The Union Budget 2014-15 was presented in parliament under economic circumstances requiring tax revenues to keep pace with targets. Considering the state of government finances and the current situation – weak monsoons, Middle-East tensions leading to oil price volatility, depreciating currency, fiscal deficit, amidst other concerns does not leave much room for populism. However, considering the high inflation and curtailed savings, taxpayers still expected some good news from the new government, such as enhanced deductions, reduction in tax rates, interest subvention on home loans and tax incentives to affordable housing. The Finance Minister has taken a cautious yet courageous path with his budget announcements. Here is a snapshot:
HOUSING: In terms of relief to the housing sector, the budget has allocated INR 4,000 Crores for low-cost housing schemes. Apart from this, the FM has also indicated that there will soon be a relaxation of FDI norms for the affordable housing sector. It is very positive that the government has taken note of the demand-supply mismatch in the LIG and EWS housing segments. However it still remains to be seen as to how fast these initiatives hit the ground in real time. Significantly, the budget has increased the income tax deduction limits under 80C for repayment of principal on housing loans from INR 1 Lakh to INR 1.5 Lakhs. Additionally, the budget has also enhanced the deduction limit on interest payment for housing loans from INR 1.5 lakhs to INR 2 lakhs. These two factors alone will lead to a vastly improved sentiment for the housing markets. The budget gave further indirect benefits for the residential sector by increasing the individual income tax exemption limit from INR 2 Lakhs to INR 2.5 Lakhs. This will increase disposable income of individuals and would have further implications on their ability to service home loans. The FM has also announced further relaxa-tion of norms for residential projects in the affordable segment. This gives us hope that the time is ripe for ‘affordable housing’ projects to take-off in India.
CONSTRUCTION SECTOR: Construction costs have been rising at the rate of 17% over the last three to four years, and this budget has not provided enough measures to bring down these costs. Contrary to expectations, material costs involved in real estate construction will remain high over the near-to-medium term, which is bound to put pressure on developers’ margins. INFRASTRUCTURE: The infrastructure and manufacturing sectors have been given paramount importance, since these are jobcreating verticals. Banks will now be encouraged to extend long-term loans for infrastructure projects without any regulatory pre-emptions such as CRR, SLR and priority sector lending norms. This will result in faster infrastructure creation and bring consequent benefits to real estate. The budget has allocated a total of INR 37,880 Crores towards the NHAI for the construction of highways, and an additional INR 3000 Crores to boost road connectivity in the North-East. For the current year, it has targeted the completion of 8,500 kilometres of national highways, which are a known real estate catalyst. Ahmedabad and Lucknow have been singled out as special beneficiaries of this budget with the allocation of INR 100 Crores towards the deployment of Metro Rail systems in these cities. The increased connectivity will raise the scope of their real estate development and also have an impact of property valuations. The development of 16 new ports has been proposed at an outlay of INR 11,000 Crores. Additionally, an allocation of INR 11,600 Crores has been made for the development of outer harbour port projects. The combined effect of all these will result in an increase in demand for commercial space at port cities.
SMART CITIES: As promised in the new government’s manifesto, the creation of 100 smart cities across India has been proposed. The budget has allocated INR 7,060 Crores towards this end, thereby giving a financial sign-off for this concept. In order to further encourage commitment towards this segment, FDI investment norms in terms of minimum required area for development have been lowered from 50,000 square metres to 20,000 sq.m. This is a big positive since a number of smaller cities will also qualify for FDI investments, thereby enabling cheaper mobilisation of funds. Smart cities, by definition, imply considerable demand for technology-enabled services, which spells good news for IT/ITeS companies. Significantly, as much as one-third of the country’s demand for office space emanates from this sector. This will have positive implications for real estate, across multiple asset classes.
RETAIL: The country’s warehousing sector has received a boost with an allocation of INR 5,000 Crores. This exhibits positive implications for Retail real estate and specifically for E-Commerce, on account of a strengthened supply chain, which has been a crucial requirement of this sector. Apart from this, the budget has not provided any further benefits to the retail sector, which is certainly a disappointment. HOSPITALITY: The budget also brought cheer to the hospitality sector in two major ways. One, it has stipulated that electronic visa services will be introduced in nine international airports in India over the next six months. Secondly, it has indicated major provisions for the creation of world-class convention centres to be developed through the PPP model. Once these centres are created, they will bring about an increase in corporate tourism into the country. We expect the absorption of hotel-related real estate to rise. REITs: The much-awaited clarity on taxation of REITs was finally delivered in the budget. REITs will be allowed tax pass-through status, which means it will not be subject to tax, provided all criteria for investments and dividend distribution are followed. This has laid the final roadmap for REITs to start operating in India and has opened-up an attractive avenue of raising funds.
IN CONCLUSION: The real estate sector’s comprehensive expectations have definitely not been met completely in this budget. However, given the economic situation prevailing in the country, this is not really surprising. As such, we are glad that the consumer has been moderately benefitted which will hopefully result in the real estate sector moving in the right direction.