Can Arun Jaitley's budget re energise the real estate sector?
Jul 12, 2014
Source : The Economic Times


MUMBAI/BANGALORE/NEW DELH: Finance minister Arun Jaitley on Thursday announced a slew of measures to spur the slackening real estate sector that includes an allocation of Rs 7,060 crore for the development of 100 smart cities, relaxed norms for the entry of foreign capital and tax relief on home loans.

Jaitley reduced the size of real estate projects eligible for FDI from 50,000 sq metres to 20,000 sq metres and halved the minimum investment limit for FDI to $5 million, but said that builders who allocate at least a third of their projects for low-priced homes, will be exempted from these caps.

The government will also provide necessary incentives for real estate investment trusts (REITs), which will have a pass-through for purposes of taxation in effect avoiding double taxation, Mr Jaitley said in his Budget speech, hoping that this would help the sector raise long-term funds from both domestic investors, including NRIs.

The finance minister also allocated Rs 4,000 crore to affordable housing for the urban poor through the National Housing Bank (NHB) and plans to extend incentives for housing loans. Slum development has been made part of corporate CSR activities.

"For the first time we are seeing a comprehensive attitude towards housing. These measures will push demand for low and mid-income housing," Abhishek Lodha, managing director of Lodha group, Mumbai's biggest real estate company, said. He pointed out that the new norms will specially aid the government's ambitious plans to provide housing for all by 2022 and build 100 smart cities.

Keki Mistry, vice chairman and CEO of HDFC Ltd, India's biggest mortgage lender, said, "The plan for so many smart cities also means a huge role for infrastructure and housing companies."

Since it was elected, the government has articulated its vision to provide housing for all by 2022 for which it wants to partner with the private sector.

According to the housing ministry, there is a shortage of around 18.78 million houses in the country of which 96% is in the economically weaker and low income segments. This move to relax FDI limit will help increase the development of low-cost and affordable housing furthering the government's vision.

Projects qualifying for foreign direct investments will increase with the reduction in minimum built up area and capitalization requirements, said S Sriniwasan, chief executive officer of Kotak Realty Fund.

"The opening up of FDI will bring in opportunities for cheaper capital for smaller projects as well, improving quality and delivery of low cost and affordable housing projects," said Getambar Anand, managing director of ATS Infrastructure and also the president of the Confederation of Real Estate Developers Association of India (Credai).

REITS too are expected to provide succor to several liquidity starved real estate companies that currently have a high level of debt on their books. They would not be able to monetize their income producing assets. While the guidelines for REITS were introduced earlier by SEBI, what was missing was the clarity on taxation for the structure because of which not company has yet taken a call on it.

A REIT is a type of security that is sold like a stock on an exchange and invests and owns real estate assets that produce a stable rental income for shareholders. "Access to capital markets combined with favourable demand scenario should catalyse the cash-starved commercial real estate segment," said Anckur Srivasttava, chairman of GenReal Property Advisers.

Jasmeet Chhabra, managing director at Red Fort Capital said the introduction of REITs will provide a new source of capital to increase the stock of investment grade commercial office space while at the same time providing an avenue to retail investors to participate in the growing commercial real estate market.

"However, given that the total supply of investment grade office space in India which would qualify for REITs is less than 30% of the total stock, it may lead to an asset bubble in the short to medium term," he said.

Raj Menda, managing director RMZ Corp, which has commercial asset portfolio of over $3 billion that it is looking to list as a REIT, however, said that mere tax pass-through status to avoid double taxation is not enough.

"Real Estate Investment Trusts should have been fully pass through. It is not adequate and lot more needs to be done, we will work with SEBI to convince the government to align the REIT structure as per international standards," he said.

Ruchir Sinha, head private debt and co-head private equity at law firm Nishith Desai Associates says the tax pass-through for REITs is a major incentive as against the distribution tax in the case of real estate mutual funds.

"Double taxation will be avoided through this and the recipient will be able to claim credit in its offshore jurisdiction against the taxes paid here."

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