Realty sector: Building hopes from the Budget?

The realty sector has often found itself in troubled waters owing to macro factors like rising interest rates, slower economic growth and lower demand. Factors like a higher debt burden and lower realisations also added to its woes.

Considering that the scenario has remained the same for the past two years, the expectations of realty players have consistently been higher from the Union Budget, and the industry has repeatedly asked for sops. This time too, the industry is ready with a wish list. Let’s look into the details of what the industry wants and what may be accepted.

However, before we take a look at the expectations from the upcoming budget let’s look at what the realty sector got in the previous budget. In 2011, the industry has asked for many sops like industry and infrastructure status for the realty sector, reduction of custom duties on technology imported for low cost housing and last, but not the least, relaxation of the FDI investment criteria. Industry and infrastructure status would have solved some problems with regard to funding for realty companies.

However, despite these demands, hardly anything came up in a direct way. A few of the benefits that were awarded included interest subvention at 1% on housing loans, the enhancement of the housing loan limit to Rs 25 lakh for units under priority sector lending and lastly, the enhancement of the rural housing fund to Rs 3000 crore. However, this was not enough to bring cheer to the ailing sector. To add to its woes, the hawkish stance of the RBI kept the interest rates higher, which resulted in the sector underperforming on the bourses. To quantify this, since 28th February, 2011 (Budget day) the Realty Index witnessed a decline of 31% as compared to a decline of 13% in the Sensex.

With the Realty sector outperforming in the year 2012, the picture is different now. While the Realty Index is up by a whopping 41% on a YTD basis, the Sensex has gained only 14%. So, what has changed suddenly in this sector, which had been underperforming for a long time?

While many attribute the sudden up-move in the sector to the expected reversal in the interest rate cycle, many feel that the government may accept a few of the demands from the sector in the upcoming Union Budget. So, let’s first understand what exactly the wish list comprises.

The first and the foremost demand is one that did not get recognised last year – that of providing industry status to the real estate sector. This would help the industry to avail itself of long-term and short-term finances, as available to industries. Currently, the realty sector, which is already reeling under a huge debt pile, has no alternative but to raise funds at higher rates. We feel that this demand may be fulfilled in the coming budget.

Secondly, realty players are also asking for infrastructure status for the affordable housing projects. This would provide for funds at lower interest rates, as infrastructure falls under priority sector lending. However, with banks already reeling under the pressure of bad loans, we do not really expect the demand to get a nod.The third demand is on the housing finance front. With the majority of houses being bought on finance, the industry is seeking incentives for housing finance companies and wants the government to make sure that housing finance companies can borrow from external commercial borrowings at better costs. One can expect some positive steps on this front.

On the financing front, the industry is also looking at incentives for home buyers and wishes the limit for deduction for principal repayment to be raised. There is a demand regarding increasing the limit from current levels of Rs 1 lakh (Under Section 80C). However, if the Direct Tax Code (DTC) is brought into force, the interest cost (Rs 1.5 lakh) will be treated for tax exemption but not the principal.

The realty industry wants housing finance companies to be treated at par with banks for the recovery of dues, and hence, wants them to be covered under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act. We don not expect any action on this front.

The industry is also making demands for the relaxation of FDI investment criteria in Tier II and Tier III cities. The existing criterion is a stringent 10 hectares for housing plots and 50000 square metres of built-up area for any construction-development project. Some relaxation is definitely required, as these are smaller ticket areas.

Some smaller demands include those for Real Estate Mutual Funds (REMF) and Real Estate Investment Trusts (REIT). However, we do not expect any movement on these unless and until some watch dog (like the SEBI in equity markets) is appointed.

So, we can see that the wish list is quite long, though we do not expect many of the points to be entertained by the Finance Minister. All in all, not many of the expectations may be fulfilled in the Union Budget 2012.

Performance of Realty Scrips Since Previous Budget.