Budget 2013: Industry status, cheap funds top real estate sector wish list
Pritam P Hans February 21, 2013The real estate sector has a long list of expectations from the upcoming Union Budget . Apart from industry status, which the real estate sector has been seeking for long, real estate companies are demanding easier availability of funds, more clarity on land titles, a check on the rise in prices of construction materials and liberalised terms for external commercial borrowings or ECBs.
"The country's real estate industry contributes approximately 5 per cent to the gross domestic product. However, due to lack of regulations and effective policies, the sector is experiencing many challenges on its growth path. The Budget must consider the fact that the Indian real estate sector generates countless jobs across its various verticals. By granting it industry status, the government will enable it to access loans at lower interest rates and collateral values," says Anuj Puri, chairman and country head, Jones Lang LaSalle India, a property consultancy firm.
The sector has been going through a difficult phase with several builders facing liquidity crisis. Some have even defaulted on debt.
"The high cost of finance through the successive increases in bank rates over the last three years, reduced liquidity and a more congenial environment for foreign direct investment, or FDI, into the sector are areas that the government can look into," says Pranab Datta, chairman, Knight Frank India, a realty consultancy.
"The regulatory framework for FDI needs to be relooked at so that constraints can be removed and the funds are not allowed to be employed for speculative purposes," says Datta.
Confederation of Real Estate Developers' Associations of India (Credai) President Lalit Kumar Jain says lending to the real estate sector has declined. "Over the last nine months, credit to commercial real estate (by banks) has gone down by more than 13 per cent and priority lending to the housing sector by 1.29 per cent. The total lending to the commercial real estate is a mere 4 per cent," says Jain, who is also the chairman and managing director of Pune-based Kumar Urban Development.
Jain says the present risk weight for commercial real estate loans is hurting the sector. Credai has called for banking reforms to facilitate low-cost funding for housing.
"As the sector is not under the umbrella of any specific regulatory authority, financing has been an issue over the number of years of credit slowdown. What is required is liberalisation of finance for the sector. The Budget should increase the scope for ECBs for real estate and provide a general relaxation of financing norms," says Puri.
Cheaper bank finance to home-buyers is also on the wish list of the sector. "The expectation from the Budget is to reduce the interest rate on home loans, especially for the mid-end housing segment, as well as tax incentives for housing investments," says Anshuman Magazine, chairman and managing director, CBRE South Asia, a real estate advisory firm.
"The scope of the interest rate subsidy for loans for affordable housing should be amplified and broadened to include a wider price band of homes to benefit buyers, especially those in the lower income group," says Puri.
Credai also wants more incentives for the affordable housing segment. "Affordable housing should be treated as a priority sector and the rate of interest for it brought down to an acceptable 7.5 per cent," says Jain.
The sector is also demanding an increase in the tax exemption limit to Rs 3 lakh. This may boost home sales by putting more disposable income in the hands of prospective buyers. Some industry players also want the existing home loan interest rate subvention scheme for low-value homes to be extended to houses worth up to Rs 35 lakh. "We hope that the government grants infrastructure status to affordable housing as it will facilitate easy financing and address the housing problem to a large extent. Also, the 1 per cent interest subsidy on home loans should be extended for houses up to Rs 35 lakh," says Boman Irani, chairman and managing director, Rustomjee, a Mumbai-based realty company.
Many real estate players want the Budget to impact policy rates to make lending cheaper. However, it is not a realistic expectation because these rates are set up the central bank.
"It is not correct to expect policy rates such as cash-reserve ratio and repo rate to go down due to measures in the Budget. The Budget has nothing to do with these," says KPMG India Co-head (tax) Girish Vanvari, who also tracks the real estate sector for the consulting company.
"The Budget can announce some fiscal and reform measures to encourage the sector. For instance, you can have tax-free bonds for the infrastructure sector, incentives for housing loans and clarity on legislation such as the land acquisition Bill," says Vanvari.
Extending incentives and measures such as clarity on value-added tax in special economic zones (SEZs) will make the sector vibrant, says the industry. "It will help SEZ developers and allied real estate sectors," says Vanvari.
The companies also want emphasis on developing infrastructure to facilitate real estate activities in suburban locations. "The Budget needs to increase infrastructure spending in urban areas with a view to unlocking the value of neglected and hidden land assets in sub-urban and peripheral districts. This will enable more holistic growth for the real estate markets in our overburdened metros and help bring down prices in the central areas," says Puri.
The sector also expects the government to allow real estate investment funds (Reits, which are mutual funds that invest in properties for rental income and capital appreciation). Reits will allow the sector to mobilise funds from small and large investors easily. At present, in real estate private equity funds, the minimum investment size is Rs 1 crore, which limits the investor pool.
"The introduction of Reits will help mobilise funds (even from small investors)," says Magazine.
Industry players, including realtors and property analysts, are also rooting for the creation of "special residential zones" (SRZs) on the lines of SEZs. "The government could seriously consider enacting provisions for SRZs to promote the growth of housing stock at targeted locations," says Puri.
"The finance minister should allow tax exemptions for small houses with carpet area of less than 60 square metres and creation of special housing zones with tax exemptions on the lines of SEZs for constructing 45-square-metre houses for the low-income group and 30-square-metre houses for the economically weaker sections," says Jain of Credai.
Among other expectations of the sector is simplification of policies to enable quick clearances. At present, developers need clearances from as many as 50-60 authorities, which results in a significant delay in taking projects from drawings board to the construction stage. Some realty players also want the government to finalise the Real Estate Regulatory Bill, which proposes to introduce a regulator for the sector and streamline several processes.