Real Estate: Key Factors from Union Budget 2016

The Union Budget is an eagerly-awaited annual events which Indians follow closely. As the decisions and allocations announced by the Finance Ministry have great pertinence to both individuals and industries. The real estate sector is sensitive to many of policies that are announced both for various industries and individuals. The realty sector is just emerging from a prolonged and painful slowdown, and is looking for all and any signs of light at the end of the tunnel. This fact makes Union Budget all the more critical, and the real estate industry has many expectations from it. 

• ·         Offer financial protection from project delays to home buyers

The Union Budget should pay specific heed to this pressing need. On purchase into an under construction property, buyers can only claim tax benefits of Rs. 2 lakh after possession if construction is completed within three years. The benefits reduce to Rs. 30,000 if the builder delays construction beyond this – and they pay higher interest. First time home buyers purchasing properties for self-use additionally pay rent.

Instead of allowing home buyers tax benefits post-possession, the Union Budget should make a provision that allows these from the time they start paying interest on housing loans. This will ease their monetary burden considerably and make increase the velocity of home loan disbursements. Similarly, if an under-construction property is purchased from capital gains, its construction must be completed within three years of its sale to avail exemption. There can be delays by developer in such cases too. These deductions should be brought at par and the construction timeline should be extended from the current three years to five years.

• ·         Provide more tax saving on housing loan and house insurance premiums

The government should increase the tax deduction limit for housing loans, especially for buyers in metropolitan cities. The current limit of Rs. 2 Lakh is insignificant given the ticket sizes in cities like Mumbai, where most houses are priced at Rs 1 crore and above. Also, tax concessions on house insurance premiums could be introduced to encourage end users to insure their homes. Similarly, the tax exemptions limit should be increased by about Rs 1 lakh and be auto-set to match inflationary trends in a financial year.

• ·         Raise house rent deduction limit

Salaried persons get house rent allowance as a component of their total salary, and cam therefore claim a deduction. This deduction can be substantial in cases where the salary and its HRA component are higher. However, self-employed persons and those who draw lump sum pays without an HRA component can only claim a maximum deduction of Rs. 2,000 a month under sections 80GG. The budget can and should address this anomaly.

• ·         Provide more incentives to boost development and consumption of sustainable real estate

The Budget should provide clear and convincing benefits to buyers of green real estate in the country. Stakeholders of the residential real estate sector definitely require more encouragement to press the green button. Most home buyers in India are averse to paying an extra premium for such projects, and the low demand means that developers are not sufficiently active in this segment. The Budget should provide a combination of incentives to boost the development and buyer interest in green real estate in the country.

• ·         Make additional allocation for infrastructure development in peripheral areas of metros

Although the previous Budget prioritised affordable housing, the upcoming Budget should allocate an amount specifically for building infrastructure and improving connectivity in the peripheral areas of cities, especially the metros. Without this, it will be difficult to provide affordable housing in the cities. Developers entering this segment should be allowed cheaper financing options, thereby also providing a shot in the arm for governments Housing for All by 2022 target.

• ·         Remove the DDT bottleneck in REITs

Despite the announcement last year, there are not been a single REIT listing in India to date. The primary reason is the presence of Dividend Distribution Tax. While the government has worked towards removing other bottlenecks, DDT has remained a key pending issue. Developers and other asset holders need the government to do away with it in the Budget 2016. Until this vital change is made, REITs – which can almost single-handedly revive the Indian real estate sector – will remain pipped at the post. To aid the faster revival of the real estate sector as well as to provide a significant boost to the economy in general, the Budget must address this issue.

Residential Property Launches Down 20%, Sale Marginally Up 3% in 2015

The launch of new residential projects was down 20% in 2015, while the sale increased marginally by 3%, the global property market and research firm Knight Frank India’s report revealed on Thursday. The report says that the glut in the realty market of the Mumbai Metropolitan Region will continue. The reform in the housing sector has failed to revive the market.

According to report, in 2015, new launches were down by 23% compared to 2014. The demand has shrunk by 6%. The property prices are stagnant. It has registered a marginal increase of 3%. This is the good time to buy the new home, says the report. Interestingly, the budget housing between Rs.30 lakh to Rs.60 lakh are always in demand, now reported in distress in Navi Mumbai, and peripheral of the central and western suburbs. While demand in Thane has slightly up by the 13%. The premium South Mumbai market witnessed a 108% jump in new project launches to 208 units in 2015.

The residential market in the MMR has been experiencing a steady fall in new launches. There was a 23% decline in the new launches in 2015, compared to 2014. During the second half of 2015, sale of housing units dropped by 6% year to year. For the first time since 2008, the demands for office space has exceeded than supply in MMR; office absorption is at 130%of supply in 2015. The information technology industry emerged as the top occupier of office space in the MMR, contributing 46% of the demand in 2015.

We have witnessed a robust office space demand with 7.5million sq.ft. of annual absorption in 2015. The overall market observed big deals across IT and Pharmaceuticals space, some of the largest office deals ever seen in Mumbai. There is a shortage of quality office space in the city; however it is not visible in the peripheral areas. Outlook for 2016 is a further decline in supply making it a favourable landlord market. However, in next 6 months we do see a gap in terms of expectations of tenant and landlord given the corporate earnings is sluggish and rents are likely to increase gradually in select micro markets due to declining supply.

Mumbai Continues To Be The Most Preferred Property Investment Point!

The Indian real estate marketing is heading for a steady revival in 2016, with over 70% of investors expecting improvement in sales in the next 12 months. The report Peering Into 2016: Taking Pulse of Investor Preference says there is a spike in investor interest in the real estate market as around 43% of respondents saying that the number of successful exits will increase this year. 

While Mumbai and Bengaluru will continue to be the most preferred destinations for investment, commercial office and mid-segment residential property will be the top two preferred assets classes by investors. After relatively muted calendar year 2013 and 2014, private equity investors significantly increased their bets on the Indian real estate sector in 2015. This report examines the motivations and expectations of PE funds who are now actively ramping up their exposure to this sector. 

As per report, a majority of exits over the last 12-18 months has been characterized by refinancing or buyback. A significant number of investors who participated in the survey believe that the refinancing theme is set to continue beyond the next 12 months.  The report said proposed regulatory initiatives such as the relaxation of foreign direct investment rules in real estate and passage of real estate regulatory bill will enhance investment in smaller projects and positively impact sentiment by boosting buyer confidence.

Today there are several financing options available. Driven by the need to increase returns and a desire to diversify, investor’s interest in international property markets is once again on the rise and India definitely seems to be leading that interest. According to the report, newer sources of capital from Japan & China are expected to enter the Indian real estate market in 2016 while pure equity investments are likely to make a comeback this year.

For the report, JLL carried out a survey of seasoned investment professionals across a number of issues like market fundamentals, successful exits, distressed deals as well as top three asset classes and top three cities for investment over the next 12 month period. Few of the challenges in the market have bottomed out. So definitely the market is reviving but it is going to be a slow one. There is a going to be greater balance between demand and supply. Investor sentiments have improved. However, it is a cautious one where investors are now more focused on good quality and locations.