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Union Budget 2023-24: Opportunity Loss For the Real Estate Sector? The real estate sector saw a sturdy growth after pandemic with record-high sales which is likely to continue in 2023

By N.Karthik and Srihari

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The Union Budget 2023 projects the country's GDP to grow at 7%. Real estate and infrastructure contribute significantly to the GDP. However, the budget has very few announcements for the real estate sector. The real estate sector did see a sturdy growth post pandemic with record high sales which is likely to continue in 2023. The urban infrastructure has been given some importance in the budget with increased allocation to capital expenditure. is anticipated to have an indirect knock-on effect on the housing demand. Also, the PMAY funding has been significantly enhanced. Apart from these two announcements, the cap on capital gains tax exemption and an intended push towards sustainable technology are pretty much the only things centered around the sector.

The significant increase (~66%) in the PMAY outlay in the budget is not surprising given that the "Housing for All by 2022" target has not been achieved yet. While the PMAY program did create an impact, it is important for the government to recognize root causes for its delay before allocating more funds to it. The non-availability of land at affordable prices especially in urban centres, delay in approvals by government agencies, and lack of incentives to private players catering to the segment are some of the challenges. These need to be recognized and tackled. Even though there is a legal mandate for private players to create an affordable housing stock, it only acts as a stick and not a carrot in most cases.

Given land is the key, the government could have considered releasing its government land to create affordable housing stock. An affordable renting stock model could have been incentivised through tax benefits around employment clusters. This could have helped the floating and migrating population in urban conglomerates.

The FM also announced the creation of an Urban Infrastructure Development Fund (UIDF) like the RIDF to finance the deficit for key sectors like mobility, public spaces, etc., The government is expected to provide 10,000 crores annually for this purpose. Public agencies will utilize this to build urban infrastructure in Tier 2 and Tier 3 cities under the NHB's guidance and supervision. By implementing property tax governance changes and ring-fencing user fees on urban infrastructure, cities will be encouraged to improve their creditworthiness and be able to issue municipal bonds. These bonds are expected to bridge the gap between requirement (~8.5% of GDP) and actual (3.5% as announced) infrastructure spending.

Apart from this, the government and regulators (RBI and SEBI) should have also pushed for the RMBS (residential mortgage-backed securities) market to ensure that it is up and running by this fiscal year. The Government could have perhaps provided sufficient capital for first-loss guarantee to get investors buy-in. This could have been like the ECLGS scheme to MSMEs and would have bailed out stressed NBFC assets. This way, NBFCs who provide last mile funding for affordable housing projects would have been able to monetize their loan portfolio through RMBS that would be attractive to investors.

A 10-crore limit on capital gains tax exemption was also mooted by the FM for investments in residential property. Also, the amount of interest previously claimed as a deduction cannot be included in the cost of acquisition or development of the property. While this move does not impact the middle class, it does have a significant impact on the uber luxury investors who buy and sell properties mostly for profits. The Budget also prioritizes expanding technology use and promoting inclusive development while maintaining green growth as its core interest. To make the cities "sustainable" and "cities of tomorrow," states and cities will be urged to implement urban planning changes and initiatives.

Some of the additional things that could have been done but left out were lower interest rates for first time home buyers, increase in interest and principal deduction thresholds and elimination of GST on buyers of under-construction affordable houses. Similarly, to incentivize the supply side, the tax holiday for developers of affordable housing which was stopped in 2022 could have been brought back. Also, input tax credit to developers of affordable housing projects could have been provided. Currently, the developers pass this on to the buyers resulting in increased prices. Additionally, tax exemption for renters, especially for houses less than 50-60L could have been provided. The direct focus on the real estate sector is found missing in the budget 2023. It is important to focus on efficient implementation strategies for the schemes announced to achieve the desired output and benefit all the stakeholders involved.

About the authors: N.Karthik is an advisor at RERI, IIM Bangalore and Sushmitha Srihari is a consultant at RERI, IIM Bangalore


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