An encapsulation of the aspects of Union Budget 2007 relevant to the real estate sector, by Trammell Crow Meghraj, India
Tourism
•Tourism infrastructure to get an allocation of Rs 520 crore as against Rs 423 crore last year
•Five-year tax holiday for two-, three- and four-star hotels and convention centres with a seating capacity of 3,000, in NCT of Delhi, Gurgaon, Ghaziabad, Faridabad and Gautam
Initiatives will provide impetus to growth of hospitality sector in NCR region in view of the upcoming Commonwealth Games.
Infrastructure
•Allocation for National Highway Development programme to be stepped up from Rs 9,955 crore to Rs 12,600 crore
•Work on Golden Quadrilateral road project nearly complete. Considerable progress made on the North-South and East-West corridors; likely to be completed by 2009
•Tax-free bonds to be issued by state-owned urban local bodies
Potential Growth Cities (focus on cities in Northeast)
•Northeastern region will get Rs 405 crore for highway development. Road-cum-rail project over Brahmaputra River in Bogibil, Assam
•Total budget for the Northeastern region raised from Rs 12,041 crore to Rs 14,365 crore
•New Industrial Policy for the Northeastern region to be in place before March 31
Other Issues
•Modified VAT applicable to developers
•Commercial rentals included in service tax
•Textile parks: allocation up from Rs 189 crore to Rs 425 crore
•MAT extended to IT companies
•Annual target of 15 lakh houses under Bharat Nirman Programme to be exceeded
•Benefits of investment in venture capital funds confined to IT, biotechnology, nano-technology, seed research, and dairy, among some others
•Excise duty on cement reduced from Rs 400 per tonne to Rs 350 per tonne for cement bags sold at Rs 190 per bag at retail market. Those sold above Rs 190 will attract excise duty of Rs 600 per tonne
•Indian investors to be allowed investment in overseas capital markets through mutual funds. Mutual funds to set up Infrastructure Fund schemes.
•Rs 150 crore to be given to Ministry of Youth and Sports for Commonwealth Games, and another Rs 350 crore to Delhi Government for the same purpose. In addition, Rs 50 crore to be provided for the Commonwealth Youth Games in Pune
•Export duty on iron ore and concentrate at the rate of Rs 300 per tonne. Excise duty for plywood reduced from 16 per cent to eight per cent
OUR REACTION
This is a moderate budget as far as its positive implications on the real estate sector are concerned.
The five-year tax holiday afforded to Delhi, Gurgaon, Ghaziabad, Faridabad and Gautam in the context of the upcoming Commonwealth Games will benefit those areas. This move will pump in demand for property in these areas and, therefore, push prices up.
The fact that service tax will be levied on commercial properties is definitely a step backwards. It will cause the cost of lease rentals to rise proportionately – another added burden that will be transferred directly to end-users.
The drop of excise duty on cement, though beneficial to the construction industry, will not translate into an overall boost of more than 1-2 per cent. The higher initiative to continue in public-private partnerships is definitely encouraging. It will help maintain growth in the real estate sector.
The six-billion-dollar infrastructure fund formulated by the Deepak Parekh Committee last year is being put into effect, and this is nothing but good news for the infrastructure industry. Investment in infrastructure will become easier, helping to escalate infrastructure development. This will obviously have positive repercussions on the real estate sector as well.
The prospect of completion of all major undertakings associated with the Golden Quadrilateral project by 2009 is extremely positive, since this will enhance connectivity between metros and bring in a considerably supply of land. New corridors will open up, and these will be typified by affordable rates that will benefit end-users. In fact, the budget’s thrust on rural infrastructure will escalate real estate opportunities in areas that were hitherto neglected. Moreover, it will lessen the movement of rural dwellers to urban areas, thus decreasing the load on already saturated cities.
We applaud the finance minister’s willingness to seriously implement the plans, announced last year, of turning Mumbai into a world-class financial hub. With the announcement to this effect in the new budget, he has put this intention into the public domain and we can certainly look forward to some major positive changes in Mumbai’s real estate market.
We welcome the introduction of reverse mortgage and mortgage guarantee companies, which will translate into direct security for homeowners. Reverse mortgage is a special loan against residential properties that allow for conversion a portion of the equity in such properties into cash. However, unlike a traditional home equity loan, line of credits, or second mortgage, no repayment is required until the borrower no longer uses the home as principal residence.
Because the budget denies venture capital funds (VCFs) tax exemption to all other than those investing in certain high-tech industries, there is now much less incentive to invest in real estate-related VCFs. This is a serious limitation, considering that India has not yet adopted real estate investment trusts (REITs) as vehicles for investment in real estate. Although denial of tax exemption for VCFs is applicable only from the coming financial year, those existing now will also be affected.
No regulatory provisions for controlling home loan rate are announced. In other words, interest rates are still left to the market and no provisions to guard against further escalations are in place. However, the fact that the budget aims to exceed the yardstick of 15 lakh houses under Bharat Nirman Programme is extremely good news good for the low-cost housing sector. Corporates will now be encouraged to invest in this sector, which will provide very healthy profit margins after this new development.
