Increased Activity in the Real Estate Sector Will Lead To Additional Employment Generation
It is the most important financial exercise to set the course of India's economy for an entire year. Union Budget 2017 has been declared - and it has impacted the real estate sector in a big way.
It is no secret that the sector has been going through challenging times for the past couple of years. It was in dire need of proactive policy changes to take it out of the red zone. The sector's importance cannot be over-emphasized - it is the second-biggest employment generator after agriculture, and contributes between 5-6% to the country’s Gross Domestic Product (GDP).
Without a doubt, the Indian realty sector deserves attention, for its health has a direct impact India's economic health. The recent budget announcements have created a lot of excitement in the sector, largely for the right reasons. Let us examine the major policy decision before understanding their impact on the market:
- Obviously, the most important announcement was the fact that affordable housing - the mainstay and backbone of the Indian real estate sector - has finally been given infrastructure status
- The Government has affirmed its intention of constructing 1 crore rural houses by 2019
- Allocation to Pradhan Mantri Awas Yojana increased from Rs. 15,000 crore to Rs. 23,000 crore
- For affordable housing, the carpet area of 30 and 60 sq meters will be applicable instead of built-up area of 30 and 60 sq meters
- Developers will get tax relief on unsold stock, as they will need to pay capital gains only in the year when the project is completed
- Also, the holding period for capital gains tax for immovable property has been reduced from 3 years to 2 years
- Developers can avail tax break of 1 year after the receipt of completion certificate for the unsold stock
- A new FDI policy, which is under consideration, will help the sector get access to a considerably larger pool of funds than it had so far
- The National Housing Bank (NHB) will refinance Rs. 20,000 crore loans
- Fund allocation for development under AMRUT and Smart Cities projects has also been increased to Rs. 9,000 crore
Now, to examine the role of and impact on various stakeholders of the real estate sector:
The Government’s intention is to spur the real estate sector - and even if it has not exactly gone all the way on this, the steps taken are commendable. To accord the housing sector industry status has been a long-standing demand. Though only the affordable housing has been given this much-coveted and all-important status, it is definitely a shot in the arm for the sector. Suddenly, the Government’s objective of providing Housing for All by 2022 looks very much achievable.
Also, increased activity in the sector will lead to additional employment generation, which is good for the economy. Tax breaks and other sops will help builders cut their cost, improve their bottom-lines and get additional liquidity to improve efficiency. These steps, along with other impending regulatory breakthroughs such as RERA and GST will not only fuel demand, but make the sector more efficient and organized.
Even though the Government’s move to demonetize high-value currency affected the secondary housing market, the primary market with genuine players did not see much of a negative impact and is, in fact, now showing clear evidence of revival.
Builders of budget housing now have access to cheaper sources of funds, thanks to the newly-granted infrastructure status. As per statistics, the shortage of housing currently stands at around 1.87 crore homes, and nearly 95% of the shortage is in the affordable segment. Now, developers can and will focus more on launching projects in this segment, where most of the demand lies.
The refinancing by NHB will also help the sector, and the tax incentives coupled with these other benefits, will result in additional supply being pumped in the market. All in all, developers - who were just a couple of months ago severely affected by demonetisation - can now look forward to healthy growth and improved balance sheets. This will have a snowball effect on related industries, and on the overall economy.
The end-user is the biggest beneficiary out of this budget. While individuals falling in the lower income slab of up to Rs. 5 lakh have been given tax benefits, the massive push to affordable housing also ensures that the dream of owning a home will soon become a reality for many more.
After demonetisation, there have been talks of interest rates reducing, and some downward action has already been recorded. With banks flushed with funds, the rate of interests might fall further, making home loans more attractive. Coupled with the push towards affordable housing, the consumers will get homes at lower cost as builders will be able to pass on the savings accrued due to long-term finance at lower rates of interest.
The NHB refinancing, especially if it comes in the form of subsidy, can push home loan rates down by a significant 200 to 300 basis points. This would have a positively dramatic impact on consumer demand. This will provide the final missing link to revive the real estate sector decisively across segments.
The budget missed out on giving industry status to entire sector, gave no clarity on single-window clearances for housing projects, and provided no additional tax incentives to first-time house owners. Nevertheless, it has visibly more positives and negatives. From here onward, momentum in the realty sector can only rev up - benefitting everyone directly or indirectly related to it.