Budget dishes out a mixed bag for real estate

The Budget has extended the tenure of the tax benefit for residential projects, hiked the allocation for slum re-development schemes, and extended the 1% interest subvention for affordable housing

Share prices of real-estate companies started shooting up after the Budget announcement because of three factors: the Budget has extended the tenure of the tax holiday enjoyed by developers;  the allocation for the slum redevelopment scheme (SRS) has been increased to Rs1,270 crore from Rs150 crore; and the 1% interest subvention for affordable housing has been extended by one more year to March 31, 2011.

The tax-free profits being earned by builders and developers from ‘affordable housing’ projects were earlier available only for projects approved before 31 March 2008, and the project had to be completed within the next four financial years. The deadline for completion of projects has now been extended to five years.

“For the housing sector, the benefits under Section 80-IB of the Income Tax Act have been extended for a year, which will be beneficial to developers focusing on the affordable housing segment.  The extension of the 1% interest subvention scheme on housing loans up to Rs10 lakh (and where the cost of the property is under Rs20 lakh) is a welcome measure. It is encouraging that the government is increasingly focusing on the acute housing shortage. This is reflected in increased outlays on the Indira Awas Yojana, focus on rural housing and the Rajiv Awas Yojana for reducing slums in urban areas,” said Renu Sud Karnad, managing director, HDFC Ltd.

Following the Budget proposals, DLF Ltd and HDIL gained 3 each while Unitech ended up 2.20%.
 
“We would have been even more grateful for the re-introduction of the 80 IB (10) tax benefit scheme, first implemented in 2001, which was definitely a boost for developers of affordable housing. Nevertheless, the fact that existing incentives continue to be in place, is positive,” said Anuj Puri, chairman and country head, Jones Lang LaSalle Meghraj.

The government has extended the tenure for tax benefits by one year due to the slowdown in the real-estate industry. But it remains to be seen how developers utilise it—whether they speed up their projects or let them drag on in the hope of higher valuations. “The extension of the tenure for tax benefits and the 1% interest subvention on housing loans will boost the real-estate industry,” said Pankaj Kapoor, founder of research firm Liases and Foras.

“Looking at the number of affordable housing projects launched by HDIL over the last few years in the Vasai-Virar region of Mumbai, this tax break will definitely add to the bottom-line of the company. The 1% interest subvention given for affordable housing will also boost demand,” said Sarang Wadhawan, managing director, HDIL.

“It is an action from the government to help developers who were in bad shape during the past year, by providing one year extra to complete their projects. It is a good initiative, but we also expected that the government will take into consideration the new projects which came up in 2009,” said Samantak Das, national head - research, Knight Frank (India) Pvt Ltd.

Commercial development in residential projects has also received a boost from the Budget, as the developers can either consider 3% of the total built–up area or 5,000 square feet—whichever is higher—for constructing commercial projects in a residential complex. Now, one can expect more commercial development in residential projects, especially big townships.

“Earlier, under section 80-IB, in a residential complex, any commercial built-up area of more than 2,000 square feet or 5% more than the total built-up area—whichever is less—had to be considered for tax benefit. This year, they have changed the provision. Now 3% of the total built–up area or 5,000 square feet (whichever is higher) has to be considered,” said Samantak Das of Knight Frank.
 
The share price of Housing Development and Infrastructure Ltd (HDIL), which is active in slum rehabilitation scheme (SRS) projects, gained on the bourses on Friday, after the allocation for slum redevelopment was increased from Rs1,50 crore to Rs 1,270 crore  in the Budget for 2010-11. 

“Increase in the allocation for slum rehabilitation is aimed to provide housing to slum-dwellers through state governments. This will definitely impact the entire slum rehabilitation policy, but overall the focus of central governments to provide a slum-free country will benefit projects which have been delayed or derailed for various reasons. The onus of providing a slum-free India has been put on the state government,” said Mr Wadhawan, managing director, HDIL.

“Overall the budget is positive but the service tax is one thing which is worrying the industry,” said Pranay Vakil, chairman, Knight Frank (India).

However, the industry has reacted negatively to the imposition of service tax under four categories. “The first is a 10% service tax on commercial rented properties.  Second, a consumer has to now pay 10% service tax if he wants a premium location (like sea-side view, higher floor, etc.) or luxury amenities in a residential complex. Third, the consumer has to pay 10% tax if he is buying an under-construction property.  Lastly, the developer has to pay 10% service tax if he is developing a property on leased land,” said Mr Vakil.
 

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