made tax free and this will increase the quality of rental homes. This will also stimulate people to buy houses and rent it out.
However, what was not addressed at all and which has been pending for a long time are the archaic laws, such as the ULCRA and the Rent Control Act in some cities as well as issues like Coastal Regulatory Zone (CRZ). Mr Vaidya added that these should be either done away with completely, or looked into more carefully so that effective solutions can be provided. As far as the CRZ is concerned, look at the way cities like Hong Kong, Dubai and Cape Town have emerged along waterfronts, he justified.
No Special Package For Mumbai
The industry also expected a special package for the city which is the largest contributor to the country’s exchequer. Added Mr Mantri: Mumbai being the main contributor to the country’s exchequer, has not been a recipient of any package in this year’s budget, especially in areas of transport, infrastructure and development of the city which would have immensely benefited the overall growth of the city, giving a better life for Mumbaikars’.
FDI In Real Estate
The FDI in townships has taken off, albeit slowly. Mr Vaidya added that the minimum requirement could have been brought down to 50 acre. More and more international developers are looking at entering India through this route and hence, it should be encouraged.
Mr Verma demanded that 100 per cent FDI should be allowed in retailing. This will bring in foreign process and practices into the Indian retail industry, resulting in more and more of organised retailing.
The industry has made certain recommendations by them to the FM which they feel should be addressed in the next Budget.
Recommendation: Relaxation of 100 acre minimum requirement for qualification for FDI in township projects to 25 acre.
Rationale: The current requirement of 100 acre is limiting interest from foreign entities. Such projects entail huge investments in infrastructure creation, and a minimum of 100 acre size limits financial viability.
Recommendation: Allow 100 per cent FDI in retail.
Rationale: FDI will bring foreign processes and practices into the Indian retail industry, which will enhance efficiency in the supply chain systems, variety and quality in product availability and more organised retailing.
Recommendation: Facilitate channelisation of small savings into real estate sector through gradual policy development, by way of collective investments schemes — real estate mutual funds.
Rationale: For the country to effectively utilise the multiplier potential of the real estate industry, real estate industry would require significant long-term capital. Also small savers, in turn would have access to long term steady income instruments backed by real estate.