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General Budget and What it means for the Retail Real Estate Industry

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Where real estate is concerned, the (FM) has proposed some pragmatic and much required changes in FDI policies for the real estate sector in the maiden Union Budget 2014-15. Towards that, the minimum requirement of the built up area and capital conditions for FDI have been reduced from 50,000 square meters to 20,000 square meters, and from $10 million to $5 million, respectively. We believe the measures announced by the Government will stimulate the real estate sector’s growth, thereby also adding substantially to India’s GDP and employment opportunities.

To boost the development of Smart Cities and ‘Housing for All by 2022’, the finance minister has proposed development of 100 ‘Smart Cities’ as satellite towns of larger cities offering exciting opportunities for prospective foreign investors and funds. A sum of Rs 7,060 crores has been provided in this fiscal for the purpose of these Smart Cities. Such rational steps will allow mid-sized and professional developers better access to capital and boost affordable housing and overall development. Moreover, easier access to FDI, clarity on tax treatment and promotion of REITs will open up new sources of capital for the cash crunched real estate sector.

Though the Finance Minster has not announced anything directly for the retail sector, there are a few budget proposals that actually gave some reasons for retail players to cheer.  An increase in the personal income tax limit will create disposable income in the hands of the consumer while the single window clearance facility for smaller businesses will directly and indirectly provide an impetus to the retail industry.

As we know, the is going through a period of gradual but rising sunshine. A number of changes have taken place on the Indian retail front such as an exponentially increased presence of international brands, malls and hypermarkets. India is fast becoming the retail destination of the region and is ranked among the most attractive emerging markets for investment, as well as the fifth largest retail destination globally. Its new found strength is apparent with incomes of major retail players growing consistently. According to in-depth studies and research, India has one of the largest numbers of retail outlets in the world and the sector is witnessing overall growth with retail growth taking place not only in major cities and metros but also in tier-II and tier-III cities and towns.

The industry in India estimates the size of organized retail to grow from the current $6 billion to $17 billion in the next 3-4 years. Also, this is the time when organized retail is going through the Renaissance period and a professional Indian mindset would grasp more easily the route to maximize this window of opportunity for unprecedented growth in organized retail.

The government has also allowed the manufacturing sector to sell its products through retail including e-Commerce without any additional FDI approval. This means manufacturing units can sell through e-commerce platforms like , , , , etc., in their current format in India. Industry surveys say e-commerce could contribute up to 4% to India’s economy by 2020 from under 1% presently.

The Goods & Services tax (GST) will replace many indirect taxes including service tax, excise levy, state value-added tax and other levies.

Simultaneously, the country’s warehousing sector has received a boost with an allocation of Rs. 5000 crores. In this, we see definite positive implications for the retail real estate sector on account of a strengthened supply chain, which has been a serious handicap and requirement for a very long time.

Looking at the larger picture, the biggest announcement for the real estate sector was the directive to SEBI to introduce the much-awaited investment instrument REITs in India in order to  provide alternative funding channels. The government’s move to provide necessary incentives to REIT’s and giving a tax pass-through status to avoid double taxation is a positive move as it will reduce the pressure on the banking system, avail fresh equity and attract long term finance from foreign as well as domestic sources.  Introduction of REITs would eventually spell scores of opportunities for developers, private funds, financial institutions and other investors, as they can be used as an exit vehicle to rotate funds as per the requirement of the time. It will also help small retail investors to benefit from regular income as well as appreciation benefits from real estate.

Significantly, the budget has increased the income tax deduction limits under 80C, of which the repayment of principal on housing loans is a component. This limit has been raised from Rs. 1 lakh to Rs. 1.5 lakhs. Additionally, the budget has also increased the deduction limit on interest payment for housing loans from Rs. 1.5 lakhs to Rs. 2 lakhs. The budget gave further indirect benefits to the residential sector by increasing the individual income tax exemption limit from Rs. 2 lakhs to Rs. 2.5 lakhs. These measures will encourage savings and investments. These two factors will lead to a vastly improved sentiment in the housing segment.

In terms of relief to the housing sector, the budget has allocated Rs. 4000 crores for low-cost housing schemes. Additionally, the Finance Minister also indicated that there will soon be a relaxation of FDI norms for the affordable housing sector. It is indeed positive that the government has taken due note of the demand-supply mismatch in the LIG and EWS housing segments, but it remains to be seen how fast these initiatives are implemented. We welcome the Finance Minister’s proposal to encourage slum development to be included in Corporate Social Responsibility of the developers that will have a far reaching impact in the long run not only in real estate but also in the index for standard of living in the entire country.

The infrastructure and manufacturing sectors have been given paramount importance in this budget since these are job creating verticals. Banks will now be encouraged to extend long-term loans for infrastructure projects without any regulatory pre-emption such as CRR, SLR and priority sector lending norms. This additional enforcement support to the creation of infrastructure will result in faster infrastructure creation and the consequent benefits to the real estate sector too would be felt in due course of time.

The budget has allocated a total of Rs. 37,880 crores towards the NHAI for the construction of highways, and additional Rs. 3,000 crores to boost road connectivity in the North-East regions. For the current year, it has targeted the completion of 8500 kilometers of national highways, which are a known real estate catalyst and will have long-reaching implications on the markets of the cities they connect. The development of 16 new ports too has been proposed at an outlay of Rs. 11,000 crores. The combined effect of these provisions should see an increase in demand for commercial office space from the manufacturing sector in India’s commercial cities.

The reduction in excise duty for automobiles, announced during the interim budget has been maintained till December 31, 2014. This will bring a positive trend in demand for automobiles, and is expected to continue over the next 6 months. This will further boost the consumer spending pattern in cars. The reduction in direct taxes has the dual effect of increasing the disposable income and improving the general consumer sentiment, especially amongst the urban households. The reduction in duties is also expected to result in greater price competitiveness of organized-sector domestic manufacturers’ vis-à-vis the unorganized sector.

On the other hand, the construction costs have been rising at the rate of 17% over the last three to four years, and this budget has not provided enough measures to bring down these costs. Contrary to expectations, material costs involved in real estate construction will remain high over the near-to-medium term, which is bound to put pressure on developers’ margins as well as the affordability factor for end-users.

Also, the much-awaited industry or infrastructure status to the real estate sector has been ignored once again. Had the FM taken the initiative in this regard, real estate, which is the second largest generator of employment in the country, would have got the required shot in the arm with better loan structuring and interest rates from banks and financial institutions, besides facilitating the much required professionalism and transparency in the sector.

Another key point that remained untouched was foreign direct investment in multi brand retail, which was conspicuous by its absence. We await further clarity on this subject. There was however the much required clarification provided that manufacturing units will be allowed to sell their products through retail including e-commerce platforms without any additional approval. The government is unlikely to formally reverse the decision to allow 51% foreign direct investment (FDI) in multi-brand retail despite the ruling Bharatiya Janta Party’s opposition to allowing the entry of overseas supermarket chains into India. Officially, however, the window remains open and foreign players who want to enter the market can seek permission from the to set up an Indian venture.

Presently, the nation urgently needs capital inflow to reduce the worrying fiscal deficit. We hope that the new government’s policies will facilitate the desired results on the economy in the coming future.