Realty looks to Budget for some magic

Inventory pile-up and demonetisation impact have left it floundering

The real estate sector has been in the limelight in terms of reforms in the last few years, be it the relaxation of Foreign Direct Investment (FDI) norms or introduction of the Real Estate Investment (REIT) regulations or the government’s mega ‘housing for all’ plan. With the largely positive policy stand, there was much euphoria and the expectations were high, with the industry hoping to return back to the growth cycles seen in the 2000-2007, era.

The ground realities have, unfortunately, been starkly different, with the industry numbers reflecting massive inventory pile-up, relatively weak FDI inflows and, more recently, early signs of a let-up in the otherwise steady demand for office space. REITs have not taken off yet and the only silver lining has been the continued strong interest of foreign investors in rental yielding properties. The industry’s woes have only increased with demonetisation and its aftermath. Adding to this, the proposed amendment to the Benami Properties Act and its possible repercussions also seem to have unsettled many players in the industry.

Big changes ahead

In the coming months, the sector is all set to undergo a revolutionary transformation with the onset of Goods and Services Tax (GST) and the Real Estate Regulation Act (RERA), both of which are expected to be significant game changers. Going forward, with a much tighter regulatory regime and increased cost of non-compliance, a significant consolidation in the industry is bound to happen, with the small, unorganised players ceding significant ground to the larger, organised players.

On the policy front, urgent measures are needed to further boost the overall demand for housing to revive the sector. Primarily, to ease the supply side, the industry requires support in terms of rationalisation of land acquisition policies (a largely State subject), project-based financial support and extension of special status benefits.

Also, easing External Commercial Borrowing norms to allow developers to access foreign debt capital across all types of projects will definitely help the cause. From a tax perspective, the scope of affordable housing projects qualifying for a tax holiday, which is currently not seen as too realistic, needs to be widened to make it attractive for new project investments. Also, the rationalisation of MAT provisions expected in general will help in reducing the effective tax rate for many industry participants.

To boost housing demand, enhancing the interest deduction on housing loans on self-occupied properties is one of the obvious measures that the Finance Minister can consider. A significant increase to, say, ₹5 lakh (from the existing ₹2 lakh) can provide immediate results in terms of helping the industry clear surplus inventory of houses, especially in the metros.

Additionally, if the scope of the tax incentive provisions for first-time home-buyers could be enhanced, home buying will be a lucrative proposition that the salaried class will not want to miss.

Reviving investment trusts

On the REIT front, while amendments to the taxation regime were announced in the last Budget, there are some gaps that need to be plugged. There have been other long outstanding demands like extending the tax exemptions for transfer of assets by sponsors to the REIT (currently this benefit is available only in respect of shares of property holding SPVs) and providing clarity on deductibility of expenses in the hands of the REITs, which also needs to be looked into. Another important amendment that Budget 2017 needs to consider is the extension of Dividend Distribution Tax (DDT) exemption into multiple-level SPV structures under the REIT, given that SEBI amended the regulations to permit such structures recently.

In summary, while the real estate industry gears itself up for greater challenges in what is going to be a very turbulent if not disruptive year ahead, there is desperation — and hope that Budget 2017 provides a magic wand which will help the sector cope with the challenges.

With inputs from Gautham Lokande, Director, BMR & Associates LLP

The writer is Partner, BMR & Associates LLP

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