Budget 2015-16 - Short on real(ty) expectations

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Vinod Behl | 09 Mar, 2015
The progressive and forward looking budget for 2015-16 demonstrating pro-growth and pro-investment themes scores high on revitalizing the economy but is low on realty revival, with the real estate sector being only an indirect beneficiary.

There is not much on the platter for real estate and housing in the Narendra Modi government's first full-fledged budget, especially as its budget last year was quite promising and real estate friendly, raising high hopes for the sector this time around. 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.

A sound economy is important to boost real estate and housing and this budget has attempted to create an institutional and regulatory framework for the economy's speedy growth, especially by laying the ground for a predictable and competitive tax regime. Also, keeping in mind infrastructure's capacity to boost real estate and revive the economy,the budget has provided a massive thrust.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 it has taken some measures.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 spelled 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 can not 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.

There is another major initiative by way of allowing foreign investments in Alternate Investment Funds (AIF) and doing away with the distinction between various kinds of foreign funding.The promised predictability for easy tax regime bodes well for Private Equity (PE) industry. And, the government, by permitting foreign investments in AIF, has increased PE's capability to tap foreign money. The provision in the budget to give 100 percent tax rebate for CSR activity, in order to utilise finances to decongest large cities and connect towns and cities is welcome. Also, slum development has been added to the list of CSR activity with 100 percent tax deduction. The 22.7 percent hike in Delhi Metro budget to Rs.4,258.61crore, will provide connectivity boost to real estate. The budget should have also laid out clearcut financing plans for Smart Cities though 42 percent devolution of capital tax revenues to states, together with capital outlay of Rs.100,000 crore for renewable energy will come handy for achieving this goal.

Talking of reformist policy initiatives, the lack of transparency in real estate transactions has been a major deterrent for foreign investors, who prefer to invest in overseas markets which though offering much lesser returns, have greater safety of investments and ease compared to India. One major reason for this is the rampant use of black money in real estate transactions. The budget has shown the government's intent to curb this menace through the 'Benaami Transaction Prohibition Bill', together with steps taken to check the influx and circulation of black money. This will improve investor sentiment and make real estate as an attractive asset class for investment by foreign investors. It will also streamline the land investment process. The stamping out of black money will make real estate transactions transparent and weed out fly-by- night operators, encouraging developers with good corporate governance. The budget announcement to set up an expert committee to fast track project approvals is a welcome move in the backdrop of large scale project delays leading to price escalation and deterring investments in real estate. The move will check project delays and cost over runs , resulting in fall in property prices. The timely completion will also restore the confidence of investors.

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 percent. 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. What more, the finance minister did not resort to reformative policy initiatives on mortgages to spur residential real estate, like increase in the exemption limit for interest on housing loans and extension of interest subvention on affordable housing. The only relief to home buyers has come through the hike in wealth tax exemption limit from Rs.30 lakh to Rs.1 crore for houses.

There is no relief for SEZs. Despite the flawed SEZ policy, the budget has not effected a cut in the MAT for SEZ units that are into manufacturing along with reduction in MAT for SEZ developers. 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.

But then, the government can and should take up some reformative policy initiatives outside the budget to boost real estate. These include incentivised policy on affordable housing and home mortgage tax breaks. 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. Also, at a time when India ranks quite low in the global index of ease of doing business, early passage of an easy and less cumbersome Land Acquisition Law holds the key to real estate and infrastructure development. However, in the absence of any immediate booster dose, real estate, especially residential real estate revival will be slow and 'achhe din' for real estate sector may take a little longer.

(Vinod Behl is editor, Realty Plus, a leading real estate monthly. The views expressed are personal. He can be reached at vbehl2008@gmail.com)