Download Union Budget 2017-18: Spotlight on Affordable Housing

Colliers Flash
INDIA | UNION BUDGET 2017-18
1 February 2017
Union Budget
2017-18: Spotlight
on Affordable
Housing
Surabhi Arora Senior Associate Director |
Research
The Union Budget promises to continue economic
reforms, control inflation and prudent fiscal
management. It will ensure macroeconomic stability
in India against the backdrop of global protectionist
policies. Post demonetisation, the surplus liquidity
in the banking system has already reduced
borrowing costs, which in turn will boost the
economy. The budget, however, provides little
impetus in the short term to the real estate sector
other than a boost to the affordable housing
segment. In our opinion, the infrastructure status for
affordable housing and tax relief for real estate
developers are positive steps but not enough to
boost residential sales in the short term. The
government has provided up to INR12,500 (USD185)
income tax benefit to individuals, which is
insufficient to provide the demand side push to the
sector.
The Honourable Finance Minister of India, Mr Arun
Jaitley presented the Union Budget 2017-18 on 1
February 2017. The budget forecasts GDP growth of
7.2% to 7.8% in 2017 and 2018, respectively. We
believe the Indian economy should perform despite
many anticipated risks such as the expected US Fed
rate hike, redemption of FCNR (Foreign Currency NonRepatriable) deposits, increasing global trade
protectionist policies and demonetisation in India.
The mantra of this year’s budget is to provide an impetus
to economic growth through extensive capital outlay in
agriculture, infrastructure, manufacturing and healthcare
sectors; and ensure credit availability for businesses.
The government has reduced tax rates for small and
medium scale enterprises (MSMEs) to 25% and
intended to improve ways of doing business mostly
through technology platforms. These measures will
indirectly help the real estate sector grow. The finance
minister granted “Infrastructure” status to affordable
housing, thereby reiterating the government’s
commitment to provide ‘Housing for all by 2022’.
While the budget puts a lot of required emphasis on
grassroots investment in rural areas, it has brought joy to
the real estate sector by announcing a handful of
measures and allocations, which is a positive sign for the
sector. The finance minister has also allocated funds for
various schemes and extended additional tax incentive
to individuals, investors and developers.
Stock Market Reaction
Company
Change (in %)
BSE SENSEX
+1.76%
REALTY INDEX
+4.83%
DLF Ltd.
+6.74%
Godrej Properties Ltd.
+5.13%
Housing Development and
Infrastructure Ltd. (HDIL)
+5.84%
Indiabulls Real Estate
+2.72%
Oberoi Realty Ltd.
+6.38%
Omaxe Ltd.
+1.64%
Phoenix Township Ltd.
+4.98%
Prestige Estate Ltd.
+5.61%
Sobha Ltd.
+2.33%
Unitech Ltd.
+3.73%
Source BSE India
Key highlights of the budget that
are likely to influence the real
estate sector
Infrastructure status to Affordable Housing –
boost for affordable residential sector
Impact: Union Budget 2017-18 granted the muchdemanded “Infrastructure” status to Affordable housing.
The step is well aligned with the government agenda of
‘Housing for All by 2022’. This will allow easier access to
capital for developers, at a much lower rate with a longer
amortisation period. In addition, it allows developers
access to viability gap funding and tax incentives. For
affordable housing purpose instead of the built up area
of 30 and 60 sqm, the carpet area of 30 and 60 sqm will
be counted. The 30 sqm limit will apply only in case of
municipal limits of 4 metropolitan cities while for the rest
of the country including the peripheral areas of metros,
limit of 60 sqm will apply.
The government has also extended the time of
completion of such projects from 3 years to 5 years.
Buyers of affordable housing got a boost with the
announcement of interest subvention of 4% and 3% on
loans up to INR0.9 million (USD13,318) and INR1.2
million (USD17,758), respectively. The proposed
deduction of the income tax rate to 5% for taxpayers
having income less than INR0.5 million per annum
(USD7,400 million) will increase the disposable income
of the common man which will, in turn, raise spending
power and increase investment in the affordable
segment.
Currently, the housing sector is active mostly in Tier-I
and Tier-II cities in India; however, the scheme will not
only provide necessary housing to the poor but also
promote the residential sector in rural areas.
Tax breather for notional rent income on unsold
unoccupied completed projects
Impact: At present, houses that are unoccupied after
getting completion certificates are subject to tax on
notional rental income. Builders for whom constructed
buildings are stock-in-trade, the rule will be applicable
only after one year of receiving the completion
certificate. The law will provide some breathing time for
developers to liquidate their inventory.
Holding period for immovable assets reduced
from 3 years to 2 years and indexation to be
shifted from 1.4.1981 to 1.4.2001
Impact: This is a significant step regarding capital
gains taxation provisions on land as well as buildings.
Reduction in the holding period and amendment in the
base year indexation will considerably reduce capital
gains tax providing tax relief for several asset holders.
It is likely to increase the government’s tax base through
immovable property and encourage the mobility of
capital assets. With the proposed taxation provisions,
property holders are more likely to engage in the sale of
real estate, thereby giving a much-needed fillip to the
sector.
In our opinion, more projects will now be eligible for
profit-linked income tax exemptions. So far, we have
seen limited participation from private developers in the
affordable housing segment despite high demand. Profitlinked exemption along with the infrastructure status for
affordable housing will push developers to undertake
more affordable housing projects, thus increasing private
player’s participation in the sector.
