Making housing affordable: Realty industry needs budget boost

The previous annual budget presented by Finance Minister Pranab Mukherjee failed to come up with some substantial measures to boost the realty industry, especially the housing sector. With the realty industry still not out of the woods, stakeholders are eagerly awaiting this year’s budget to crack the frozen property market.

Limited access to funds, increasing cost of debt to both developers and property buyers and high construction cost had played spoil sport last year. Even the new year started with a negative outlook for the real estate sector due to weak overall demand and high construction costs.

The recent Estate Report by Knightfrank, stating that around 44 per cent of housing units under Rs.35 lakh are unsold in top seven cities, is a sad commentary on the affordable housing which is considered to be a key to real estate revival.

The cash-strapped and debt-ridden developers are eyeing budgetary incentives like including land and building cost in capital expenses to undertake social housing to address the huge gap between demand and supply.

The Finance Ministry has a long-pending demand to promote special residential zones (SRZs) through tax incentives and liberalised floor area ratio (FAR) to make affordable housing a viable business proposition for developers who complain of squeezed margins.

On the funding front, cheaper and easier bank financing and policy measures to help developers access private and international credit through insurance and pension funds and external commercial borrowing (ECB) will go a long way in giving much needed momentum to the real estate sector.

Finalising guidelines for real estate trusts and mutual funds and opening up of external commercial borrowing in real estate will reduce cost of funds and ease property prices, thereby boosting affordability. There is a case for setting up of a dedicated affordable housing fund to facilitate lending at low rates to developers of low-cost housing.

Foreign investors are keen to fund real estate projects including affordable housing projects but at the policy level, there’s a need to liberalise norms for repatriation of foreign direct investment.

During 2011, besides prohibitive home prices, high home loan rates have also been responsible for steep decline in home sales including that for affordable housing segment. Though post-budget, interest rates are expected to come down in view of the central bank’s new credit policy, there is a case for liberalising priority lending by further raising the home loan limit beyond Rs.25 lakh to benefit the buyers of affordable homes in metros.

Similarly, one expects that the budget should seriously look at substantially hiking the tax bar of Rs.1.5 lakh in view of the steep hike in home prices. And existing home loan takers should also derive the benefit of subvention in the interest rates enjoyed by new home loan seekers.

The loan-to-value for affordable, low-cost homes needs to be raised. But the recent instructions of the RBI to banks to exclude stamp duty, registration fee and other levies from total cost will further bring it down from 80 percent 70-75 per cent, thereby burdening the home buyers to arrange for extra up-front money.

But the good news is that the National Housing Bank (NHB) aims to provide better loan-to-value offer through its joint venture mortgage guarantee company which is expected to become operational by the second quarter of 2012-13. The company will provide guarantee to banks and housing finance companies. And such home loans backed by guarantee will ensure enhanced credit availability at lower interest rates to home buyers.

There’s a major hurdle to the growth of real estate due to high taxation structure. In the residential segment, one-third of total value of homes comprise taxes. There is a strong need for a viable tax structure by way of rationalisation of levies such as foods and services trax, stamp duty, local levies and service tax. Tax relief on rental housing by lowering tax rate and tax slab and tax exemptions to affordable housing are other measures which can provide a fillip to the housing market.

Further an effective roll out of new Direct Tax Code (DTC) planned for the coming fiscal should simplify and improve the tax system by way of removing distortions in the tax structure and expanding the tax base. This could in turn boost the confidence of investors to invest in real estate projects.

A host of policy initiatives like allowing foreign investment in multi-brand retail, extending external commercial borrowing limit, providing infrastructure status to townships, cheap finance, streamlining building approvals to prevent cost overruns, introducing real estate regulator, facilitating affordable land for low cost housing, reduction in minimum alternate tax for SEZs and measures to boost skilled manpower may go a long way in putting the real estate on fast track.

Considering the rising challenge of urbanization, the budget should address the serious issue of augmenting urban infrastructure. One can expect a revamped urban renewal mission for integrated urban development, keeping in view that only 20 percent of the huge funds earmarked for this mission were utilised during the 11th plan.

As a new policy initiative, a base level reform agenda for capacity building in initial phase followed by incentive reform in the second phase may well give a new thrust to the mission. Another major policy push in the form of incentivised public-private partnership is required to successfully implement the government’s ambitious plan to make India slum-free by 2014.