Granting industry status to affordable housing will help developers in accessing funds.
The Union Budget 2017 – 2018 continued the government’s focus on the agriculture, rural and low income group segments. Some of the key measures impacting the low to mid income group include announcements for the affordable housing segment that are extremely positive for the sector. Granting industry status to affordable housing will help developers in accessing funds for these projects, achieving better margins on account of 80 IB tax benefits and creating supply for the first time home buyer. The qualifying size of affordable houses being amended from built up area to carpet area is a significant move in expanding the bracket of homes under affordable housing such that even a 2BHK house in non-metros gets included in this category. This widens the affordable housing opportunities for home buyers and developers.
Even prior to the budget, private equity funds had started eyeing opportunities in affordable housing and we also had many enquiries from overseas investors for this space. With the budget announcements, this sector looks even more attractive, and we can expect private equity funds and foreign investors to increase their stake in this sector.
Further impetus to this sector comes from an increased allocation to infrastructure at Rs. 3.96 lakh crore and to national highways at Rs. 64,000 crores. Connectivity being an important determinant for feasibility of locations for affordable housing, this infrastructure push will augment marketability of city outskirt areas benefiting both the developer and consumer.
The higher infrastructure spending also augurs well for the manufacturing sector and allied sectors which automatically translate to higher demand for logistics and warehousing. Going forward, we expect greater institutional participation in logistics especially warehousing development. We will see more funds with specialist fund managers to focus and manage these investments.
The budget was a mixed bag for foreign Investment from private equity funds. Proposed abolishment of Foreign Investment Promotion Board in 2017-18 increases the prospects of raising foreign funds. For real estate, this combined with RERA makes the sector more transparent and attractive for investment through FDI route which in turn will help in raising larger capital at cheaper cost of funding providing an impetus to investing in real estate.
On the flipside, provisions introduced in section 94B for thinly capitalized companies could impact the use of debt for foreign investments in Indian companies. Debt has always been a more tax efficient method of finance than equity as dividend income is not tax deductible. Thinly capitalized companies (where debt is higher than equity) have used this to re-characterize debt into equity and avail tax benefits. This budget proposes to bring in provisions which will limit this interest deduction that can be claimed by Indian companies for payments made to their associated enterprise situated overseas. This was an efficient repatriation strategy and this change will impact investments made in highly leveraged sectors such as real estate and infrastructure.
In relation to foreign funds investing by way of compulsorily convertible debentures or non-convertible debentures, it is not clear if this section 94B will be triggered on account of such funds being classified as an associated enterprise. Few important criteria include whether the investment by way of CCDs accounts for more than 26% of the voting power of the investee companies, whether NCDs constitute more than 50% of the book value of the assets of the company and the nature of participation/ control exercised on these investee companies. A clarification is required to exempt foreign funds from this provision.
Real estate financing has been characterized in recent times by too many investors chasing too few good opportunities. Liability of capital gains for joint development agreements (JDAs) to arise in the year the project is completed, will help to bring in more supply of quality land as land owners will be keen to offer their land for real estate development. This deferment in capital gains is akin to the reduction in the cost of land increasing the gamut of opportunities for developers and in turn the need of capital. This provides a great opportunity for funds and financial institutions to increase the opportunity set for investing.
The Budget also announced that NHB shall refinance up to Rs. 20,000 crores of individual housing loans. This shall inject further liquidity in housing finance companies and banks along with increased surplus generated due to demonetization. Interest rates will definitely tend downwards making home loans cheaper. This will provide a push to residential real estate demand and lead to stable sales over the next few quarters.
Overall, the budget has introduced positive measures for all stakeholders including developers, consumers and investors. This along with, effective and fast implementation of RERA, changes to make the approval processes simpler, shall help in providing stability and platform for growth in this sector.
The author is Executive Vice Chairman of Milestone Capita Advisors