Tax relief for buyers of second homes can also propel growth and make real estate more attractive for investment

The real estate sector recovered strongly in 2021 with improved sales and leasing activities. Residential property reported a strong recovery as home sales rose 71 percent year-on-year to 237,000 units.

Low interest on home loans, stamp duty cuts and extension of tax benefits on affordable housing, as announced in the previous budget, helped the sector reach almost 90 percent of pre-Covid numbers.[1]

India’s net office absorption – a measure of the amount of office space leased over a period of time – reached 5.85 million square feet last year, up 8 percent YoY in major cities.[2] The data centre segment further reported high demand, with its real estate requirements expected to reach 15-18 million square feet across major Indian cities.[3]

The New Year is being considered as a year of opportunity for the real estate sector. As the Indian economy is expected to clock growth of 8-9 percent, it will revive demand for infrastructure and increase consumer spending.

With the Union Budget to be announced on February 1, here are some recommendations that would retain the momentum in the real estate sector, boost developers’ confidence and encourage sales in both residential and commercial segments.

Development in tier 2 and 3 cities: Tier 2 and 3 cities contributed significantly to the sector’s growth. With work from home and work from anywhere policies, employees returned to their hometowns or bought a second home in smaller cities. Building townships in such cities and towns also caters to the rising trend of community-driven lifestyles – a realisation that has been reinforced in the lockdown months. This has led to a spike in demand and now needs to be pushed further by developing infrastructure and incentivising the building of townships in smaller towns. Tax relief for buyers of second homes can also propel growth and make real estate more attractive for investment.

Affordable housing: The threshold of the stamp duty value of a residential unit for the purpose of affordable housing needs to be revised or modified as what can be afforded in smaller towns cannot be replicated in major cities. Expanding the ceiling or adjusting the definition as per location will go a long way in achieving housing for all in a shorter time span. The budget can also allocate more capital to the Special Window for Affordable & Mid-Income Housing  (SWAMIH) Fund – created to give relief to homebuyers of stalled projects – as that will cover more projects. Increasing the fund allocation for the Pradhan Mantri Awas Yojana, launched in 2015, will contribute to the government’s goal of housing for all by 2022.

Tax relief: Now that there’s a revival in consumer demand, the market will do well if the budget increases the overall tax deduction limits for interest on home loans and repayment of principal amounts. Increasing tax benefits for home-buyers under Chapter VIA and Section 24 as well as extending the sunset clause for claiming deduction for interest on affordable housing loans will be a great incentive for buyers as that will drive consumption and boost home sales. Given this context, a more flexible banking system that allows easy, improved and low-cost credit to homebuyers would propel sales further. Apart from sales, the budget can include a higher component for house rent allowance to boost the rental market.

The increasing costs of raw materials such as iron, steel and cement have added to overall property costs. Waivers or reductions on GST of these materials will lower property costs, increase sales and provide relief to developers. A waiver or capping of GST on under-construction projects that have been delayed or stalled during the pandemic will help in completing them faster.

Single-window clearance: A single-window clearance will accelerate the construction and delivery process as frequent delays in securing approvals stall projects and incur additional costs.

Commercial real estate: With India aiming to be a $5 trillion economy, the commercial segment is optimistic because this will generate demand for high-quality offices, flexible office space, co-working spaces, warehouses and data centres. The budget can look into aiding the manufacturing and logistics sectors, boosting startups and MSMEs, and promoting digital penetration and industrialisation, all of which will attract potential investors and private capital players, thereby supporting the growth of commercial realty. For instance, the rapid growth of life sciences research & development in India is expected to attract private equity institutional investments amounting to about $18 billion, which will simultaneously generate real estate demand for 96 million square feet by the end of this decade.[4]

Conclusion

Second only to agriculture, the real estate sector generates the maximum number of jobs in India[5], making it a critical sector. Currently, it has a 7 percent[6] contribution to the gross domestic product, which is expected to rise to 13 percent[7] by 2025. Further, it’s estimated that the real estate market size will be $1 trillion by 2030,[8] thereby making it a significant chunk of the economy.

Hence, even though the real estate sector has demonstrated resilience amid low-demand months, these policy initiatives will help strengthen the sector, enable development of quality spaces for attractive investments, continue generating employment and finally, add value to the economy.

References:

[1] Residential real estate market beats pandemic blues, sales in top 7 housing markets grow 71% YoY, JLL, 3 January 2022, accessed on 25 January 2022

[2] Indian real estate industry, Indian Brand Equity Foundation, 17 December 2021, accessed on 20 January 2022

[3] Indian real estate industry, Indian Brand Equity Foundation, 17 December 2021, accessed on 20 January 2022

[4] On a booster dose: life sciences real estate, Savills, 9 December 2021, accessed on 25 January 2022

[5] Indian real estate industry analysis, India Brand Equity Foundation, 3 December 2021, accessed on 25 January

[6] Realty contribution to GDP to reach 10% by 2025: official, MoneyControl, 29 July 2021, accessed on 27 January

[7] Indian real estate industry analysis, India Brand Equity Foundation, 3 December 2021, accessed on 25 January

[8] Indian real estate industry analysis, India Brand Equity Foundation, 3 December 2021, accessed on 25 January

(The authors are Partner-Risk Advisory and COO–India Global, KPMG Partner–Tax, KPMG in India)

https://www.moneycontrol.com/news/business/real-estate/budget-2022-allocate-more-capital-to-fund-that-provides-relief-to-homebuyers-of-stalled-projects-7997901.html