Courtesy - Mantri Developers Pvt Ltd
If one looks at the future prospects of this sector, there is bound to be unstinted growth though a few challenges including the existing tax laws and some complex regulations attached to multidimensional real restates like SEZ's and Industrial Parks exist. In the wake of these, foreign investments seem a good sign of growth for the Indian Real estate Market especially at a time when the foreign currency is in appreciation.
However, the Real Estate has witnessed a downfall in the last quarter of the year. According to Reuters, the Industry has contributed only 5% of India's overall GDP during 2011–12 as compared to a contribution of 10.6% in FY 2010-11'. The factors contributing to the same have been noted as a mismatch between demand and supply (the demand that is expected to grow at a compound annual growth rate (CAGR) of 19% between 2010 and 2014 according to CREDAI), lack of cheap credit and increased debt servicing levels and the declining rate of foreign direct investment in the real estate sector. Other factors include sliding stock market indices, rising home loan interests, inflationary pressures, heavy taxation, fund crises, soaring input costs and global uncertainty. The lurch in Real estate has even made the Construction Companies vigilant about taking up only those projects which come attached with the surety of being fully financed.
Budget 2012–13While the Budget has allowed concessions on some specifics segments in the Real estate sector, greater have been the sections that have evidently been ignored. In general, a sense of discontent has been noticed in the industry players who were hoping for some strong policy decisions to boost the falling real estate sector.
Thumbs-upBoosts for Affordable Housing, Manufacturing Sector and Rental Housing Stock in the Budget seem to have got a thumbs-up from many developers.
- In the case of Affordable Housing sector, a hugely untapped market in India, External Commercial Borrowing (ECB) has been made available - complying to a pending wish made by realtors for long. There has also been a reduction in the tax held on ECB interest source (20% – 5% for three years), enabling developers to get funds at a lower cost for these projects. The extension of the one percent interest subvention scheme for low cost housing has also been a welcome move for this realty segment. This helps more developers to launch affordable housing since they would be getting money on much lesser interest rates than the domestic banks and private equity funds.
- For the Manufacturing sector, a tax relief has been announced on capital gains from the sale of a house, if invested in equity in a small or medium scale manufacturing enterprise. This announcement renders property investors with more options to save capital gains, while also opening up an avenue for the small scale manufacturing sector to raise funds. The raise in funds for industrial growth would conclusively increase the demand in housing in the longer run.
- A few other initiatives for the sector, including setting up of credit guarantee trust fund to ensure better flow of institutional credit for housing loans have been taken.
- Further in case of TDS, to ease out the burden on a buyer, a one-page challan for payment of TDS has been proposed which would mean collection of tax at the earliest instead of the previous situation in which the TDS was deducted by the transferee when a property was transferred by a non-resident. Hence now the onus of deduction of tax falls on the transferee.
- Issue of tax-free infrastructure bonds will provide substantial funding in the sector and aid in bridging the funding gap for infrastructure projects.
Thumbs-downThe Real Estate Industry had a lot of pre-budget expectations which seem to have been unfulfilled.
- Indirect tax revisions like increase in excise duty rates and hiking the service tax is bad news for the Real estate who take services from all service industries and for whom the service tax is levied on 25% of the gross sale value of the property. The hike from 10% to 12% this year would amount to an increased construction cost, leading to an increase in the property price which would finally affect the buyers too. Thankfully, the affordable segment housing has been exempted from the same.
- While an exemption limit of Rs. 3 lakh was foreseen incase of the disposable income of the common man leading him to make more investments, the personal income tax slab has been hiked to Rs. 2 lakh only.
- Realtors were hoping for the sector to be recognized as an 'Industry' allowing more transparency and discipline in the sector, besides which it would have brought down the borrowing costs for the developers.
- There was initially a proposal of TDS @1% on payment of consideration for purchase of an immovable property (other than agricultural land) having value in excess of Rs. 25 lakh (Rs. 50 lakh for immovable property situated in specified urban areas). This proposal also outlined that documents requiring registration shall not be registered unless proof of withholding tax is produced to the registration authority. While with this one could keep a check on the black money, it could also give birth to many challenges like putting pressure on cash flows for developers and tax payers exiting properties at a loss etc. Acting fast on the discontent experienced by the Industry Players, the Finance Minister Pranab Mukherjee has recently decided to withdraw the same. The decision has been applauded by many who felt that the TDS would have created additional administrative costs for the government, and would be a burden on consumers. There are also diverse views as some developers feel that since real estate is actually a state subject, TDS would have generated revenues for the central government.
