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BW Businessworld

Jaitley Budget Makes Building Smart Cities Easier

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The housing and real estate sector, reeling for the past few years with stagnation and lack of growth incentives, finally saw some real movement in Arun Jaitley’s budget. Real Estate Investment Trusts (REITs), which have been debated with even some rudimentary forms introduced, may now see the light of day.

FDI norms for the property market also saw some relaxation. Overall, there were distinct signs of the Modi government rising to the needs of urbanization by rolling out elements of a nation-wide city development programme.

In the budget, REITs, which own and manage a portfolio of properties acquired through a pool of funds raised from investors, will now get pass-through status and other incentives. A pass-through entity does not have to pay corporate tax as it is transferred or ‘passed through’ to its stakeholders.

REITs traditionally invest in large leased commercial properties that have ‘A’ class tenants, and thereby provide good returns to their investors. On the flip side, developers can raise funds in a tight market by selling complete and leased properties to REITs. Since they are typically listed, REITs also provide easy exits for investors at their choosing.

Commenting on the announcement on REITs, Surabhi Arora, Associate Director of Colliers International, said, “the introduction of REITs would be beneficial for the Indian market as they not only provide efficient access and flexibility to raise capital but also provide an alternative exit option to the investor.

The introduction of REITs in India would spell scores of opportunities for developers / private funds / and financial institutions as they can be used as an exit vehicle to rotate funds as per the requirement.”

Anish Sanghvi, associate director, PricewaterhouseCoopers (PwC), however sounds a warning note: “While a pass-through structure to facilitate single-layer taxation is a welcome change, no relief has been granted on the DDT leviable on the SPVs (holding real estate assets) distributing dividends to REIT/InvIT.

This could potentially be a big dent in the Business Trust (BT) economics, since the SPVs are unlikely to be leveraged substantially and would therefore need to distribute dividends rather than pay interest.”

The Modi-Jaitley budget also looks ahead to the needs of urbanisation by planning for “100 smart cities” with an allocation of Rs 7,060 crore presumably for infrastructure and planning, along with a boost to affordable housing. To ensure the erratic FDI pipeline is well fed, FDI norms in realty have been relaxed

to make the sector attractive for foreign investors. More specifically, the requirements of minimum development area for a project to be eligible for FDI has been reduced to 20,000 sq metres from 50,000 sq meters earlier, while the minimum capitalisation requirements for wholly-owned subsidiaries for FDI projects has been cut to $5 million from $10 million earlier. These investments will have a three-year, post-completion lock-in. 

To encourage FDI to add to the stock of affordable housing and move builders away from their penchant for luxury and upper middle class housing, the finance minister has provided that real estate projects with at least 30 percent cost allocated to low cost affordable housing projects should not be subjected to the limitations of capitalisation, minimum area requirement and lock-ins.  These investments will also be subject to a lock-in period of 3 years after completion of the project.

Reacting to the slew of measures for the housing and realty sectors, Pradeep Jain, chairman of Parsvnath Developers, said: “Funding had always been a concern for us as developers. Foreign investors were also shying away due to ambiguity in rules. With implementation of REITs and relaxation in FDI norms, the problem of fund crunch will get mitigated.”

Low cost housing, a demand for urban clusters, has been given a boost with an allocation of Rs 4,000 crore for the National Housing Bank. This will be routed as cheap credit for affordable housing projects for the urban poor.