Union Budget 2019-20 was a tad of disappointment for Real Estate sector though it has announced major tax benefits that will help stimulate demand for affordable housing as well as steps to bring out model tenancy law to promote rental housing, which will open up a new vertical of opportunity. The disappointment stems as the budget fail to address some of the key pressing concerns/issues such as land reforms, solutions to kick-start struck projects as well as relief to cash starved developers, conferring industry status to the sector, change in personal tax benefits etc.

Government in Interim Budget 2018-19 has extended the 100% tax holiday under section 80-IBA of the Income Tax Act, 1961 to 31 March 2020. Subsequently the GST Council has cut the GST rates for residential properties effective April 1, 2019. While the residential properties outside affordable segment attracts an effective tax of 5% without input tax credit (ITC) the effective GST for affordable housing projects was 1% without ITC. In earlier budgets it has awarded the infrastructure status to the affordable housing segment, increased the carpet area and re-defined income definitions to boost supply in the market.  

Budget proposal

For purchase of an affordable house valued up to Rs 45 lakh, an additional interest deduction of up to 150000/- for interest paid on loans borrowed up to 31st March, 2020. This enhances the interest deduction upto Rs 3.5 lakh from earlier Rs 2 lakh for affordable home purchase.

To enact a Model Tenancy Law. And this is part of several reform measures of GOI to promote rental housing in the country. The Model Tenancy Law will be finalized and circulated to the States. The Current Rental Laws are archaic as they do not address the relationship between the Lessor and the Lessee realistically and fairly.

The National Housing Bank (NHB), besides being the refinancer and lender, is also regulator of the housing finance sector. As efficient and conducive regulation of the housing sector is extremely important in current context and considering somewhat conflicting and difficult mandate to NHB, the budget propose to return the regulation authority over the housing finance sector from NHB to RBI. Necessary proposals have been placed in the Finance Bill.

About 1.95 crore houses are proposed to be provided to the eligible beneficiaries in the second phase of Pradhan Mantri Awas Yojana – Gramin (PMAY-G), during 2019-20 to 2021-22. These houses are also being provided with amenities like toilets, electricity and LPG connections.

Ceramic roofing tiles and ceramic flags and pavings, a hearth or wall tile etc. that currently attracts an import duty of 10% is now to attract a duty of 15%. This is done to provide a level playing field for domestic industry.

Proposed ‘Study in India' programme that will focus on bringing foreign students to study in higher educational institutions of the country. It has also provided an amount of Rs 400 crore for FY 2019-20 under the head "World Class Institutions". Trebling of outlay for "World Class Institutions" for FY20 over the revised estimates for the previous year is to convert tap the potential of the country to become a hub of higher education.

Developing 17 iconic Tourism Sites into world class tourist destinations, which will serve as a model for other tourism sites. The Iconic Tourism Sites would enhance visitor experience which would lead to increase visits of both domestic and international tourists at these destinations.

Customs duty on base metal fittings, mountings and similar articles suitable for furniture, doors, staircases, windows, blinds increased to 15% from 10%

Customs duty on ceramic roofing tiles and ceramic flags and pavings, hearth or wall tiles etc increased to 15% from 10%.

Foreign Portfolio Investors (FPIs) will be permitted to subscribe to listed debt securities issued by ReITs and InvITs.

Stock to watch

Mahindra Life Space Developers, Oberoi Realty, Prestige Estates, Ashiana Housing, Sobha Developers

Budget Impact

Additional interest deduction of Rs 1.5 lakh taking the total interest deduction up to Rs 3.5 lakh for affordable housing (priced upto Rs 45 lakh) as against Rs 2 lakh earlier for houses purchased until March 31, 2020 will translate into a benefit of around Rs 7 lakh for home-buyers over their loan period of 15 years. This is expected to boost the affordable home demand auguring well for the sector who is sitting with significant unsold inventory. The model tenancy act will facilitate the state to bring in new rental laws meeting the current needs. The repeal of current archaic rental laws at state levels and new rental laws may usher in required institutional framework. Unlike western countries the rental housing has not attracted interest as well as big investment. And the new model tenancy act may prove to be a trigger for take of rental housing in a big way.

Allowing foreign portfolio investors (FPIs) to subscribe to listed debt papers of REITs will broaden the investment options for foreign investors and henceforth, spur higher flow of funds. FPI investments in REITs through debt papers will enable REIT players to increase the asset portfolio and make REIT investments more attractive.

Bringing Housing Finance Companies (HFCs) under the regulatory control of RBI thereby creating a unifying regulatory authority for Banks, NBFCs and HFC will lead to better regulation and improved transparency in the system. Pre-budget, there were strong indications that the Centre would create a stress-asset fund to get work started on the stuck projects and provide relief to cash-starved developers as well as aggrieved homebuyers. If that has come in, it would have been a big positive for the sector as it would have home buyer sentiments. However the rise in import duty on tiles and base metal fittings, mountings and similar articles suitable for furniture, doors, staircases and windows is expected to drive the cost of construction up. Overall, despite some positives, as it fail to address key pressing issues of the industry, it is neutral for the sector.