India Ratings & Research (Ind-Ra) expects the proposals in the Union Budget 2014-15 to boost end-user demand for housing and improve funds availability to the real estate sector. The agency had identified these parameters as potential factors for a positive change in the sector in its 2014 sector outlook report.
End-user demand is likely to be stimulated by the proposed increase in tax deduction for home loan payments on self-occupied houses. The budget proposes an aggregate annual increase of Rs 100,000 in deduction from taxable income - the deduction for interest payment on housing loans has been increased to Rs 200,000 from Rs 150,000 and that under Sec. 80C (which includes principal repayment on housing loans) to Rs 150,000 from Rs 100,000.
To put this in perspective, for a person who has an Rs 2 million loan carrying a 10.5% interest rate and repayable over 15 years, the reduction in monthly outflow would be about 11%. This change will immediately benefit all owners of mortgaged properties. Demand for residential real estate may also pick up as the monthly outflow required would reduce for prospective buyers. This of course assumes that real estate prices remain at current levels.
The proposed relaxation of minimum thresholds (built-up area and investment) for foreign direct investment in real estate projects is likely to significantly improve funds availability, especially for the affordable housing segment. The budget has proposed to reduce the minimum built-up area threshold to 20,000 sqm from 50,000sqm and minimum investment to USD 5 million from USD 10 million for real estate projects. These minimum threshold limits however will not be applicable for those projects which commit at least 30% of the project cost for affordable housing.
The clarification that tax on the income earned by real estate investment trusts (REITs) will be a pass through removes a major impediment to its attractiveness. Introduction of REITs will allow channelising of funds from retail investors to the real estate sector. They would also provide diversification benefit to real estate investors. REITs are thus likely to be an important source of funds for the sector, especially for companies which own income-generating commercial and retail assets.
Overall, the real estate sector, especially the residential real estate sector, has the potential to improve, especially if real estate prices remain stable.
