FM fails to meet real(ty) expectations

In the Narendra Modi government's first full-fledged budget, there is total lack of thrust on real estate despite its significant contribution to the GDP with its multiplier effect. Fiscal sops to housing would have helped revive the sector, which has been reeling under stress for a long due to a liquidity crunch coupled with low demand and weak sales.

The decision to set up a National Investment and Infrastructure Fund (NIIF), tax free infra bonds and reforming the regulatory architecture around infrastructure will flag off big ticket investments. Public spending of Rs 1.25 trillion, the Public Procurement Bill, the Dispute Resolution Bill and Bankruptcy Law are triggers for making infrastructure sector attractive for investors. The major boost to infra development with an investment hike of over Rs 70,000 crore for the coming fiscal, along with the allocation of Rs 22,000 crore for housing and urban development, will help spur realty growth.

Lack of easy and cheap funding for home buyers and developers (especially those engaged in affordable housing) has been the biggest bane of real estate and the budget has not done much for it.

Though the government has shown its seriousness about its flagship mission, 'Housing for All by 2022' by proposing to build 6 crore houses, it has not spelt out any concrete financing plan to achieve this high goal, especially as it has not addressed the core issue of increasing affordability and supply of housing. And, considering that the maximum requirement is to build homes under low cost and affordable category, this massive task cannot be accomplished without the active participation of private builders. But no incentivised policy for them to take up low-margin affordable housing has been announced.

However, in a reform- oriented approach, the budget has made Real Estate Investment Trusts (REITs) viable in the Indian context with the provision of pass-through tax for investments in REITs and rationalisation of capital gains tax, paving the way for effectively channelising domestic and foreign funding for real estate.

But the flip side of budget is worrying. At a time when housing sector is experiencing weak demand in view of unaffordability of homes, the budget has not responded to long pending demand for granting industry status to real estate to access cheap funding. Rather, it presented a double whammy. Instead of meeting industry demand to remove service tax on affordable housing, the budget has hiked it from 12.36 to 14 per cent. Not just that, excise duty has also been raised marginally.

Together with this, the freight hike will result in increase in cement, sand, steel and iron prices, making homes more expensive. The only relief to home buyers has come through the hike in wealth tax exemption limit from Rs 30 lakh to Rs1 crore for houses.

There was no policy prescription to boost rental housing to tackle housing shortage and reinvestment of capital gains for sale of single residential units into multiple units.

Going forward, the RBI reducing the repo rate is expected to reduce home loan rates that will help accelerate realty revival. The Real Estate Regulatory Bill pending for a long time needs to be implemented to ensure fair and transparent transactions, thereby making real estate an attractive asset class for investors, particularly foreign investors.

By: Vinod Behl