Real estate is one of the major contributors to the economy, as it supports innumerable ancillary industries and provides employment to millions, directly and indirectly.
The Central Bank and government have taken meaningful measures to alleviate the stress in the real estate sector by executing three successive repo rate cuts and rationalising the Goods and Services Tax (GST) regime. Now is the time to look further and focus on more specific issues. Following are a series of expectations from the first Union Budget of the Modi government’s second stint at the Centre:
‘Industry status’ to real estate
With the transformation in the way business is conducted under the reformative Real Estate (Regulation and Development) Act, 2016 (RERA) regime, it is time to recognize the role of the real estate sector as a full-fledged industry. Real estate is one of the major contributors to the economy, as it supports innumerable ancillary industries and provides employment to millions, directly and indirectly. Growth in real estate has a multiplier effect on the economy. Availing industry status would enable developers to raise funds at lower rates and cut down their cost of capital and augment their execution capabilities.
Deduction on the principal repayment of housing loans (Section 80 C).
At present, Section 80 C of the Income Tax Act does not provide for a focused benefit on housing. Tax payers have numerous investment alternatives to choose from and the lack of tax benefit on the principal amount of home loans makes them put their home purchase decisions on hold, thus impacting sales. A separate annual deduction of INR 150,000 for principal repayment will provide the much needed fillip to opt for home loans and inadvertently push real estate sales.
Real Estate Investment Trust (REIT)
While the government has taken measures to provide fiscal incentives in earlier budgets, we have seen only one REIT listing so far. The government can further push the REIT agenda by reducing the timelines of investment from three years to one year for long-term capital gains taxation; thereby ensuring larger retail investor participation.
The last few budgets have taken many steps to stimulate affordable housing demand, however, despite the efforts, conversion of latent demand to actual sales have remained slow. Some urgent steps are therefore required under the ambit of the upcoming Union Budget to provide a boost to the sector. To begin with, the government can enhance the eligibility criteria for Credit Linked Subsidy Scheme (CLSS) and GST rate benefits to help a larger section of consumers in urban centres.For instance, the annual household income criteria across all consumer categories should be enhanced such that it is in sync with house prices in major urban markets like Mumbai and Delhi.
Further, availability of land is a major hurdle in the implementation of these projects. For private players to enter this segment and to help achieve the ambitious “Housing for All” targets by 2022, the Central Government needs to direct state governments (as land is a state subject) to start earmarking land parcels for this purpose and make them available for free/nominal costs to developersin order to bring down the input costs and make the prospect more attractive for developers. Also, these land parcels need to be equipped with basic infrastructure and utilities like road, water and power.All this will together make the affordable housing segment financially viable for private players, thus fueling their participation which is needed for the fulfillment of national affordable housing goals.
NBFC liquidity crisis
The Non-Banking Financial Companies (NBFC) capital crunch has been negatively impacting the developer community and the real estate sector as a whole. NBFCs had come to be the primary lenders for most builders and developers in the last four – five years.But as they now have no capital to lend, they are not even honouring their prior commitments, including finance for construction costs; stalling many under-construction residential projects across India. The government needs to take fiscal measures to address the worsening NBFC liquidity crisis. Permission to issue tax-free bonds to raise capital will be a prudent step in this direction.
To meet the urban housing requirements, the government should consider promoting the development of an institutional rental market by providing market creation incentives.The government needs to align with changing consumption patterns as trends like co-living are already gaining ground. On an individual basis, higher House Rent Allowance(HRA)or related benefits can be extended to such rental housing avenues to help consumers opt for it along with the associated tax benefits. On an institutional basis, fiscal measures like tax breaks/tax holidays to rental housing, will definitely give a fillip to this segment.
Besides real estate, another prominent area of intervention is urban mobility. On this account, the government should accelerate its initiatives on infrastructure development which will open up cheaper land parcels for housing and ensure better affordability.
[Shishir Baijal is the Chairman & Managing Director at Knight Frank India.]