BUDGET 2023 ANALYSIS: IMPACT ON REAL ESTATE

BY Sapna

As per the Economic Survey, apart from housing, construction activity, in general, has significantly risen in FY23 as the much-enlarged capital budget (Capex) of the central government and its public sector enterprises is rapidly being deployed. Going by the Capex multiplier estimated for the country, the economic output of the country is set to increase by at least four times the amount of Capex. 

The Economic Survey also points to the “release of pent-up demand” reflected in the housing market accelerating the demand for housing loans. Consequently, housing inventories have declined, prices are firming up, and construction of new dwellings is picking up pace and this has stimulated innumerable backward and forward linkages in the construction sector. 

The Union Budget 2023 in principle will give impetus to the real estate sector through a number of significant announcements, directly or indirectly relevant to the real estate. For instance, increased funding and private investment opportunities in urban infrastructure, and collaboration between Central and state governments to approve building projects, provide land use permits and ensure that titles are uniformly registered will enhance real estate demand in the long term. 

The downside of the Present budget for real estate has been the no direct impetus to the sector as well as the homebuyers. The long standing demands of the real estate players also remain unaddressed in the current Union budget.

BENEFITS FOR REAL ESTATE

One of the most heartening announcement of the budget this year has been the enhancement of outlay for Pradhan Mantri Awas Yojana (PMAY) by 66 per cent to over Rs 79,000 crore. This will surely push the affordable market segment of the real estate. 

The overall Capital Expenditure Outlay on Infrastructure Development was increased by 33%, which will be 3.3% of our GDP at Rs. 10 Lakh Crore. This will drive up property values and prices, leading to increased investment and development in the real estate market.

The Finance Minister has also proposed to provide exemption to any income arising to a body or authority or board or trust or commission, (not being a company) which has been established or constituted by or under a Central or State Act with the purposes of satisfying the need for housing or for planning, development or improvement of cities, towns and villages or for regulating any activity or matter, irrespective of whether it is carrying out commercial activity

Tax exemption increased from Rs. 5 lakhs to Rs. 7 lakhs in the budget will lead to higher disposable income in the hands of the individuals that they can utilize for home buying or property investments. This enhanced tax rebate will also help affordable housing buyers to upgrade to mid-market housing segment. Furthermore, the proposal to reduce the highest surcharge rate from 37% to 25% in the income tax will ensure a healthy flow of investments into the premium housing segment. 

Furthermore, for better targeting of tax concessions and exemptions, Finance Minister has proposed to cap deduction from capital gains on investment in residential house under sections 54 and 54F to Rs 10 crore. Also, proposed is the amended provisions for computing capital gains in case of joint development of property to include the amount received through cheque etc. as consideration. While interest paid on borrowed capital for acquiring or improving a property can, subject to certain conditions, be claimed as deduction from income, it can also be included in the cost of acquisition or improvement on transfer, thereby reducing capital gains. It is proposed to provide that the cost of acquisition or improvement shall not include the amount of interest claimed earlier as deduction.

In terms of commercial real estate, the extension of tax holiday for start-ups by one year and the significant push to infrastructure will boost the commercial real estate sector in tier 2 and 3 cities. While, the newly established Infrastructure Finance Secretariat will assist all stakeholders for more private investment in infrastructure, the Urban Infrastructure Development Fund (UIDF) managed by the National Housing Bank, and will be used by public agencies to create urban infrastructure in Tier 2 and Tier 3 cities. 

The focus on manufacturing and push to ‘Make in India’ will increase the commercial real estate market momentum and need for sophisticated office spaces beyond Tier I cities. Such measures also add to the development of new commercial hubs reducing the pressure from the metros and tier-I cities. The reduced

In addition, the government’s focus on creating more decentralized storage facilities for agricultural products can create more warehousing demand. This, along with the measures to promote IT will see more technology initiatives in real estate. The revamped MSME credit guarantee scheme will also support key stakeholders in the real estate sector and provide them a much needed support.