Mr Parwez while being disappointed with the increase in the service tax rate that would finally be passed on to end users feels that the postponement of a firm decision on FDI in multi-brand retail is also a disappointment.
Expectations UnfulfilledIndustry goers also point out that there hasn't been much improvement in the Budget (wrt Real estate) as compared to the last budget. The 1% interest rate subsidy provided for loans towards affordable housing continued from the last budget while a 1% tax rebate for home loans on properties costing up to Rs. 25 lakh was being expected with the new budget. The industry was seeking removal of the minimum alternate tax and dividend distribution on SEZ developers that was introduced in 2011. More expectations that got stalled include enhancement of interest deduction on home loans, granting of infrastructure status to SEZs, IT Parks and Townships and rationalization of stamp duties.
Though a lot of positivity has flowed with the policies for the affordable housing segment, there are many who don't agree with the efforts as being very 'genuine' and feel that this would only mean a boon for affordable housing segment in Tier II and Tier III cities and not in Tier I cities which are already reeling under the prevalent high property prices. Some even believe that 'an affordable housing fund' should have been a good initiative. Mr Rajeeb expresses his happiness over the policies for affordable housing sector but adds that the Real estate sector was expecting a lot of incentives for infrastructure which would have proved to be a boost for the real estate. He adds, "In the affordable segment, there are not many projects hence, the boost to the affordable housing doesn't necessarily mean a boost to the Real Estate. All developers are not focussed on that segment due to less profit and less margins. There should have been some policies for the premium and luxury segments too."
Organisations like CREDAI accept making many representations to the ministry to bring down the cost of the loans which have been unanswered. The National Real Estate Development Council (NAREDCO), an autonomous self-regulatory body established under the aegis of Ministry of Housing and Urban Poverty Alleviation, Government of India in its pre-budget memorandum for 2012-13 had asked for incentives for Housing Development, Promoting Rental Housing and Housing Finance amongst many others.
"The industry was looking forward for the budget to come with policy decisions, such as the long standing demand of the realty sector for an industry status, which would have eased the borrowing cost and avenues for raising funds for the developers. Though one may argue that because of the steep increase in home loans, the realty prices have not shown any major correction, however, it cannot be denied that the volumes have come down significantly, projects are getting delayed and launches have been deferred leading to pileup of inventory," opines Mr Agarwal. According to him, some critical issues that have been left untouched and need to be addressed include:
- Reduction in the tax structure for different materials used in construction and development of real estate sectors.
- Overcoming regulatory authority for saving time for getting approvals at different levels
- Incentives to the developers for investments in the technology in construction activities
- Increase in the deduction amount to individual buyers for investing in housing sector
- Relaxation in FDI regulations for easy flow of fund into the realty sector
- Re-introduction of Fiscal benefits to the developers of SEZs
The Future – Mandatory Steps for the sustainable growth of the sector"The government has to understand that the Real Estate Sector is the second largest contributor to GDP. It employs so many people. When it will grow will the economy also grow too and if it has to grow the infrastructure would definitely grow," Mr Rajeeb emphasizes. Not getting approvals at the right time and getting the land at high costs are a deterrent. Mr Shah wants the government to create incentives for housing bank loans. He also points out that since the major component of Real Estate is land, the government should bring reforms in the land and its peripherals. The cost of land is very high and its restricted availability becomes challenging in the Real Estate segment. Adding that townships are the future he avers that they should be encouraged and some tax concessions should be given to them. Infrastructure should be improved and land should be released for the same. For the next financial year Mr Shah predicts, "Even with all odds, the sector is going to perform great since the supply will never fall short due to the burgeoning population. I don't think that the economy of the country will do very good. The system is very slow. The country definitely needs a leader like Sam Pitroda who brought a revolution in the entire telecommunication in the country".
Mr Agarwal believes that the reduction in the CRR (Cash Reserve Ratio) by the Reserve bank of India recently is likely to have some impact in the lending rates by the banks to the cash strapped Realtor sectors. According to him, there is need to overcome the regulatory provisions as the plans have to be approved at different levels consuming maximum time in implementation of the project leading to increase in the cost. "Currently, the customer has to pay 40% of the total cost towards different taxes. This needs to be simplified ultimately benefitting the end-user. The real estate sector is experiencing and undergoing shortage of skilled manpower. This ultimately affects the construction industry as different schemes introduced by the central and state governments are encouraging people to migrate to their original place for better earning," he concludes.