After three to four years of stress, the real estate sector was meant to recover in the 2020 fiscal. Some factors like demonetisation (2016), implementation of the goods and services tax/GST (2017) and the enactment of the strict Real Estate Regulatory Authority/RERA law caused significant disruptions in the sector. The NBFC crisis was another shock. Then the Covid-19 pandemic hit India and the government implemented nation-wide lockdown. All construction work was stalled till September 2020 due to labour shortage. The consumer sentiment was also weak at that time. Digital adoption in selling property did not work well. From October, housing sales began to get back on track - on the back of pent-up demand and the festival mood.
Some measures like softening of interest rates on home loans to around 7% had a positive impact on home in Maharashtra. It is reported that in that state, reduction of stamp duty on registration of properties was a game changer and it pushed property sales significantly.
Expectations from government
The central government has taken some important measures like invoking the ‘Force Majeure’ clause under the FERA to extend project completion deadlines by 6-9 months. The other measures include the extension of interest subsidy for the middle-income group, relaxing tax rules to allow sale of homes valued up to `2 crore at a 20% discount to circle rate. These moves have been welcomed by the industry. But according to many industry insiders, more should be done - particularly in the demand side. Demand side interventions include increase in tax sops on purchase of residential units, cut in stamp duty similar to the Maharashtra model, measures aimed to help increase the liquidity of the NBFCs and ensuring extension of Credit Link Subsidies (CLSS) of middle income group buyers.
Budgetary allocation for the real estate sector
The recent budget proposals for FY 21-22 have emphasised on ‘housing for all’ and also on affordable housing for the middle-income groups. Some of the areas where the Budget has addressed the real estate sector are discussed below -
1) The Budget has proposed to increase the safe harbour limit from 10% 20% for specified primary sale of residential units. This would help both the buyers and the developers.
2) On the affordable housing segment, the Budget has firstly provided an extension to the deduction of interest of upto `1.5 lakhs till March 22. Secondly, to help the supply side of the affordable housing segment, the FM has declared that affordable housing projects can avail a tax holiday for another year, that is, till March 22. Thirdly, to increase the supply of affordable rental houses for migrant workers, the FM declared to allow tax exemption for notified ARH projects.
Real Estate Investment Trust (REITs) and InVITs
REITs are involved in structuring funds that allow investors to invest for earning profits. It is a real estate company that owns, operates or finances real estate projects. Infrastructure Investment Funds (InVITs) are innovative vehicles that allow developers to monetise revenue-generating real estate and infrastructure assets. It enables investors or unit holders to invest in these assets without actually owning them.
The government has taken initiatives of debt financing of InVITs and REITs by foreign portfolio investors with some changes in legal restrictions declared in the Budget. This would further ease access of finance to InVITs and REITs thus increasing the possibility of availability of funds for infrastructure and the real estate sector.
The Dividend Distribution Tax (DDT) was abolished in the last Budget. This was meant for helping the investment facility in the sector. But the dividend in the hands of the shareholders was taxable. In the present Budget there has been a proposal to make the dividend payment of REIT and InVIT exempt from TDS. It has also been proposed for foreign portfolio investors to enable them the benefit of deduction of tax on dividend income at lower treaty rates. This would help the shareholders to pay advance taxes. From the coming FY, advance tax liability on dividend income shall arise only after the declaration or payment of the dividend.
It is known that a big amount of infrastructure spending by the government is a way to reverse the recessionary economy. It is also an employment creating sector. The government has taken many infrastructure projects. A total of 702 km of conventional and another 1,016 km of metro and RRTS is under construction in 27 cities. In this regard, one can notice that MetroLite and MetroNeo are the two new technologies which would be used to construct metro railways at a lesser cost but with the same experience, safety and convenience. These technologies will be used in tier 2 and in some peripheries of the tier 1 cities.
In addition to these, a huge proposal has been declared in the budget for the development of infrastructure projects. Important projects include the Kochi Metro Railway Project’s second phase of 11.5 km at a cost of `1,957.05 crore, the Chennai Metro Railway Project’s second phase of 118.9 km at a cost of `63, 234 crore, Bangaluru Metro Rail Project’s phase 2A and 2B of 58.19 km at a cost of 14,788 crore and Nagpur Metro Rail Project phase II and the Nashik Metro at a cost of 5,976 crore and 2,092 crore respectively.
It is known that infrastructure needs long term debt financing. For this purpose, the government has felt the need of a new Development Financial Institution (DFI). This would be a professionally managed institute. A Bill would be introduced to form a DFI. For this purpose, a sum of `20,000 crore would be allocated to capitalize the DFI. Its target would be to increase the capacity to lend `5 lakh crore.
Plan for setting up a Bad Bank
The setting up of a bad bank has also been raised by the FM in her Budget speech. Bad bank means a bank to clean up the bad or toxic loans. That means the banks’ unhealthy loans assets or non-performing assets (NPA) are to be separated from the existing banks’ books and those are to be brought into a special institution which would deal only with those bad assets. The bad bank would be interested only in realising or recovering the NPAs.
A plan for migrant workers
To have a successful infrastructure project, availability of migrant labour is to be developed. The FM has proposed to launch a portal that will collect relevant information on gig, building and construction workers among others. This will also help to formulate health, housing, skill, insurance and credit and food schemes for migrant workers.