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- Housing estate gets less real
The real estate industry has gone into a tizzy following the Union finance minister's announcement of a 12.5% service tax on commercial lease rentals. Experts say this may have a cascading effect and escalate property prices further.
This is not good news for the property market. The service tax will be passed on to the occupant because the landlord will not absorb it.
We are awaiting the fine print. But it looks like there will be a negative impact on the retail industry. Rentals are a major expense for every retailer and the extent will depend on how much service tax we will have to pay.
It is possible that the tenant may refuse to pay the service tax at 12.5% of the rent and the owners may be required to absorb this increase. This will lower the owner's yield and an investor may turn away from real estate. The domestic real estate venture capital funds, which have already put money into income yielding assets, will suddenly find the income going down by 12.5%.
The effective rate of taxation is lower because of certain exemptions available under the Income Tax Act. The proposed service tax will negate this benefit. This tax might imply that commercial premises that had already been rented out on lease or leave and licence, would also be subjected to the levy with effect from the date to be specified hereafter.CommentQuote0Flag
- Realty is all smiles
The real estate sector is gung-ho on the budget, which it believes, will not only further drive demand but also temper prices going forward.
The finance minister has cleared reverse mortgage scheme for senior citizens while mooting creation of mortgage guarantee companies.
While these are expected to spur home buying, the industry is happy with the fact that critical input — cement and steel — prices would come down, resulting in softening of real estate prices.
The finance minister in his speech took up the long standing demand of the industry saying that National Housing Bank (NHB) would introduce “reverse mortgage” scheme.
The scheme will allow a senior citizen who is owner of a house availing a monthly stream of income against mortgage of his/her house, while remaining the owner and also occupying the house throughout his/her lifetime. Neither they have to repay or service the loan during that period.
Industry feels that people would look at buying property not only for shelter but also for financial security in the old age.
Typically, after death of the owner, his or her heir may opt for paying up the loan (money she received through reverse mortgage) and take back the property. If the heir does not pay back, the property goes back to bank.
Chidambaram also said regulations will put in place to allow creation of mortgage guarantee companies.
This will allow housing finance companies and banks to offer loan to those people where housing finance companies (HFCs) are not earlier keen on. If their loan is underwritten, HFCs may consider offering loan to weaker section of the society and senior citizen’s too.
While so much for demand creation, real estate industry feels tweaking of excise duty on cement will also help reduce prices.
FM has proposed reduction in the rate of duty from Rs 400 per tonne to Rs 350 per tonne on cement sold in retail at not more than Rs 190 per bag rate while increasing it to Rs 600 per tonne on cement that has a higher MRP.
Reduction in import duty on seconds and defective steel, used in production of some construction steel, will also help.CommentQuote0Flag
- Hospitality, new mantra for realtors
Though the Budget did not have anything substantial for the real estate industry, there is one sector that has the developers buoyant - hospitality. Most builders in the Delhi NCR are now keen on entering the hotel industry after the finance minister announced a five-year income tax holiday for two, three or four-star hotels. However, another spin-off effect would be on the land prices of hotel sites - they are bound to go up as a result of the announcement.
The tax holiday also includes convention centres with a seating capacity of not less than 3,000. However, the Budget lays down that the hotels should be completed and begin operations in the National Capital Territory of Delhi or in the adjacent districts of Faridabad, Gurgaon, Ghaziabad or Gautam Budh Nagar during the period starting from April 1, 2007 and ending March 31, 2010.
The Delhi NCR seems to have been the only region that seems to have benefitted from the Budget, courtesy the Commonwealth Games. This will help in making Delhi a world-class city and give a major boost to the hospitality industry, encouraging developers to foray into this sector in a big way.
An increase in the number of hotels will also increase employment and provide a great surge to the tourism industry. However, it will also have a productive effect on the real estate sector as it is bound to increase land valuations for hotel sites in the city.
Last month, a subsidiary of the Delhi-based Eros Group, The Millennium Plaza notched up a five-acre plot for a hotel site in Sector 47, Gurgaon for Rs 255.20 crores. This is bound to go even higher. This step is very clearly aimed at addressing the severe shortage of hotel rooms in Delhi before 2010 Commonwealth Games. However, the Budget has failed to address the key issue here - that of land availability for hospitality use. These tax benefits may even have a counter productive impact as it can lead to increased land valuations for hotel sites in the city. Tax exemptions enhance free cash flows of the project thereby leading to an increase in residual valuations of the project.CommentQuote0Flag