Small steps, if not a stride in the right direction

While the Budget 2016 will have an impact on the real estate sector, the effect may be limited. Whether it will create the booster required for this industry or not remains to be seen.

The Government’s Housing for all’ initiative may witness some traction with the ‘tax exemption for housing projects with flat sizes up to 30 sq mt in metros and up to 60 sq mt in other cities’. However, the impact may not be as per expectations since the size restrictions could have been a bit more generous especially in metros. The Industry will await clarification on the calculation (carpet/built up) of the above mentioned sizes.  The removal of DDT on income distributed by REITs is another step in the right direction. This will create liquidity in real estate and enable exits of many large FDI investors. This is being seen as a confidence building measure among the foreign investors.

There is a strong focus on infrastructure in this Budget. This enhanced public expenditure on infrastructure can be a catalyst to fuel demand and create the much wanted growth.

An insight into how the Budget will meet the peoples’ expectations on a couple of issues is listed below: 

More Tax saving on Housing loans

Expectation:

There seemed to be an urgent need to increase the tax deduction limit for housing loans. The ongoing limit of INR 2 lakhs had been negligible mainly in cities like Mumbai, given the prices prevalent. Secondly, instead of allowing home buyers tax benefits post-possession, the Union Budget was expected to make a provision that allows these from the time they start paying interest on housing loans that will reduce the tax burden on the home buyer.

What did Budget 2016 bring in?

An additional deduction of INR 50,000 for interest on home loans under Sec 80EE has been introduced. While this will provide relief, the beneficiaries are limited since this has been restricted to first time home buyers. Moreover, this will apply only in cases where the cost of property is within INR 50 lakhs with the loan amount up to INR 35 lakhs. This restriction will not benefit home buyers in metros/Tier 1 cities.

The Government has proposed an extension of the 3 year deadline for claiming Tax benefits. With this being increased to 5 years, those buyers who are yet to receive possession within 3 years from taking the home loan, will now benefit since the tax deduction will not be restricted to INR. 30,000  

 

DDT bottleneck in REITs

Expectation:

There has not been a single REIT listing in India for more than a year since its announcement due to the applicable Dividend Distribution Tax of 15%. While the Government had made attempts to remove other bottlenecks, the all-important DDT issue still needed to be resolved. Investors, developers and owners of large assets hoped the Budget would provide this welcome change, which could help revive the Indian real estate sector.

What did Budget 2016 bring in? 

The Budget has finally announced the removal of Dividend Distribution Tax for REITs and Infrastructure Investment Trusts. The current DDT of 15% will not be applicable and any distribution of income of SPVs to REITs will now not be subject to DDT.

 

Single window clearance

Expectation:

The real estate industry needed a single window clearance to fast track project construction and safeguard both retail and individual investors from losses due to delayed or stalled projects.

What did Budget 2016 bring in?

This point was not addressed in the Budget and will be a dampener for the industry which is already reeling under delays causing a further increase in holding costs due to an increased time to launch.

 

Industry status

Expectation: 

Promoters of real estate companies have been expecting industry status for a while now. This would enable companies to access capital at cheaper pricing from financial institutions. Not only could the savings from lower cost of capital be passed on to the buyers, it would also have added to the balance sheet health of real estate companies.

What did Budget 2016 bring in?

The central government has avoided providing real estate companies the ‘Industry’ status. This has been the long term demand of industry stakeholders and has a direct impact on the growth of this sector which fuels the growth of many other industries.

 

Land record digitisation

Expectation: 

All real estate industry stakeholders have been awaiting digitisation of land records. This will enable making land investments less risky from a domestic / FDI investor’s perspective.

What did Budget 2016 bring in?

The central government has allocated INR 150 crores towards digitisation of land records. This is a step towards reducing risk in real estate as well as achieving Industry status. 

Overall the budget has addressed few concerns of residential as well as commercial real estate. Benefits tax to budget housing sector will increase demand, and the demand will further be accentuated by tax benefits on home loans. Commercial real estate investors and landlords will greatly benefit from removal of DDT as this will enable them to completely or partly exit their assets. The step is in the right direction but a lot is to be done.The key would lie in the implementation of the above policies and also the consumer and investor reaction to them.

 

About the author

Suresh Castellino works with Colliers India as National Director, Investment Services. He brings more than 19 years of successful hands-on commercial real estate investment, finance, development, asset management, and property management experience, both as a leader and as a strategic advisor. He has also been in the Investment Sales Division and concluded transactions for investment in projects for developers as well as fund exits totaling to more than 50 million USD.

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