Budget 2023-24 Expectation: Simulate sustained consumer spending and positive value creation to spur real estate
Government must accord industry status to realty to enable it to access low-cost credit to build affordable homes
The Government of India over the years has set ambitious targets related to housing, infrastructure, and sustainable development, which present significant challenges in the current volatile global economic and fiscal conditions. It is important for the government to adopt strategic interventions through budgetary outlays that support industries and sectors which have battled economic fluctuations, rising interest rates, and supply chain challenges.
The real estate sector which currently accounts for 7 per cent of India’s GDP and is expected to grow to 13 per cent of GDP by 2025, requires the government’s attention to ensure sustained demand, access to capital, ease of business, and supportive regulations that will cushion any shock from external economic forces.
The upcoming Union Budget assumes significance in the backdrop of a global recession where a few important steps will need to be taken to ensure the robustness and growth of the sector.
More disposable incomes in consumers’ hands
Policies simulating sustained consumer spend and positive value creation are required for shielding the real estate sector which depends significantly on global capital and supply chain. The growth in the residential sector post-pandemic, the largest segment in the real estate sector despite tightening interest rates and increase in pricing due to higher input costs, points to the importance consumers are placing on housing assets. Therefore, ensuring a higher disposable income in the hands of consumers through tax rebates and rationalisation of taxes will be crucial.
An increase in the tax deduction under 80EE, 80EEA, 24(b), and/or 80C against home loans will encourage consumers to invest further in housing assets. This will ensure a circularity in the residential business, making it an attractive investment proposition while incentivizing the developers to invest more into new projects.
The home loan interest rate has significantly increased over the last 3 years from 6.75 percent in 2020 to 8.9 percent and therefore, fewer hikes in repo rate will be crucial in ensuring constant demand. It is important for various states to allow for tax rationalisation through a reduction in stamp duties to support the above budgetary support which previously has yielded record treasury collections in various geographies.
Industry status to enable faster and cheaper credit
As a long pending demand, it is pertinent to accord the industry status to the real estate sector in order to enable it to access low-cost credit to build affordable and more financially-sound projects. Currently, the financing rates for developers hover between 8 percent and 14 percent from banks depending on the project status and the developer’s track record. However, real estate is usually seen as a risk sector by most lending institutions, and developers are pushed to access high-cost loans which have resulted in gross NPA reaching 6.1 percent in 2021 for non-bank lenders.
The complexity of reclassifying non-performing loans by lending institutions results in loss of access to capital for the developers that push north the development costs and dependency on last mile funding ecosystems like SWAMIH fund become important to ensure completion. Ready access to cheaper credit will ensure consistent investments that also create employment and entrepreneurship opportunities. While the sector has already progressed in this direction, an industry status will only accelerate the process and create a shared value for everyone in the ecosystem- customers, developers and partners.
Input Tax credit benefits for co-working firms to spur businesses
The rise of co-working companies in India has democratised the commercial real estate segment in India and is supporting the growth of new-age businesses across the country. However, in order to support this democratisation, which is not just limited to metros but has expanded significantly to smaller cities across the country, it becomes imperative to offer Input tax credit under the Goods and Services Tax (GST) to the co-working sector. Enabling co-working companies to claim input credit on work contracts and construction services supplied will enable them to pass on the cost-benefit to occupiers which include startups and small businesses, and thereby reduce their overall costs.
India has committed to ambitious targets in the recently concluded COP27. Given the LTLEDs that GoI has presented at the summit, the revamping of the construction sector is extremely critical. While private capital already is pushing for more sustainable development by adopting the ESG standards, the larger industry body is yet to implement any such practices to support the net-zero targets. It is therefore important that the Budget provides concessions for the construction sector that adopts ESG monitoring and commits to sustainable development. Providing enhanced tax rebates for increased carbon credits, and providing tax concessions on green bonds being issued will push the sector to adopt sustainability as a key goal. This is critical as public policymaking is deeply rooted in providing a clean and hygienic environment as part of the quality of life in many government programmes like SMART Cities, National Clean Air Programme, National Action Plan on Climate Change, etc.
The writer is Managing Director, Valuation Services (India) at Colliers (@colliers_ind). Colliers is a diversified professional services and investment management company. Views expressed are personal.
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