The real estate sector has given a mixed response to Union Budget 2016. While some real estate experts are of the view that the finance minister has definitely made a concerted attempt to manage expectations with a balanced budget, others feel that the Union Budget 2016 is a disappointing one for the industry as well as the sector.
In what comes as a relief, Union Budget 2016 has allowed 100% deduction on profits to companies which construct apartments measuring up to 30 square metres in four metro cities and 60 sq m in other cities. It means that any realty company which constructs housing units in the above-mentioned category will not have to pay any tax on profits it incurs from housing projects. “This shows the government’s commitment towards its promise to provide housing for all by 2022,” says Aman Singh Gehlot, director, Ambience Group.
Some experts like Sanjay Dutt, managing director, India, Cushman & Wakefield, believe that the Union Budget has placed greater thrust on affordable housing and has brought about much-needed cheer for the real estate sector.
“The finance minister’s announcement of 100% deduction in tax from profits of affordable housing developers will shift their focus to a segment that has been largely ignored owing to business viability issues. However, the caveat of housing space limits (30 sqm in four metro cities and 60 sqm in other tier-II cities) should have been equitable, and the three-year window for project completion could have been for a longer duration as approvals and construction typically take a long time,” says Dutt.
Besides this, Budget 2016 brings some good news for first-time homebuyers who will get an additional exemption of Rs 50,000 annually on loans of up to Rs 35 lakh for purchase of homes costing up to 50 lakh. They will also get service tax exemption.
“Most first-time home buyers in the major metros will be left out of the additional Rs. 50,000 tax exemption announced today, as it is applicable only on houses worth up to Rs. 50 lakh with loans of up to Rs 35 lakh for houses. This announcement will mostly benefit first-time home buyers in tier-III and tier-II cities,” says Anuj Puri, chairman and country head, JLL India.
A major announcement, feel many experts, with implications for the real estate sector in India is removal of dividend distribution tax (DDT) from real estate investment trusts (REITs). Investors, who earn dividend on their investment in REIT, will not pay any tax on it. “This exemption has cleared a final hurdle on the way of the successful listing of REITs in India. We expect a few listings to happen in the current year itself, either by financial institutions or developers. Currently, around 229 million sq ft of office space can be seen as REIT-compliant. If we assume that even 50% of these get listed, we are looking at a total REITs listing worth $18.5 mn sq ft,” says Puri.
Agrees Dutt, saying, “Till now DDT was applicable on SPVs (special purpose vehicle or entity, usually a subsidiary company, the obligations of which will remain secure even if the parent company goes bankrupt). This was a huge hindrance in the introduction of REITs investments, making them less attractive. This move is likely to please the institutional investors who view India as an untapped market for this asset. REITs have a huge opportunity for developers and investors in India given their potential in the Indian real estate market. However, abolishment of DDT alone may not be sufficient enough for companies to launch REITs in the coming months.”
According to Navin Raheja, chairman and managing director, Raheja Developers, “This budget scores 8/10 in the affordable housing and Housing for All initiative which is still relatively new and unexplored segment. However, it has very little to offer for the balance of the industry (in terms of some fiscal relief). The continued focus and high budgetary allocation for infrastructure development always augurs well and has a domino effect on real estate. It helps increase both the depth and breadth of the market. Hopefully, the Government will be able to greatly enhance the speed of execution on the ground.”
Calling it a disappointing budget, RK Arora, chairman, Supertech, says that the real estate sector had pinned great expectations on the budget but “the only significant relief announced in the Budget for real estate, is exemption of Rs 50,000 for housing loans of up to Rs 35 lakh and that too on houses costing up to Rs 50 lakh. This nominal relief is available to a very few and not to a large section of home buyers as the cost of housing units has gone beyond Rs 50 lakh.”
“The addition of 0.5% Krishi Kalyan Cess on all services would impose an additional burden on home buyers who are already burdened with increase in local stamp duties and sector rate increases in addition to cost escalation. None of the grievances of real estate sector for providing bank finance has been addressed in the budget and real estate has been made entirely dependent on high cost finances. There is also no proposal to encourage investment in real estate,” says Arora.
Besides the announcement which will impact the realty sector directly, many provisions in the budget for other related sectors such as infrastructure, retail, ecommerce etc will have a positive bearing on the realty sector, feel experts.
Says Puri, “Approximately 16-18 km of road construction per day has been achieved by the middle of the current financial year, and the Budget has adopted measures to significantly step up NHAI (National Highways Authority of India) capabilities in this regards. Roads infrastructure has had great influence on real estate development, particularly with the new land it opens up for development through highways and feeder routes.
“The Budget has outlined revival plans for non-functional airports in partnership with state governments, with a vision to spend around Rs 100 to 150 crore on each airport to make them functional again. This will give a boost to infrastructure in many tier-II and tier-III cities, and is without a doubt positive for their real estate markets. A select few projects that are commercially viable with good ridership could pick up pace in the near term,” adds Puri.
The current budget announcements will revamp of the Model Shops & Establishment Act which could help the retail sector considerably. Unorganised retail could receive a fillip as smaller shops will now also be given the option of remaining open for all seven days of the week, like organised malls. Also, the budget has made a strong case for promoting start-ups in India with 100% tax rebate on profits announced for them for three years. According to experts, as more start-ups get encouraged to commence operations, developers are expected to offer more small mixed-use properties or arrangements for sharing of office space to cater to this segment.