Infrastructure status to 'affordable housing' good for economy

The Union Budget presented by Finance Minister Arun Jaitley has accorded a big push to infrastructure, real estate and the housing sector. Focus has been on augmenting housing stock under the ‘affordable segment’ both in rural and urban areas and making purchase of such apartments more attractive. The budget has addressed to the dynamics of both supply and demand side of the housing industry.

The landmark  budget announcement was according infrastructure status to ‘affordable housing,’ which was a long-standing demand from all the stakeholders. This will have far-reaching positives on the economy. The builders will get great relief on their borrowing costs, on loans which can be in the bandwidth of 11-13% and even lesser as such loans will come under the priority sector lending of the banks.

Presently, builders are servicing construction finance at the rate 15%-21% which is prohibitive, uneconomical and not viable for them to take up affordable housing ventures. To give further impetus to increase the supply of housing stock and to reduce the huge pile-up of inventory of unsold housing stock (eight lakh flats pan-India), the finance minister has mooted two benefits to the builders/real estate community.

Most of the housing projects are undertaken on the joint development (JD) agreements with the landlord and the builder. Till now, capital gains had to be paid at the time of executing the registered JD. The same has been now revised and the liability becomes payable only in the year of completion of the housing project.

Second, in the backdrop of huge inventory, builders will have to now pay ‘notional rent’ of the unsold flats, end of the year, after getting the completion certificate. This is a welcome move, though scrapping the tax would have been ideal, specially in the backdrop of the uncertainty on the  Goods and Service Taxes (GST) rates and how they pan out for builders and other real estate players, who are presently in a state of flux.

The prime minister’s vision and mission of ‘housing for all by 2022’ envisages construction of two crore and four crore houses in the urban and rural areas, respectively, by 2022. To give the big push, the allocation to rural housing has been increased from Rs 15,000 crore to Rs 23,000 crore with a mandate to build an additional one crore pucca houses by 2019 - though the performance has been very patchy during the  last year.

To make it lucrative for the builders, the 100% tax waiver on the profits earned from the affordable housing projects, the tenure criteria has now been extended from the current three to five years through Section 80-IBA, which will now be amended.

Very sensibly, the definition of affordable housing has been tweaked from super built-up area to carpet area of apartments of 30 sqm  (333 sft) in the four metros and 60 sqm (646 sft) in the non-metros, though 333 sft limit for metros like Mumbai and Delhi does not make much sense. This leads to end-users getting bigger flats and encourages builders to take up more and more affordable housing projects, which is now highly incentivised and tax friendly.

Two additions

The cash-linked subsidy scheme (CLSS) under the flagship Pradhan Mantri Awas Yojana (PMAY), which entitles subsidy of 6.5% for housing loans (Rs 2.2 lakh being directly received from NHB –National Housing Bank –  to the borrowers’ account, thus reducing the loan quantum) up to Rs 6 lakh for LIG and EWS (household income of Rs 6 lakh per annum for LIG and Rs 3 lakh for EWS, with woman as sole/joint owner) category in urban areas, launched last year gets two additions. LIG is low-income group and EWS is economically  weaker sections.

Loans up to Rs 9 lakh and Rs 12 lakh now get subsidy of 4% and 3%, respectively. With home loan rates falling to sub 9% and factoring the subsidy, the effective housing loan rates will be 5-6%. This is one of the reasons why the finance minister has not touched direct income tax benefits for principle and interest repayments on housing loans, including for first-time buyers.

Hugely beneficial

The budget has also provided NHB refinance to HFCs (housing finance companies) to the tune of Rs 20,000 crore for the present financial year, which will hugely benefit the housing sector through the multiplier effect. Whether the refinance of Rs 20,000 crore is earmarked only for affordable housing schemes or subsidising some marginal costs of borrowing of HFCs remains to be seen.

To encourage home-owners ‘to graduate’ from smaller to bigger houses, the withholding period for reckoning of long-term capital gains has been reduced from 3 years to 2 years, coupled with a sensible change in the indexation reference for fair value assessment from April 1, 1981 to April 1, 2001. This will reduce the tax burden substantially.

The same is applicable for the builders to whom land and buildings are ‘stock in trade’. Commentary on non-performing assets of banks to the tune of almost Rs 9 lakh crore and concrete policies, including launch of a ‘bad bank’ for NPAs (non-performing assets), were missing in the budget.

Recapitalisation of Rs 10,000 crore to the banks is anaemic when the credit off-take is at an historic low at 5%. Even the increase of allowable provisions for the NPAs of banks from 7.5% to 8.5% is not significant, vis-à-vis the scenario of bad debts, low credit off-take and shrinking net interest margins experienced by banks.

Legislation to confiscate assets of absconding offenders (Vijay Mallya effect) and making action against cheque dishonours more stringent should speed up the recovery process. In sum, the slew of pragmatic budget proposals give a fillip to the real estate and housing sector, without compromising on fiscal prudence of containing the deficit at 3.2% of the GDP in 2018.

The focus now moves to the Reserve Bank of India’s monetary policy on February 8, with a fond hope for a repo rate cut of at least 25 bps (basis points) from 6.25% to 6%.

(The writer is a Bengaluru-based banker)