Budget 2017 comes at a time when the real estate sector is grappling with the effects of demonetisation on the sector. On November 8th, the government announced that it would demonetise high value currency notes of Rs 500 and Rs 1000 to crackdown on black money. In one shot, the government did away with 86 per cent of the country's bank notes in circulation.
This has hurt the real estate industry, which sees a lot of cash transactions especially in the resale residential market. Different estimates suggest that home sales have almost halved and land prices are expected to decline. Investors have fled the market and home prices are expected to decline in the short term.
The demonetisation move could not have come at a worse time for the real estate sector, which was just beginning to see a revival in home sales. While we appreciate the intent behind demonetisation, we believe the industry needs a shot in the arm. We hope the government will help the industry get back on its feet with its Budget measures.
A few of our Budget expectations are in fact long standing demands. RICS and the real estate industry have been asking for an industry status for the sector for a while now. We believe our demand is valid considering the sector contributes to well over 15 per cent of India's Gross Domestic Product (GDP). An industry status will help real estate developers borrow at reasonable rate of interests easing their funding requirements. Inaccessibility to funds at reasonable rate of interest leads to delay in construction. This increases the final cost of homes which in turn negatively impacts the end consumer. An industry status for the entire real estate sector instead of infrastructure status for affordable housing alone can help in improving demand for homes. We hope to see this announcement in this year's Budget.
Project delays affect everyone from the developer to the home buyer. We believe a single window clearance system will help reduce delays because this would expedite government approvals.
Home buyers should also be offered financial protection from project delays. Buyers of under-construction properties can claim tax benefits of Rs 2 lakh after possession, if the construction is completed within three years. This three year construction period starts from the end of the year during which the loan was taken.
But, if construction takes longer than three years, the buyer can claim deduction of only Rs 30,000. We have seen many projects across the country get delayed by more than three years. The government must consider allowing interest deduction in such cases without the restriction of Rs 30,000 and the possession year must be counted as the year mentioned in the buyer agreement.
The government can also consider raising tax deduction limit of Rs 2 lakh on interest paid on home loans. The fact is that most homes in metro cities cost over Rs 70 lakh and the current deduction limit is low. An increase in interest payment limit will help home buyers. It may even be prudent to introduce tax concessions on house insurance premiums to encourage home buyers to insure their homes.
We hope to see some more action on REIT's (Real Estate Investment Trusts) as well. Two years back, India's market regulator, the Securities and Exchange Board of India issued guidelines on REIT's. Real estate developers can now list rent yielding assets providing an exit option to developers and investors in commercial assets. It also provides a good opportunity for institutional and retail investors to invest in real estate assets and earn regular dividends.
In last year's Budget, the government did away with the Dividend Distribution Tax (DDT), which was an impediment to REIT listings. We also saw the government increase investment cap in under-construction projects from 10 per cent to 20 per cent. The upcoming Budget should offer more incentives for REIT listings such as reducing level of taxation of REIT income, waiver of capital gains for the developer at the time of transfer of property into REIT and removal of service tax on lease premises. We hope to see REIT listings this year.
Budget 2017 should also allocate an amount specifically for building infrastructure and improving connectivity in the peripheral areas of cities, especially the metros. It is not possible to provide affordable housing in cities without the right infrastructure in place. We feel real estate developers who build affordable homes should be allowed cheaper financing options to make 'Housing for All by 2022' a reality.
Finally, on the Goods and Service Tax, we would like to see clarity on the tax credit for real estate transactions. The government should allow input credit because this can lead to a reduction in home prices.
While this may seem like a long list of demands, as stated earlier some of these have not been met for years. Real estate sector is key to revival of economic growth and we believe it should be given its due in the forthcoming Budget.
(The writer is, Global Managing Director, Emerging Business, RICS)