Finance Minister Pranab Mukherjee has, by and large, given a skip to the real estate sector as he presented the Union Budget 2011-12 amid rising inflation, tight liquidity, high interest rate, industrial slowdown, delayed reforms and negative market sentiment. The finance minister has raised the housing loan limit to Rs 25 lakh for priority sector lending. He also announced that the government would liberalise the scheme of interest subvention of 1% on home loan by including loans up to Rs 15 lakh for houses that cost up to Rs 25 lakh. Apart from this, interest subvention on housing loans is extended by one year. He also did not accord the long-pending demand for industry status to the realty industry, a move which would have made bank financing easier and cheaper for companies. VCCircle brings to you key reactions on the impact of the Union Budget on the real estate sector:-
Vaibhav Jatia, Managing Director, Rhythm Realty: Overall the budget will have some positive impact on the real estate sector particularly on the residential side. Some positive key takeaways could be:
Incentives for developers executing low cost housing projects: This has been much overdue and it's good to see the government finally providing some relief here. Huge opportunity exists for developers who are willing to cater to the bottom of the pyramid and sell homes priced between Rs 4 lakh and Rs 8 lakh a unit targeted at the lower income classes. So far, developers have been avoiding this sector due to several factors such as high cost of land and difficulty in obtaining home financing thereby making such projects economically challenging. However with the incentives included in this budget and hopefully additional incentives to follow, developers will be encouraged to look at this segment a little more closely and assist in providing sustainable housing solutions for India's large population belonging to the lower income classes.
Further bad news for SEZs and the commercial sector: No tax breaks for developers under the SEZ framework. The commercial sector that has largely underperformed will continue to face challenges going forward. Large commercial projects (particularly IT projects) have been executed under the SEZ framework. Faced by a solution of oversupply and a lack of demand, developers of such projects found a little respite through the tax breaks that were offered under the SEZ framework. However, with these tax breaks going away the larger developers who have SEZ projects on their balance sheet will see some adverse impact in the form of increased tax liability.
Interest subsidy of 1% on home loans over Rs 15 lakh (up from Rs 10 lakh) to have a little impact on the upper middle residential segment: The upper middle and luxury residential segments are plagued by high and unaffordable end product prices. An interest subsidy will help but ultimately only a 10-15% decrease in end product prices will allow a larger base of customers to afford and purchase such units.
Anuj Puri, Chairman & Country Head, Jones Lang LaSalle India: SEZs have been brought under the purview of MAT, which basically diminishes the benefits that SEZs offer for developers over other commercial real estate asset classes. Also, raising the priority home loan limit from Rs. 20-25 lakh is good news for the LIG segment but will do nothing to ease the pain in the metropolitan cities where real estate prices and therefore demand for affordable housing is highest. Companies such as Unitech and Ansals, which are rolling out budget housing, will be benefited by increase of volumes. However, enhancing personal tax exemption limit from Rs. 160,000-180,000 is insignificant and insufficient to make a difference in real estate market terms. Also, allowing FDI in mutual funds would have been a blessing if the Government had been more proactive in allowing REMFs.
Pradeep Jain, Chairman, Parsvnath Developers Limited : The Union Budget 2011-12 has given major attention to the infrastructure sector and to real estate sector and for the same I thank the finance minister for giving due importance to the second largest employment generating sector of Indian Economy – real estate sector. The market has welcomed the reduction of fiscal deficit target. For the real estate sector & infra sector, there are at least six major influencers:
- Priority home loan limit increased to Rs 25 lakh from Rs 20 lakh: This will certainly help the Lower Income Group of buyers who plan to buy a home through bank loans. As in last budget it was directed that every bank has to maintain 20% of its loans to this priority section, this is definitely a boost for the sector as it will increase demand.
- Interest subvention of 1% on housing loans raised to Rs 15 lakh with cost of house upto Rs 20 lakh:
Interest subvention is basically an interest subsidy given by the government on loans. Here, a subsidy of 1% on loan upto Rs 15 lakh on a housing costing not more than Rs 25 lakh is definitely a giant leap so as to boost the demand for affordable housing.
- Allocation of Rs 58,000 cr to Bharat Nirman projects and proposal to set up Mortage Risk Guarantee fund for rural housing : This is a very good move by the union government towards rural development of our country. As the project also includes development of rural housing, this allocation is going to help the developers in developing quality housing projects in rural parts of India.
- Creation of an Infrastructure Debt Fund to boost infrastructure funding and to increase Infrastructure spending by 23% : It has become a very tough task to get loan from banks for the infrastructure projects. Also, after the latest scams, banks are now reluctant to lend to this sector. This Infrastructure Debt Fund will certainly ease the entire procedure and will help us in securing regular inflow of fund for our ongoing and new projects.
- Plan to allow FII limit in infrastructure bonds up to $25 bn: For the entire infrastructure sector, I think this is the most important step taken by the Hon’ble finance minister. This will solve the funding problem of the entire sector up to a great extent.
- As the government has also proposed a cut in the excise duty on cement and steel, it will further help the developers in cutting input cost of the construction.
However, much more was expected to accelerate supply of affordable housing stocks. Also, about MAT in SEZs, Government should not deflect from declared policy of tax exemptions, which gives wrong signal to investors in such projects.