How the 2016 Budget Will Influence the Affordable Housing Sector in India

For a large part of the Indian populace, an owned home is a distant dream. Some estimates claim a demand of 22 million houses and growing. The affordable housing segment (less than Rupees 50 lacs) comprising the bulk of this market is expected to get a huge boost following budgetary announcement of sops. Let us now examine in detail how the budget will influence consumers, investors and developers, and help revitalize the affordable housing sector in Indian real estate.

2016 Budget India

Win-Win for All Stakeholders

These measures along with an additional tax benefits on interest payments for individuals are aimed at increasing attractiveness for real estate consumers, investors and developers. These steps will help revive demand in the sluggish property market and increase economic activity.

For consumers, the budget aims to induce the first time buyer to purchase his or her house and create a provision of an additional deduction for interest of Rs 50,000 per annum for loans up to Rs 35 lakh sanctioned in 2016-17. However the house cost should not exceed Rs 50 lakh in this case.

The budget also has good news for investors, apart from the increased attractiveness of investing in an under construction project. Real Estate Investment Trusts (REIT’s) can now safely purchase completed rent bearing commercial and residential projects, and expect to generate good rental yield. Globally REITs provide fixed income options to investors and help them invest indirectly into such big ticket rent bearing real estate assets. This will now become a reality in India. The budget exempts REITs from dividend distribution tax (DDT) which is their primary channel of paying back their investors.

2016 Budget India

Builders and developers currently reeling under the double whammy of declining sales and huge debt will benefit with 15-20 per cent upside on profits after paying the MAT. Builders have till now been focussing on the premium segment which though small, was profitable. These players will now be incentivised to shift focus to the low cost segment to avail the benefits outlined in the budget, which include a hundred per cent tax deduction for profits on projects building homes up to 30 square metres in the four metro cities, and 60 square metres in other cities, approved between June 2016 and March 2019.

Also, construction for any government scheme for houses up to 60 square meters would also be exempted from service tax. However, to avail these benefits, developers will have to expedite construction and ensure that projects are completed within three years from the date of approval. The budgetary proposals will also make it easier for the builders to access the much needed capital from foreign and domestic investors by showing them the expected Return on Investment (ROI).

With all of these proposals and improvements to the tax structure, the government hopes to turbo charge the housing & construction sector which in turn translates into huge gains in employment and economic activity.

However, there are a few challenges which remain to be sorted out. The industry now has to work with the state governments to convince them to increase density norms to achieve 30 square metres and 60 square metres of housing and also introduce single window clearances for projects to be completed in the mandatory three year time frame. Overall, the industry is optimistic that this budget kick-starts the recovery process of the real estate sector by boosting activity in the affordable housing sector.

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