The proposals announced in Budget 2014-15 for the realty sector are expected to improve liquidity for cash-short real estate companies, improve demand for housing and increase the supply of affordable houses.
The important proposals are according of pass-through status (meaning, no corporate income tax)for real estate investment trusts (Reits), relaxation in norms for foreign direct investment (FDI) and raising the tax-exemption limit on housing loans. Plus, allocation of Rs 4,000 crore to the National Housing Bank.
The pass-through status for Reits was the final hurdle for launch of the instruments after clearance by the Securities and Exchange Board of India. Reits, which are like mutual funds, are expected to create new sources of funding for developers. These could attract around Rs 90,000 crore in the first year of operation.
The immediate benefit would be to companies with a large portfolio of leased assets.
“I will be surprised if we do not see the first Reit in the next 12 months. Around 700 million sq ft of office assets can be brought under Reits,” said S Srinivasan, chief executive officer, Kotak Realty Fund.
Added J C Sharma, vice-chairman and managing director of Sobha Developers: “Reits will bring a lot of capital for developers from domestic and foreign investors.”
The minister also relaxed the minimum area prescribed for getting FDI from 50,000 sq metres to 20,000 sq metres and minimum capitalisation from $10 million to $5 mn. Further, projects commiting at least 30% of total project cost for affordable housing would be exempted from minimum built-up area and capitalisation requirements.
“The reduction in built-up area and size of projects will allow mid-sized and smaller developers with good track records better access to FDI and boost affordable housing,” said Sachin Sandhir, managing director at RICS, South Asia.
Added Sharma of Sobha: “Earlier, raising funds was an issue for many developers. Now, more money will come from abroad and developers will have more options to raise funds.”
The minister’s allocation of Rs 4,000 crore to NHB will increase the flow of cheaper credit for affordable housing to the poorer sections. “It will make developers more inclined towards affordable housing,” said Sharma.
The increase in the tax deduction limit on account of interest on loans in respect of self-occupied house property from Rs 1.5 lakh at present to Rs 2 lakh is expected to improve purchasing power. “This would especially help first-time homebuyers, currently struggling to buy property due to price escalations,” said Sandhir of RICS.