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Increase In Excise Duty Will Hurt Profitability
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For the real estate and housing sector, this years' budget has exceeded expectations given the pressure on fiscal situation. Most importantly, it has taken into account the crying need to focus on affordable housing sector by allowing ECB for low cost housing, road as well as construction. With holding tax on ECBs for affordable housing has been reduced from 20 per cent to 5 per cent for 3 years and this move will help ease the liquidity in the sector. Also, investment linked deduction of capital expenditure in affordable housing is proposed to be provided at 150 per cent as opposed to 100 per cent. All these measures will encourage supply of low cost housing. For the home buyer, the 1 per cent interest subsidy scheme has not been rolled back, however there were expectations of the increasing the subsidies through this scheme. Participation of FII's to grow corporate bond markets is also a very positive development and will open up the opportunities for real estate companies. Only silver lining is the extension of 1% interest rate subvention loans upto Rs. 15 lacs for housing projects upto Rs.25 lacs by 1 more year and ECBs for affordable housing. However, it would have had more impact if a broader price bracket was covered
Construction and real estate have continued to contribute strongly to the overall economic growth. In 2011-12, the construction industry contributed 8.2 per cent (~ 670,778 crore to national GDP) while real estate contributed 10.6 per cent in 2010-11. Of this, housing contributed nearly 5 per cent and is expected to increase to 6 per cent with institutional credit growth of 20 per cent over the next three years. What is worrying is that the growth rate of construction has decelerated to 4.8 per cent, due to external factors and hardening of interest rates and challenges associated with land acquisition in some places. With steep increases in cement and steel prices, the profitability of construction companies has also been affected, which is further expected to increase marginally over this year.
Even as services sector performed well, slow growth in manufacturing and industry, stubborn inflation, high interest rates and the ever rising subsidies bill, all exerted pressure on the country's finances. This to some extent has translated in the budget raising tax revenues and cutting on government expenditure, resulting in less than populist measures from being announced, which the industry and common man were hoping to hear from this budget.
However, it is essential that we realize that it is a tough balancing act that the finance minister has had to do, considering there are several key sectors that have been vying for the attention of the budget. Considering the fiscal pressures and the economic and political constraints, budget announcements for the real estate sector can still be regarded as sector friendly with housing and urban infrastructure receiving a boost.
While it may be argued that some of the long standing demands of the sector have been overlooked in yet another budget, some level of 'expectation management' is considered necessary in evaluating and analyzing what this budget has done to meet and sustain infrastructure development and sector growth.
Spurring economic growth through infrastructure development
The development and maintenance of essential public infrastructure is an important ingredient for sustained economic growth and this budget has provided ample thrust to the sector. Considering infrastructure investment can lift economic growth and support social objectives, the outlay of infrastructure tax free bonds for financing infrastructure projects has been raised to Rs 60,000 crore in 2012-13. This includes Rs 10,000 crore for NHAI, Rs 10,000 crore for IRFC, Rs 10,000 crore for IIFCL, Rs 5,000 crore for HUDCO, Rs 5,000 crore for National Housing Bank, Rs 5,000 crore for SIDBI, Rs 5,000 crore for ports and Rs 10,000 crore for power sector.
Infrastructure development contributes to poverty reduction by spurring economic growth, stimulating enterprise opportunities, generating employment and providing people with access to basic needs.
Therefore with urban infrastructure development our cities are expected to transform into 'engines of growth' and assist in the creation of enabling environments for both private and public financing.
While individuals may feel marginalized by the budget, given the lack of direct sops or incentives they have received, the focus on infrastructure will help support human resource development, capacity building and institutional strengthening of infrastructure facilities, thereby ensuring that people have access to better lifestyles, through improved job opportunities, higher disposable incomes and amenities such as housing, roads, transport, power etc. in the long run.
Is housing for all becoming a reality?
Housing is an essential aspect of economic development. Not only is it an enabler of economic performance but also encourages regional competitiveness. The Government's plans have presented an opportunity to improve the use of housing as an enabler of economic growth; however policies and economic and social factors prevalent in the market have not been that responsive to the local economic development conditions and requirements of people.
