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Budget 2012 – A letdown for Real Estate Industry

March 19, 2012

In the backdrop of screaming deficiency of  housing supply in India, much was expected of the Union Budget  2012-13 to kick start the sputtering Real Estate industry. Its widely accepted that the housing shortage is between 28 to 30 million houses in India, and the urban agglomerations face most of this pressure. The increasing home loan rates, cost of construction materials, project funding and taxes were all on the wish list of developer community. The budget offered almost no relief on all accounts, except for the ECB approval for ‘Affordable Housing’.

When we look at the desired support in context of providing housing in metros, Tier 1 & 2 cities some of the important items left wanting were the policy direction towards reducing home loan rates, allowing borrowing from international markets for mid to large housing projects, and lowering of tax incidence at various levels. The current deduction amount of Rs. 1.5 lakh allowed for interest component of home loan annual repayment is inadequate. This deduction limit was appropriate when houses used to cost on average basis between 20 to 40 lakhs. Today the ticket sizes have increase at least 3 times, and the deduction limit should have been Rs. 3.0 lakhs. The applicability of Service Tax for under construction projects versus the completed ones, does not appeal to home buyers as the final product does not change basis stage of purchase. Hopefully with the GST roll-out there would not be a incidence of VAT and Service Tax, and not to forget the Stamp Duty.

Affordable housing projects located 30 kilometers or more from commercial hubs is not the answer to housing woes. Many such projects have not progressed at the desired space in the absence of transportation infrastructure, and civic amenities. Hence I believe that a dedicated infrastructure development program should be implemented that will identify specific locations in the city outskirts. EWS & Affordable housing projects should commence only after completion of requisite infrastructure, as is the case in international cities undergoing rapid urbanization. ECB funding options should also be available for mid to large housing projects within the city as defined by 30,000 square meters. The proposed Real Estate Regulation Bill can be structured to monitor the flow of FI funding towards development activities and prevent speculative land purchases. The REIT & REMF instruments should also follow to lend the desired transparency and maturity to real estate industry.

The industry continues to be hopeful that the lending institutions would lower home loan rates to assist purchase decision. The regulatory bill would provide adequate control mechanism to monitor the utilization of FI funding. Implementation of GST will iron out anomalies in taxation and lower cost to home buyer. Its most desirable that these fundamental shifts are made at the earliest, but then its a function of Government will and bureaucratic efficiency.

2 Comments leave one →
  1. March 19, 2012 6:13 pm

    Very appreciative and excellent insight how to do things that I may have done slightly differently!

  2. April 21, 2012 3:55 pm

    This is really nice one on budget 2012 and also on Real Estate India

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