GOVT Considers FDI in Real Estate

All said and done, the government is already on the right track by considering the hiking of income tax exemption available for interest payment on home loans to Rs 2.5 lakh a year. However, there are still a number of blanks to be filled. The Budget should make high-priority provisions for the laying down of necessary infrastructure so that new areas can be opened up. The concept would be to create and link-up satellite settlements to main cities that will help tackle the demand-supply mismatch.

The Budget should provide clarity on the STPI guidelines whether they will remain or not, or whether they have changed. The Budget should offer clarity on the introduction of a real estate regulator, since the fact that India is now a member of the global village makes higher levels for transparency imperative. This regulator may not necessarily decide on rates, but should put down firm principles in terms of property dealings and also quality parameters in terms of rating of constructions.

The Budget should provide forward momentum for real estate mutual funds so that real estate becomes accessible to retail investors, as well. The Budget should free the rental income yielded by commercial premises from service tax. The Budget should extend the tax holiday under Section 80-IA (4) (iii) for developers who build, operate and maintain industrial parks so that the compromised IT industry gets a shot in the arm. The Budget should finally and decisively enable the entry of foreign direct investment into the real estate sector. The Budget should reintroduce tax exemption for developers who construct flats of smaller size with tax benefits, offer incentives to developers to concentrate more on affordable housing and rationalise stamp duty registration charges for land so that obtaining land for affordable housing becomes more feasible for developers.

Tax exemption to be raised to Rs 2.5 lakhs from Rs 1.5 lakhs

The government is taking some bold positive steps to boost the real estate sector. The tax exemption limit for the interest on a home loan may be raised to Rs 2.5 lakhs from the current Rs 1.5 lakhs in the upcoming budget. Besides this, the repayment of principal amount is part of investments eligible for benefit under Section 80(C) of the Income-Tax Act, which has a ceiling of Rs 1 lakh.

The existing tax exemption limit is considered inadequate at a time when a two-bedroom house in big cities costs at least Rs 25 lakh. Considering a person takes a loan of Rs 20 lakh at an interest rate of 9.5%, he would pay Rs 1,88,493 towards interest alone in the first year. His annual interest payment in the first five years would be more than Rs 1.5 lakh. Hence a raise to Rs 2.5 lakhs would benefit the home buyers and be an impetus for growth of the housing sector.

If the exemption limit is hiked to Rs 2.5 lakh, then a person paying that much home loan interest in a year will save an additional Rs 31,000 in tax every year (WOW!!) . This saving of over Rs 2,500 a month would be significant for most borrowers, making home purchases more affordable. However, as per existing norms, the tax benefits start flowing in only after the construction of the house is completed, which usually takes 2-3 years in case of builder flats. The housing industry has urged the government to allow for the deduction as soon as loan repayment starts, as it would give substantial relief to home buyers and boost demand

TATAs ambitious housing projects

After successful completion of cheapest car project, Tata group is now working on cheapest hosing solution through its two realty subsidiaries, Tata housing and Tata Realty. Tata group has discussed about the land requirement for the project and they have decided to develop land in 3 major ways. First one is Tata housing working with the company that owns the land. Second one is, Tata housing can also take the SPV route and then decide on the profit sharing ratio and the third one is the option of purchasing the land. After completion of project, the property could either be sold or leased. Managing committee refused to share any kind of details by saying that it would be premature to comment.

Real Estate Update

Indian realty majors have been reeling under a severe cash crunch for a long time now. Will the crisis subsiding (atleast seeming to subside), real estate players have started taking prudent measures to improve their financial condition. Capital Intensive projects have been scrapped/ deferred and affordable housing has become the buzz word.

Players are looking at deleveraging their business with asset monetisation and equity stake sales. Sobha is looking at raising PE funds (in talks with Actis, JPMorgan, and IL&FS Private Equity), DLF is planning to sell its non core assets, Unitech has done a QIP, Parsvnath is planning a 2500 crore QIP and others have been also been following the same path.

With prices down ~30% from the peak, genuine buyers are returning to the market, albeit only in the housing segment. In the last three months, Unitech and DLF have sold 3.2msf and 2.5msf of launched properties. Demand is bound to accelerate over the next 12 months as the economy revives and interest rates stay soft, though commercial demand would come only after the

oversupply is absorbed.

Rentals at Saket for commercial/ retail property have fallen to Rs 120 (who would have imagined that last year). In Gurgaon, rates for new apartments have been cut by over 30% by builders. A lot of construction activity seems to have restarted with the realty players having consolidated their finances.

However, there is a lot of dirt and debt in the balance sheet of most of the realty players which will need prudent financial decisions to clear. Real estate is still away from recovering. Real estate stocks though have shown a decent bounceback in the recent rally of the Sensex. Most of the stocks are up over 50% from its March lows.

The IPO market has seen some activity with Mahindra Holidays coming out with a public offering at a conservative price. The issue has been subscribed 20% on the first day itself, though the pre IPO placement to SBI and Jacob Ballas have taken a 32% haircut on their price!