In lieu of the supply constraints and lack of financing options for this segment, the budget this year has provided a slew of incentives for affordable housing. The measure to extend ECB to the low cost/affordable housing segment is greatly appreciated and should allow developers of such projects to have access to low cost financing. Better capital availability will help in timely project execution, translating into higher volumes.
In effect this may provide a two-fold benefit, by encouraging more developers to look at this segment and also allowing the cost savings from such financing mechanisms to then be passed on to end consumers, thereby reducing their capital outlay. Additionally the setting up of a credit guarantee trust fund will help encourage lenders to increase the capital flow to this segment.
Has the home buyer been marginalised?
This budget to some extent has also addressed the existing woes of the home buyer. The continuation of the 1 per cent interest subvention scheme has been extended for this fiscal and will provide an impetus for homebuyers looking to purchase property up to Rs 25 lakh in value. However, the budget did not deliver on the expectations that the price band for this scheme be widened to Rs 40 lakhs, especially in lieu of current property prices, mainly in urban centers.
Also, exempting proceeds from the sale of a residential property from capital gains tax is a definite plus for home buyers, who are now equipped with more reinvestment options. Previously, the only route for exemption available to home buyers was purchase of another property or tax saving bonds, which will now include investing in equity or equipment of an SME. On the flip side, this move could result in a lowering of sales volumes in the secondary sales market.
The increase in service tax is also a dampener for the sector and could affect consumer sentiment to some extent, considering the total outlay that consumers will have to make towards home purchases (mid to high end segment) will increase, albeit marginally. Given that the market is already fraught with price hikes and rising inventory, the increase in excise duties of certain materials and prices of cement and steel will further result in escalations and lead to low consumer sentiment. However, from an overall perspective, the budget will help facilitate infrastructure growth in the long run, which will positively, albeit indirectly impact consumers.
Bhim Yadav, Chief Executive Officer, Falcon Realty Services
We welcome the Finance Minister's decision to allow External Commercial Borrowings (ECB) for low cost affordable housing projects as this will give a much needed boost to the affordable housing segment. This will further help in bridging the demand supply gap in the affordable housing segment. Also setting up of the Credit Guarantee Trust Fund to ensure better flow of institutional credit for housing loans is an excellent impetus which will have a great impact on the prospective customers going for affordable homes.
Our Global Eco-city project which is located on NH-8 alongside the Delhi-Mumbai Industrial Corridor (DMIC) will see a surge in demand as Japanese funds have pumped in to a great extent for a gamut of sectors including infrastructure, technology, automobile, etc. Also, people with an income between 5 lakh to 10 lakh will have to pay a tax of 20% which was earlier Rs. 8 lakh. This will leave more money in the hands of consumers and thus they can invest more in low cost housing.
Rajesh Srivastava, Managing Director, Meinhardt India
The Union Budget for FY 2012-13 has a lot of potential for Infrastructure & Real Estate sector. Finance Minister, Dr. Pranav Mukherjee stated clearly that lack of infrastructure is a major concern in India and there is grave need to remove infrastructure bottlenecks. I too, strongly feel the same. While we continue to be one of the fastest growing economies, our pace of development is unlikely to continue unless it is supported by an equally robust development of its infrastructure. There is a balanced scope of development in both Urban and Rural areas but more stress has been given to enhance & develop the Rural India. There are some critical challenges mentioned in the Budget, like lack of monitoring resulting in time and cost overruns or acquiring land for projects, the implementation gaps, leakages from public programmes and the final quality which pose a serious challenge to the industry & overall growth. There are a lot of crucial things which needs immediate attention like proper Master-planning, Transport connectivity, strengthening basic infrastructure on water, irrigation, sewage-system, power-electricity etc. All this has been mentioned in this year's Budget and would be duly taken care of by the government by the Infra-investment fund of Rs. 50,000 Crores.
