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India Inc India Inc: Wednesday, 09 March 2016 06:42

Realty Corner with Deepak Varghese - Budget 2016: Base of the pyramid stimulus

by Deepak Varghese

This year’s Budget has been labelled as offering something for everyone and the real estate segment has not been left out. India Inc. realty expert goes behind the headlines and also flags up some opportunities for global investors.

This year’s Budget was probably the first with such an industry-wide guessing game on the direction that it would take. As always, there are some industry and ministerial interactions where expectations on both sides are tabled. But this time while the meetings did take place, it still remained a Budget that could not be guessed. Irrespective of the run up the Budget, industry has reacted positively and endorsed the underlying theme – stimulus at the root level.

This is the theme running across the Budget and the impact on the stimulus to the real estate sector is as follows:

  • Residential units below the size of 30 square metres in the big metros of the country and below 60 square metres in other locations to be exempt of all taxes except the Minimum Alternate Tax (MAT). Service tax and VAT benefit alone, if passed on to the end user, would make these homes 10 per cent cheaper. 

    The budget has made an attempt to incentivise developers to address a segment that required attention. The market nationally had been stagnating at unit sizes greater than 200 square metres but developers kept competing in this market, ignoring the demand for mass housing due to the extra sales effort and complexity being the same for selling a larger unit. This latest move in turn will hopefully enhance consumption in the cement and steel industries.

    A week after the Budget, concerns have been raised about builders developing units in locations where the price per square meter could be as high as $10,000, beating the intention of the finance minister’s announcement. We could see some capping of unit costs when the Budget finally goes to Parliament for ratification.

  • Continuing the theme of kick-staring sales at the base of the pyramid, buyers of homes costing less than Rs 5,00,000 ($75,000) with loans less than Rs 3,50,000 ($52,000) will get an additional Rs 50,000 ($750) as deduction towards loan interest. Further, the Budget has recognised delays in construction and has recognised the interest paid during the construction period by the borrower to be offset against income earned after five years and until the life of the loan. 

    Until now it was ruled that the construction period was three years and delays in possession would not qualify the individual borrower to carry forward the interest paid during the construction period to be off-set against future income 

  • India has been talking about Real Estate Investment Trusts (REITs) for a few years now with a legislation passed two years ago but without a single REIT being launched. One of the key hindrances is that incomes distributed by REITs were subject to dividend distribution tax, compressing yields in the hands of the investors. This Budget has removed the dividend distribution tax and finally given REITs a pass through status. While the intent is to get in liquidity for the commercial realty sector, stamp duty waiver at a state level remains a hindrance as it adds cost to assets being pooled before listing the REIT. 

Further, from an investor perspective, high net worth (HNW) individuals continue to have the option of direct purchases where a third of the income is offset as expenses while this benefit does not come via a REIT investment. While developers have been quite positive about the removal of the dividend distribution tax, it remains unclear if it will be attractive enough for investors especially given currency concerns.

For a global investor, the foreign direct investment (FDI) threshold has been the lowest ever and a level playing field with automatic entry of funds, 100 per cent control and defined exit rules. With the stimulus to the smaller units market, foreign investments as low as $5 million should find Indian residential markets with unit sizes below 60 square metres in non-metropolitan cities and 30 square metres in the metros an interesting segment, especially combined with the Real Estate Regulation Bill that make compliance even more stringent in this sector.

Deepak Sam Varghese, founder-director of Moonbeam Advisory, is a career banker with nearly two decades of experience in retail and private banking. He is a specialist in banking services and wealth advisory and has been advising domestic and non-resident Indians (NRI) in Mumbai, Delhi, Dubai, Singapore and London, where he was based. Now Bangalore-based, his special emphasis is on financial advisory in real estate transactions, advising investors and developers in key Indian metros.

Views expressed in this article are the author's and do not necessarily reflect the views of India Inc

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