Indian Budget 2017 a boost for affordable housing

India Inc. property expert unravels the Indian government's recent Budget for 2017-18 and its impact on the country's real estate market. The central theme of the 2017 Budget in early February seems to be towards creating cash flow and consumption from the bottom of the pyramid. This would then flow upwards to more robust and long-term capital formation at the hands of the development companies. The same trend is observed in the changes to the real estate rules in the current Budget. The Indian government is on a mission to house the middle and lower strata of society and in order to boost this agenda it has accorded the status of infrastructure to affordable housing. Affordable housing is defined as units less than 600 square feet in non-metropolitan cities and in metropolitan cities it is defined as 300 sq ft. The Budget has shifted reference to carpet size as against built up, where built up homes are about 20 per cent more than carpet size. The impact of this being that developers of such projects will be able to borrow at a much cheaper rate and thereby boost home purchases for end use. However, 300 sq ft for metros is too small for a home and industry feels that it should have been at least 450 sq ft. Home loan interest offset on homes rented out has been capped at Rs 200,000. High net worth investors (HNWI) had a trend of buying homes on a mortgage and renting it out. Given typical mortgage costs were at 10 per cent per annum and rental yields more like 2.5 per cent, they would offset the negative interest against incomes from other sources after reducing rent from interest paid. This gave them an offset to reduce direct taxes. This loophole has now been closed. Properties costing more than Rs 200,000 have already been affected badly due to end use sales and demonetization. The latest Budget provision will definitely impact such property sales going forward. The holding period of property for the purpose of computing long-term capital gain has been reduced to two years from three years. This move should give a boost to owners of small homes upgrading to larger homes. This read in tandem with the affordable homes getting infrastructure status should give a boost to home buying. The shift of base year for the purpose of capital gain indexation from 1981 to 2001 will lead to lesser profits being declared on the sale of a home and more free cash in the hands of the seller. This would not force the seller to resort to taking part of the sale proceeds in cash. Besides reducing black money creation, it will also bring in properties into the market at various price points and create a general transparent liquidity cycle of sales and purchases of properties. Overall, the Budget is a good attempt to boost the real estate sector. An agenda to support the middle and lower strata and an attempt to bring more transparency into the pricing by eliminating opportunities of creation of black money will have a positive impact. Deepak Sam Varghese is founder-director of Moonbeam Advisory