The total investment in infrastructure including roads, railways, ports, airports, electricity, telecommunications, oil gas pipelines and irrigation is estimated to have increased from 5.7% of GDP in 2007 to around 8.0% in 2011. This year's budget aims for an increased growth rate between 9-10% with the fund-allocation of Rs. 10,000 crore on developing the National Highways alone. Budget 2012-13 gives major thrust on accelerating the pace of investment in infrastructure, as this is critical for sustaining and accelerating an overall growth. Efforts to attract private investment into infrastructure through the Public-Private Partnership (PPP) route have met with considerable success, not only at the level of the Central Government, but also at the level of the individual States. A large number of PPP projects have taken off, and many of them are currently operational in both the Centre and the States. Since resource constraints continue to limit public investment in infrastructure, Public-Private Partnership (PPP) based development has been strongly emphasized in this year's Union Budget. Special attention has been paid to the financing needs of private sector investment in infrastructure. Infrastructure investment (defined as electricity, roads and bridges, telecommunications, railways, irrigation, water supply and sanitation, ports, airports, storage and oil-gas pipelines) would be increased from about 8% of GDP to about 10% of GDP. The total investment in infrastructure would have to be over Rs. 45 lakh crore or $ 1 trillion in the next five years. Financing this level of investment requires larger outlays from the public sector, and this has to be coupled with a more than proportional rise in private investment.
The growth curve of Indian economy is at an all time high and contributing to the upswing is the real estate sector in particular. The Union Budget 2012-13 is very promising for the infrastructure sector and would fetch great results if implemented effectively. For economic and financial policymakers, new incentives to attract capital and projects have emerged. The ambitious FDI policies provide greater access to global capital markets will further expand the mix and amount of resources available for development. Infrastructure challenged India represents a fertile opportunity for a new approach that would attract needed financial resources for sustainable development and allow even greater participation in the global economy. With major National & Global players making large-scale investments, the coming year would boost up the development of infrastructure and thus construct a developed Nation."
GRK Reddy, Chairman & Managing Director, MARG Group
For Infrastructure and real estate sectors, the Union Budget 2012-13 throws up a mixed bag in terms of positive measures and disappointments. However, amidst a backdrop of rising inflation, tight liquidity, high interest rates, industrial slowdown, delayed reforms and a negative market sentiment, the budget at best can be described as 'realistic' and to a large extent 'growth oriented'.
A string of measures by the Finance Minister to boost investment in the infrastructure sector is most welcome. I am sure that the below measures will propel the economy to a healthy growth trajectory in the coming years.
Measures in budget 2012-13 have largely been disappointing except for some interventions in the affordable housing space.
K. S. Sudarshan, Chief Operating Officer, Ozonegroup
Overall, the budget lacks on reforms intent. Finance Minister has tweaked the rates and his political compulsions probably held him back from looking at reforms initiatives.
R Sarabeswar, Chairman and CEO, CCCL
In spite of remarkable introductory speech, in action, expectations not likely to be met. Of course ECB in low cost housing and in certain areas may ease funds for Infrastructure projects. Increase in Service Tax and Excise duty will set inflationary trend. Since there is no clear guidance about GST and DTC, it is disappointing.
T. Chitty Babu, Chairman & CEO, Akshaya
Announcements made in Budget 20102 – 13 especially the increase in service tax and excise duty rate is bound to increase the input costs thereby leading to increase in the cost of buying real estate. This does not forebode well for the industry. Allowing ECB for affordable housing is a welcome move. The Government could have certainly increased the exemption limit on interest paid for housing loans .The government has also been silent on pushing reforms and introduce policies to increase housing stock.
For the real estate and housing sector, this years' budget has exceeded expectations given the pressure on fiscal situation. Most importantly, it has taken into account the crying need to focus on affordable housing sector by allowing ECB for low cost housing, road as well as construction. With holding tax on ECBs for affordable housing has been reduced from 20 per cent to 5 per cent for 3 years and this move will help ease the liquidity in the sector. Also, investment linked deduction of capital expenditure in affordable housing is proposed to be provided at 150 per cent as opposed to 100 per cent. All these measures will encourage supply of low cost housing. For the home buyer, the 1 per cent interest subsidy scheme has not been rolled back, however there were expectations of the increasing the subsidies through this scheme. Participation of FII's to grow corporate bond markets is also a very positive development and will open up the opportunities for real estate companies.
Only silver lining is the extension of 1% interest rate subvention loans upto Rs. 15 lacs for housing projects upto Rs.25 lacs by 1 more year and ECBs for affordable housing. However, it would have had more impact if a broader price bracket was covered