10 million homes to be built by 2019 for the
homeless and those living in kutcha houses
Impact: To stimulate the rural housing sector in India,
INR230 billion (USD3.4 billion) has been allocated under
the Gramin Pradhan Mantri Awas Yojana. In line with
their aim to promote affordable housing not only in cities
but also in rural areas, the government intends to
complete 10 million homes by 2019.
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Colliers Flash | 1 February 2017 | INDIA | UNION BUDGET 2017-18 | Colliers International
National Housing Bank (NHB) will refinance
individual housing loans of about INR200 billion
(USD3 billion) in 2017-18
Impact: The demonetisation drive towards the end of
2016 has resulted in surplus cash within the banks;
thereby allowing major banks across the country to lower
their lending rates.
The lending rate cut will be welcomed by not only new
homebuyers, but will also be a reason to rejoice for
homebuyers who have already taken a flexible housing
loan. However, the refinancing scheme from the NHB
will improve the sentiment of current homeowners,
especially those subjected to high lending rates in the
past.
likely to catch the attention of foreign investors and also
aid and enhance investment in the real estate sector.
The government is looking to upgrade airports in tier-II
cities and proposed to monetise unused land assets.
Another positive step is the decision to introduce a bill to
resolve disputes in PPP projects.
Capital gains tax liability changed for Joint
Development Agreement (JDA) signed for
development of property
Impact: If a Joint Development Agreement is signed
for the development of property, then the capital gains
tax will only be paid in the year of completion of the
project. Apart from several other measures to reduce
capital gains tax, this step will provide tax relief not only
to the landowner but also the builder/promoter, thereby
decreasing their liability.
No cash transaction above INR0.3 million
(USD4439) permitted
Impact: As one of the extensions to the
demonetisation drive, the government plans to disallow
any cash transaction above INR0.3 million (USD4439).
The real estate sector involved several cash transactions
before the demonetisation drive. However, buyers and
developers had turned cautious post-demonetisation
with a notable reduction in the number of cash
transactions.
Increase in investment in infrastructure and
development projects
Impact: Following the announcement of several major
Thus, in our opinion, this provision may only lead to a
nominal impact on the sector in the short term, while it
will lay down the foundation for a transparent economy
and boost foreign investment.
infrastructure projects in 2016, the union budget
disclosed one of the biggest budget allocations for the
infrastructure sector. About INR1310 billion (USD19.4)
billion) has been allocated for railways and INR64.9
billion (USD0.9 billion) for highways which includes
2,000 kms of coastal roads, facilitating better
connectivity between major port cities such as Mumbai,
Chennai, Kochi and other cities and small towns.
Abolition of Foreign Investment Promotion
Board (FIPB)
Similarly, select airports in Tier-II cities will see
investment for operation and maintenance through the
public-private partnership (PPP) model.
This is in conjunction with the government’s view to
further liberalise FDI norms and attract foreign investors.
Under the automatic route for FDI, the foreign investors
will not require any prior approval from the FIPB and will
only be subject to laws defined for each sector.
The government plans to elevate the current state of
infrastructure in India aiming to create a state of the art
infrastructure network. Improved infrastructure is more
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Impact: Over the last two years, the government has
implemented several reforms to encourage Foreign
Direct Investment (FDI) in India. As more than 90% of
the total FDI inflows currently take place through an
automatic route, the government has decided to do away
with the FIPB in 2017-18.
Colliers Flash | 1 February 2017 | INDIA | UNION BUDGET 2017-18 | Colliers International
Conclusion
Overall, it was a positive budget for the sector and the
government has done well to create awareness for the
need to increase tax compliance. Demonetisation was a
temporary setback and we expect the economy to
bounce back and in particular, we look forward to the
gains once Goods and Services Tax (GST) is rolled out
later this year.
Introduction of innovative land-pooling
mechanism for development of the new state
capital of Andhra Pradesh
Impact: The budget announced that the new state
capital of Andhra Pradesh is being constructed by an
innovative land-pooling mechanism without the use of
the Land Acquisition Act. Land acquisition remained a
much-debated issue and a major hurdle with respect to
large-scale developments.
The new land pooling mechanism may significantly
reduce land related disputes and increase the speed of
development. The exemption of capital gains tax will
uplift the confidence of landowners whose land is being
pooled for the creation of the capital city under the
government scheme. However, the exemption is only
limited to those who were the owners of such land as of
June 2, 2014, the date on which the state of Andhra
Pradesh was reorganised.
For more information:
Surabhi Arora
Senior Associate Director |
Research | India
[email protected]
Uttara Nilawar
Manager | Research |
Mumbai
Uttara.nilawar @colliers.com
Contributors:
Amit Oberoi
National Director |
Knowledge Systems |
India
Andrew Haskins
Executive Director |
Research & Advisory |
Asia
+91 124 456 7580
Copyright © 2017 Colliers International.
The information contained herein has been obtained from
sources deemed reliable. While every reasonable effort has
been made to ensure its accuracy, we cannot guarantee it. No
responsibility is assumed for any inaccuracies. Readers are
encouraged to consult their professional advisors prior to
acting on any of the material contained in this report.
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Colliers Flash | 1 February 2017 | INDIA | UNION BUDGET 2017-18 | Colliers International