Anuj Puri, Chairman & Country Head, JLL India
The Union Budget 2014-15 was presented in the parliament under economic circumstances that required tax revenues to keep pace with targets. Considering the state of government finances and the current situation – below-normal monsoons, Middle East tension leading oil price volatility, the weakness of the India rupee etc., there was not much room for populism.
However, considering the high inflation and curtailed savings that they have had to contend with for some years now, taxpayers still expected a fair shake from the new government, such as enhanced deductions, reduction in tax rates, interest subvention on home loans and tax incentives to affordable housing.
The Finance Minister took a cautious, yet courageous path with his budget announcement:
In terms of relief to the housing sector, the budget has allocated Rs. 4000 crore for low-cost housing schemes. Apart from this, he has also indicated that there will soon be a relaxation of FDI norms for the affordable housing sector. Though the government has announced such incentives for low-cost housing in the past, the real task lies in the fast execution of the fast execution of these initiatives. It is very positive that the government has taken due note of the demand-supply mismatch in the LIG and EWS housing segments, and it remains to be seen how fast these initiatives hit the ground in real time.
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 lakh. Additionally, the budget has also increased the deduction limit on interest payment for housing loans from Rs. 1.5 lakh to Rs. 2 lakh. These two factors alone will lead to a vastly improved sentiment on the housing markets.
The budget gave further indirect benefits for the residential sector by increasing the individual income tax exemption limit from Rs. 2 lakh to Rs. 2.5 lakh. This will increase disposable income of individuals and would have further implications on their ability to service home loans.
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.
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-emptions such as CRR, SLR and priority sector lending norms. This additional enforcement of banks to support the creation of infrastructure will result in faster infrastructure creation and the consequent benefits to the real estate sector.
The budget has allocated a total of Rs. 37880 crore towards the NHAI for the construction of highways, and additional Rs. 3000 crore to boost road connectivity in the North-East regions. For the current year, it has targeted the completion of 8500 kilometres of national highways, which are a known real estate catalyst and will have long-reaching implications on the markets of the cities they connect.
Ahmedabad and Lucknow have been singled out as special beneficiaries of this budget with the allocation of Rs. 100 crore towards the deployment of Metro rail systems in these cities. The increased connectivity will raise the scope of real estate development there and also have an impact of property valuations over the mid to long term
The development of 16 new ports has been proposed at an outlay of Rs. 11,000 crore. Additionally, an allocation of Rs. 11,600 crore has been made for the development of outer harbour port projects. The combined effect of these provisions will be that there will be an increase in demand for commercial office space from the manufacturing sector in India’s major port cities.
As promised in the new government’s manifesto, it has proposed the creation of 100 smart cities across India. The budget has allocated Rs. 7060 crore towards this end, thereby giving a financial sign-off for this concept. This will have very positive implications for real estate across all segments, namely residential commercial, retail and hospitality. Smart cities, by definition, imply considerable demand for technology-enabled services, and this is a big positive for IT/ITeS companies in India. Significantly, as much as one-third of the country’s demand for office space emanates from this sector.
The country’s warehousing sector has received a boost with an allocation of Rs. 5000 crores. In this, we see positive implications for the retail real estate sector on account of a strengthened supply chain, which has been a serious requirement of this sector for a very long time. Apart from this, the budget has not provided any further benefits to the retail sector, which is a disappointment.
The budget also brought cheer to the hospitality sector in two major ways. One, it has stipulated that electronic visa services will be introduced in nine international airports in India over the next six months. This will increase the magnitude of tourist arrivals in the country. Secondly, it has indicated that major provisions will be made for the creation of world-class convention centres to be developed through the PPP model. Once these centres are created, they will bring about an increase in corporate tourism into the country. Ailing hotel chains are looking at a significant revival in their fortunes, and we expect that the absorption of hotel-related real estate will rise in the bargain.
All In All…
The real estate sector’s expectations have definitely not been met completely in this budget. However, given the economic situation prevailing in the country, this is not really surprising as the government needs to balance myriad issues while addressing growth. We are satisfied at the real estate sector is once again headed in the right direction.
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