Budget analysis: Nothing to cheer about realty sector

The 2012-13 budget is a sad commentary on the real estate and housing sector. Especially so as despite the budget's objective to create conditions for growth and focusing on domestic-driven growth recovery, real estate has been given a short shrift though Economic Survey points out that the share of real estate in country's GDP is set to grow from 5 percent to 6 percent. What is really disappointing is that barring some window dressing, the budget has not taken any concrete measures to address the twin crucial issues of increasing supply and boosting demand. And that too when the realty has been reeling under high property prices, liquidity crunch, high cost of debt, muted FDI inflows, increasing inflation coupled with low business sentiment. Today, residential property, principal demand driver for real estate remains restrained with key indicators like sales and absorption hit by high prices spurred by increasing inputs and debt costs. This is clearly evident from the industry statistics showing almost 50 percent of unsold inventory in top cities like Delhi-NCR, Mumbai & Bangalore. So much so that even affordable housing has been facing a slow down. In this backdrop, the real estate sector which is under stress, required a booster dose in terms of fiscal incentives supported by enabling development and regulatory environment. But that has clearly not happened in the budget. Liquidity crunch has been the bane of real estate but budget has not addressed this serious issue of low bank credit flow and high funding cost. The long pending demand of the sector for granting industry status and giving infrastructure status to big township projects has been ignored, denying easy credit access at cheaper rates. High property valuations are having negative impact on flow of FDI especially as foreign investors are already wary of ambiguous policies and lack of transparency in real estate transactions in the absence of a regulator. And the budget has done nothing to liberalise investment and exit norms for FDI that could have given a much needed boost to FDI. Also the brakes on FDI in multi brand retail will further retard the growth o retail real estate. Also the budget has missed the REIT & REMF opportunity to give boost to FDI.REIT & REMF guidelines awaiting finalisation, could reduce cost of funds and property prices, thereby boosting affordability. The budget does not hold much hope with high home loan rates contributing significantly to slow down in housing demand. The recent CRR cut by RBI does not mean anything unless repo (interest) rates are cut. Real estate sector requires at least one percent reduction in home loan rates to boost demand though that is quite unlikely in the face of high deficit and inflation. Also no attempt has been made to increase Loan to Value (LTV) ratio or housing loans especially when the recent RBI directive has excluded stamp duty, registration fee and other levies for total home cost, thereby bringing down LTV from 80 per cent to 70-75 per cent. Moreover the much expected increase in the Rs 1.5 lakh cap on interest payment and Rs 1 lakh cap on principal home loan amount has not happened in the budget, thereby dampening the spirit of home buyers.And though the budget proposal to set up Credit Guarantee Trust Fund to ensure better flow of institutional credit for housing loan may be useful in the long run, it will however have no immediate impact on the housing loan scenario. There is a major hurdle to the growth of real estate due to high taxation structure which in the residential segment, amounts to 30 percent o the total cost of the home. This calls for a viable tax structure by way of rationalisation of GST, stamp duty, service tax, local levies etc. Even 1 percent TDS has been imposed on property sellers on transactions worth Rs 50 lakh in big cities and 20 lakh in smaller cities. But instead of providing any relief, the budget has further hiked the service tax which together with increase in excise duty, will further push up property prices, thereby dampening demand. The exemption on capital gains tax on property, if proceeds are invested in SMEs may be of little use. No tax benefits/incentives have been given in the budget to cover up high cost of green buildings with a view to give fillip to green realty. Nor has it looked at duty structures to ensure that MIG and LIG housing is not a revenue source. With housing for all a tall order for the government in view of about 25 million shortage of low cost housing, the government has rightly put focus on affordable housing in the budget. Allowing ECB for low cost housing, extension of interest subvention for one more year for loans upto Rs 15 lakh on property cost up to 25 lakh, service tax exemption on low cost mass housing up to 60 sq mt and Rs 4,000 crore fund for rural housing are the steps that will give a boost to affordable housing. Even on the infrastructure front, budgetary provisions like ECB for road, power projects, Rs 60,000 crore allocation for Infra projects Rs 5000 crore for creating ware housing facilities and one year extension of sunset clause on tax incentives for infra projects are growth oriented moves. However there is no policy initiative to boost rental housing. Also in view of rise in affordable housing cost, property price cap of Rs 25 lakh should have been increased to benefit home buyers in tier 1 & tier2 cities. Moreover the budgetary provision to bring affordable housing under priority sector lending would have gone a long way in giving much needed push to affordable housing. All in all, with marginal increase in income tax limit and with additional burden of service tax and excise duty further bringing down disposable & investable income, it may well prove to be a setback to demand, with budget bringing hardly any cheers to realty. source:http://www.realtyplusmag.com/rpnewsletter/fullstory.asp?news_id=19759&cat_id=8