‘India’s real estate looking positive’, says report

KUALA LUMPUR: The current state of India’s government finances and situation does not leave much room for populism, but considering the high inflation and curtailed savings, taxpayers can still expect some good news from the new government, according to Jones Lang LaSalle India’s (JLL) Budget 2014 — Positive for India Real Estate report. The Union Budget of India for 2014 to 2015 was presented by finance minister Arun Jaitley in Parliament on July 10.

Low-cost housing schemes have been allocated 40 billion rupees (RM2.1 billion) and Jaitley has indicated that there will soon be a relaxation of foreign direct investment (FDI) norms for the affordable housing sector. The income tax deduction limits under Section 80C for repayment of principle on housing loans have been increased from 100,000 rupees (RM5,283) to 150,000 rupees while the deduction limits on interest payment for housing loans have been increased from 150,000 rupees to 200,000 rupees. Individual income tax exemption limit has also been increased from 200,000 rupees to 250,000 rupees.

According to the report, this will greatly improve the sentiment for housing markets and would assist individuals in servicing home loans but notes that it still remains to be seen as to how fast these initiatives will take effect.

The budget has not provided enough measures to bring down construction costs which have been rising at a rate of 17% over the last three to four years. Therefore material costs involved in real estate construction will remain high over the near to medium term which will put pressure on developers’ margins, said JLL.

Infrastructure and manufacturing sectors have been given priority since they are job creating sectors, therefore banks are now encouraged to extend long-term loans for infrastructure projects without any regulatory preemptions such as cash reserve ratio (CRR), statutory liquidity ratio (SLR) and priority sector lending norms. JLL believes this will enable faster infrastructure creation.

The budget has allocated 378 billion rupees to the National Highways Authority of India for the construction of highways, with an additional 30 billion rupees to boost road connectivity in the North-East regions. This year’s target also sees the completion of 8,500km of national highways. Meanwhile, Ahmedabad and Lucknow which are special beneficiaries of this budget are allocated 1 billion rupees towards the deployment of the Metro Rail systems which, according to the report, will increase connectivity and impact property value.

The development of 16 new ports has been proposed at an outlay of 110 billion rupees, and an additional allocation of 116 billion rupees has been made for the development of outer harbour port projects. These two allocations combined would increase demand for commercial office space at the port cities, said JLL.

The new government’s manifesto to create 100 smart cities has been allocated 70.6 billion rupees. The FDI norms in terms of minimum required area for this development have been lowered from 50,000 sq m to 20,000 sq m which enables smaller cities to qualify for FDI investments, thereby enabling cheaper mobilisation of funds.

JLL also notes that this will have positive implications for real estate across multiple asset classes since as much as one-third of the country’s demand for office space emanates from this sector.

The warehousing sector has been allocated 50 billion rupees which exhibits positive implications for retail real estate and specifically for e-commerce on account of a strengthened supply chain which has been a crucial requirement of this sector but apart from this, no further benefits have been provided to the retail sector, stated the report.

In the hospitality sector, electronic visa services will be introduced in nine international airports in India over the next six months, along with the indication of major provisions for the creation of world-class convention centres which are to be developed through the public-private partnership model. The report said these centres will build up corporate tourism and increase the absorption of hotel-related real estate.

Finally, the budget has delivered the much-awaited clarification on taxation of real estate investment trusts (REITs). REITs will be allowed tax pass-through status, which means it will not be subject to tax, provided all criteria for investments and dividend distribution are followed. According to the report, this has laid the final roadmap for REITs to start operating in India and has opened up an attractive avenue of raising funds.

“The real estate sector’s comprehensive expectations have definitely not been met completely in this budget. However, given the economic situation prevailing in the country, this is not really surprising. As such, we are glad that the consumer has been moderately benefitted which will hopefully result in the real estate sector moving in the right direction,” said JLL.


This article first appeared in The Edge Financial Daily, on August 1, 2014.