The Government has taken meaningful measures to alleviate the stress in the real estate sector by setting up an Alternative Investment Fund (AIF) for last mile funding of the projects stuck in affordable housing segment. Rationalising the Goods and Services Tax (GST)rate, boost to overall affordable housing segment and support to NBFCs are some of the other positive steps undertaken by the Government. Now is the time to look further and focus on more specific issues pertaining to the real estate sector.
Following are a series of expectations from the Union Budget:
‘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 recognise 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 exclusive 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 provide a fillip to housing sales too.
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. 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. The affordable housing price definition should also be enhanced for lower GST rate benefits to reach a larger segment of consumers.
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 developers in 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 are now struggling with raising capital, 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 further measures to address the worsening NBFC liquidity crisis and improve the sentiments for the NBFC sector. While, stressed asset fund for stuck realty projects has been rolled out, quick and effective implementation would be critical.
To meet the urban housing requirements, the government should consider promoting the development of an institutional rental market by providing market creation incentives. The proposed model tenancy law is a step in the right direction. While progress on the draft guidelines is expected, the government also 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. The government’s plan of spending INR 102 trillion on infrastructure investment in the next 5 years, is a welcome step. Effective and quick implementation of this plan would provide the much-needed boost to the economy and real estate sector.
[Shishir Baijal is the Chairman & Managing Director of Knight Frank India. All views, opinions and expressions are personal and limited to the author.]