Budget 2021: Hits and misses for real estate

Two major incentives given to the real estate sector are tax benefits for affordable housing and for private investment formats such as REITs and InvITs.

Commercial realty in India is now a fast-growing sector that will boost the economy greatly in the coming years.

Which sector is the second biggest creator of jobs in India and soon expected to contribute a whopping 1/10th of the national GDP? If you guessed real estate, then you’re right. Realty is considered to be one of the nation’s most crucial economic engines, which is why the sector has welcomed the investment push by Finance Minister Nirmala Sitharaman in her Budget 2021.

Second only to agriculture in terms of employment generation, real estate contributes as much as 8% to the nation’s GDP. By 2025, the real estate sector is anticipated to account for as much as 13% of the country’s GDP — powered in large part by office spaces (27% growth, year on year), followed by retail and warehousing.

The hit moves

Two major incentives given to the real estate sector are tax benefits for affordable housing and for private investment formats such as REITs and InvITs (Real Estate Investment Trusts and Infrastructure Investment Trusts). The FM proposed to extend by another year — till March 31, 2022 — the tax exemption benefit, as well as deduction of interest on loans for affordable housing. Another praiseworthy move that will provide succour to migrant workers is tax exemption for notified Affordable Rental Housing Projects, making rental homes more accessible for migrants.

Further, in a truly future-forward move, the FM provided stimulus to REITs and InvITs with the exemptions on TDS (tax deducted at source). The FinMin further proposed to allow the entry of foreign portfolio investors into debt financing of REITs and InvITs. This will make REITs and InvITs a more lucrative investment for the common man, and help bring more private participation and flow of funds into the real estate and infrastructure sector.

The FM also announced a few indirect support measures, such as an injection of funds in infrastructure development, which will boost overall capital appreciation of nearby property.

Missed opportunities

While the above announcements are welcome and will no doubt boost the sector, there are some measures that real estate experts hope the government will also introduce in the near future. One of the longest-running hopes of the sector has been receiving industry status. This would impart three huge benefits: (1) acquiring loans at lower interest rates, (2) attracting equity investment and, (3) enabling developers to refinance debts. Never has this been more crucial than now, when the real estate sector is in dire need of liquidity and relief from pandemic-inflicted setbacks.

It must be noted that even during the pandemic, while the rest of the financial markets was stalled, commercial real estate had bounced back by Q3. Since then, net absorption of commercial property has increased by 63%, while new completions grew by 59%, when compared to the previous quarter. Commercial realty in India is now a fast-growing sector that will boost the economy greatly in the coming years.

It’s noteworthy that any benefit rolled out to an ‘industry’ as large as this one would have a multiplier effect on the economy, also helping Non-Banking Financial Companies (NBFC), Housing Finance Companies (HFC) and banks to recoup on non-performing assets (NPA). In short, the entire economy would gain.

With time, even the Indian public is showing more interest in investing in commercial real estate, something that has been made accessible to them through REITs and fractional or shared ownership. The hope is that the benefits provided to REITs will also be extended to fractional ownership, to encourage more people to invest. Other liquidity-easing measures that developers were looking forward to would have included rational capital supply, access to funds, and longer repayment cycles.

Another long-standing hope of the sector is the re-introduction of the Input Tax Credit (ITC) and other GST reforms. The industry’s hope was that there would be a set-off on GST paid on input materials against GST on rent from the completed property: this would have been a move that would especially help developers who retain assets and rely on their leasing or rentals for income, but feel that they are subjected to dual tax levy on this account.

In conclusion

Commercial property will be among India’s strongest economic engines going forward. Any benefit the government extends to this sector will be felt manifold across the economy. While the Budget may have been a mixed bag for the sector, one hopes that the government will announce further stimulus measures in the near future.

(By Shiv Parekh, Founder, hBits)

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