Column: Real Estate Gets A Push

The union budget 2016 was eagerly awaited as the Indian economy growing by robust 7.2 per cent looked for growth stimulus amid global and local challenges. Real estate and infrastructure, being one of the important sectors driving domestic economic growth and creating direct and indirect jobs, was looking for concrete measures to be spelt out in the Union budget.

In view of uncertainty and slowing global growth, relying on the domestic markets to sustain the economic growth has been a prudent choice. The government has planned to achieve this through allocation of resources in various sectors that will drive the rural growth. This growth is sought to be achieved through creation of physical infrastructure that will lead to creation of jobs.

In the roads sector, more than 70 projects aggregating 8,300 km and involving an investment of Rs 1 lakh crore has been put on fast track, with 85 per cent of the projects on track. Roads and highways have been allotted Rs 55,000 crore with an additional Rs 15,000 crore to be raised through bonds. The total investment in the roads sector including the PMGSY allocation would be Rs 97,000 crore. This investment in roads alongwith with Rs 218,000 crore of capital expenditure on railways will be a major driver of economic growth.

Government capex will help in stimulating the local economy and kickstart the capex growth from the private sector in years to come. The finance minister has also spelt a clear agenda for expediting the enactment of a law to speed up dispute resolution in public-private partnership (PPP) projects and renegotiate the contracts to end uncertainty without comprising transparency, a move that should help many stranded projects.

“Housing for all” has been a key motto of the government and addressed in the budget by providing incentives for affordable housing — both to the developer and the end-user. The budget has provided 100 per cent deduction of profits to undertakings for flats up to 30 sq. metres in the four metros (Delhi, Mumbai Kolkata and Chennai)and up to 60 sq metres in other cities approved during June 2016 to March 2019 provided they are completed within three years of the approval. To incentivise first-time home buyers, an additional deduction of Rs 50,000 per annum has been provided by way of tax relief for loans up to Rs 35 lakh during the next financial year, subject to the value of the house not exceeding Rs 50 lakh.

Incentives For Affordable Housing
The incentive provided to developers will increase the supply of affordable housing and make houses more affordable. End-users too can now benefit from interest rate reduction, stable incomes and added budgetary incentives. The budget also provides exemption from service tax on construction of affordable houses up to 60 sq. metres under any scheme of the Central or state government including PPP schemes. Excise duty exemption has been extended for ready mix concrete. The above measures are expected to reduce construction cost which may be passed on to end-users. This will definitely help the ailing real estate sector for increasing sales velocity though price increase still remains a distant target for at least a couple of years.

The budget gives a boost and clarity to REIT and INVIT by waiving dividend distribution tax (DDT) on them. REIT for real estate and infrastructure assets will lead to monetisation of the assets in the form of listed instruments providing regular income. The developers will be able to liquidate the assets and help in deleveraging their balance sheet. Bank capital locked up in such assets will be freed for financing other assets. REIT and INVIT will thus usher a new debt securities segment and attract large FDI flows. I will be surprised, if we do not get less than $5 billion in the next 12-18 months in real estate and infrastructure.

Silent On Reforms
Though the budget has met some of the pending demands of the real estate sector, it has been silent on the legislative reforms which would bring transparency and protect the rights of real estate stakeholders, mainly the home buyers. The passage of the real estate regulatory Bill in the budget session has not been mentioned. Though the measures announced in the Union budget will bear positive results in the medium to long term, it has failed to address the immediate concerns of the real estate sector. According industry status and single window clearance system could have been the biggest game-changing reforms for the real estate sector but there was no mention of them in the budget.

Currently, the residential real estate segment has been plagued with mounting inventory, rising input cost, low sales velocity, frequent regulatory changes, and approval delays and higher cost of capital. The above factors have led to severe liquidity pressure on developers who have been saddled with debt from banks and financial institutions. The overall real estate scenario is unlikely to change for the better in 2016 though weaker hands (developers) and casual investors are exiting the market in favour of stronger developers through development and marketing arrangements and distress sale of assets with lots of flexibility to stronger developers.

This market is also rewarding the corporate developers due to the faith and confidence in brands. In the current scenario, the industry is desperately looking at interest rate reduction stimulating sales for its survival.

The author is managing director & CEO, ASK Group