Realty: recent developments

The annual Union Budget is one of the most awaited events in the country as it bears many direct as well as indirect impacts on individuals and corporates alike. The excitement that rests with individuals also creates immense pressure on the government, that aims at keeping the country’s economic machinery balanced and in momentum for the next one year.

This event has an impact on every industry and sector that contributes to the country’s economic growth. Real estate as a sector contributes significantly towards the country’s GDP (approximately 5-6%), and is also the second largest employment generator. Thus, budgetary impacts affect it  directly, and this in turn bears indirect effect on many other allied industries too.

This year’s Budget came in with much good news for the sector. It was a balanced Budget which pronounced the government’s intentions very clearly — ‘affordable housing’. It has been reiterated that for the sector’s and the country’s growth, this is the segment that has to flourish.

Announcements in this year’s budget have ensured that this segment now becomes focus for all players in the sector. Important announcements made in this year’s budget that will impact sector significantly are:

*For affordable housing, size was redefined as homes with carpet area of 30 and 60 square metres as against built-up area of 30 and 60 square metres.

*Long term capital gains reduced to two years from three years and lowering of tax by 5% for companies with turnover below Rs 50 crore.

*Tax break of one year after receipt of completion certificate for unsold units works as a much needed breather for developers.

*The total allocation of Rs 3,96,135 crores in 2017-18 for infrastructure.

*Income tax reduction to 5% from 10% for individuals with incomes lesser that Rs five lakh.

These announcements will show impacts on every stakeholder of the sector, some will have direct, some indirect, but everyone would benefit from it ultimately.

Developers
Developers have been facing finance issues from a long time due to lack of industry status. But with affordable housing acquiring industry status, at least for developing this segment, developers will have access to cheaper and competitive finance. This direct finance gain will eventually be passed on to a home buyer only. This also has paved way for the emergence of affordable housing segment in the coming years. In the last one year, many developers had already shown interest in this regard.

However, after budget announcements, this focus will become well-defined and aggressive too. Providing clarity on home sizes falling under the segment is very progressive, as new sizes are also relevant for metros. Various sops and tax breaks for developing projects in this segment are well appreciated, as they provide incentives for a developer to enter this segment.

Home buyers
Home buyers who have been complaining of high prices in the realty sector, often stating that the sector has become unaffordable will now be spoilt for choices as every developer will be offering homes in the affordable housing segment. For an end user, availability of choices will quadruple in the next couple of quarters.  In addition, halving of income tax for individuals with incomes less than Rs five lakh will leave them with more money to fulfill their dream of owning a home now. In general, home buyers will witness reduction in prices as developers will stand to reduce financial burden on them and pass the benefits to home buyers.

Reduction of capital gains tenure has brought a wave of joy among investors, and this is good news as this segment of home buyers also contributes significantly towards projects progress and construction momentum. The whopping infrastructure outlay this year ensures that affordable housing will not be in a non-connected locality lacking basic facilities. Infrastructure development always has an indirect impact on the realty sector. The direction of infra development and realty is always connected — their sequence may sometime be different but both are important for growth. Currently, a lot of focus is being laid on decongesting city centres by creating urban centres outside the main city, and this cannot be achieved without infra development.

The Budget effects were just setting in when RBI’s monetary policy was announced and yet again, it maintained its status quo by keeping key rates unchanged. After the Budget, the sector was hoping for a rate cut that would have propelled the growth of the affordable housing segment and brought the government closer to its dream. Having said that, it is understood that banks are flushed with cash and thus will reduce lending rates in near term. It is expected that interest rates below 8% are what the sector requires for getting back its momentum.

The future
Recently, the realty sector witnessed a stream of regulatory changes, namely, RERA, GST, demonetisation and Benami Transactions (Prohibition) Amendment Act.

All these have short term teething issues that will slow down the sector to a very small degree. But in the long run, all are ensuring evolution of a strong, transparent, ethical and well-grounded sector. The sector has been reeling under pressure and with recent developments including the Budget, it is expected to stand tall as always in next two quarters with signs being shown from April-May 2017 itself.

(The author is managing director,Unishire)