Union Budget’s significant emphasis on Capex and Energy Transition, will enable robust domestic economic growth and help counter the expected global headwinds. The focus on making India future ready by way of AI labs, 5G and R&D and Digital Public Infrastructure create more job opportunities and auger well for sustained long term economic growth.

DRAWBACKS FOR REAL ESTATE

The new measures announced in the Union Budget 2023-24 aim to provide a fine balance between sustainable growth and financial stability. But, from a real estate perspective, there were no immediate booster shots. 

Providing the real estate sector with the 'Industry' status would have assisted it in attracting equity investment for refinancing its debts, and obtaining loans at lower interest rates. Despite being a long-pending request of the sector, it has not been addressed in the Union Budget 2023-24.

There was a clear focus on building sustainable cities for tomorrow, but direct incentives to the real estate sector were missing from the budget. Although the Government has provided much-needed capital expenditure towards the country's infrastructure, the budget fails to address the rising housing prices due to inflation. The real estate sector had expected some tax reliefs for home buyers on their home loan repayment in the new tax regime that could have made housing more affordable for the buyers. 

Goods and Services Tax (GST) reduction on raw material for construction like cement, steel and the GST rebate on rental income which stands at 18 percent, too did not find a place in the current budget. Moreover, the expected single window clearance demand was also not met in the budget. The sector had been looking forward to these measures to boost housing affordability and demand, which would have gone a long way in achieving the goal of "Housing for All".

One of the major changes is the introduction of a new tax regime, which offers lower tax rates for individuals who forgo exemptions and deductions. However, this regime also foregoes the previous deductions on housing loans - one of the most popular incentives for middle-class homebuyers. This will tend to subdue the home buying sentiment going forward. In sync with this, real estate industry was also looking forward to CLSS scheme being reintroduced, to uplift the housing segment as well as redefining of affordable housing’s standard definition for 60 m and 90 m that would have brought more homebuyers, especially in metro cities in the ambit of availing subsidies.

Continuation of interest subsidy for first-time home buyers under PMAY will help affordable housing, which was impacted immediately after Covid. This incentive will also allow developers to generate revenue, cash flows for timely completion of projects. Apart from tax reliefs, steps in the form of reduction in home loan rates would have enhanced purchasing power of homebuyers. The real estate sector hopes, over a period of time following the budget, more announcements will come through that will provide overall relief to all stakeholders in the sector.

For the luxury real estate segment, the proposed cap on deduction from capital gains on investment in residential houses under sections 54 and 54F to Rs 10 crore can prove to be a be a big deterrent for the luxury residential buyers. If the investment in new house property is more than 10 crore, then the deduction amount will be limited to Rs. 10 crores only. In summary, the maximum deduction an individual or HUF can avail is Rs. 10 crores by investing in new house property. It is going to impact the ultra HNI buyers as they need to pay long-term capital gain on the sale of house property with big ticket size.

REITs / InvITs are mandatorily required to distribute their cash surplus upto certain limits as per SEBI regulations on a quarterly basis. The distributions generally consists of interest, dividend or repayment of debt. The law provides for a pass through status or single stage taxation of the receipts. The receipts are either taxed in the hands of the Trust or the unit holders. The repayment of debt was not taxable in the hands of both. 

Now, for commercial properties, in the budget, it is proposed to tax distributed income by business trusts in the hands of a unit holder (other than dividend, interest or rent which is already taxable) on which tax is currently avoided both in the hands of unit holder as well as in the hands of business trust. From April 1, 2023 all distribution by a REIT/InvIT representing repayment of debt is taxable as "other income" in the hands of the unit holders.

This announcement has created some uncertainties in the market and industry players are seeking government support on the matter. REITs are a total return product combining steady distributions with upside on account of capital appreciation driven by growth indicators, this makes it an attractive and successful investment product, especially for retail investors. The measure proposed in the budget will mean a lot more tax on investors.

Indeed, the Union Budget 2023 has made announcements on ease of doing business and has reduced the number of compliances that companies need to run establishments, which is in turn will encourage start-ups. The budget however does not mention any specific measures for the co-working sector which is seeing a high growth trajectory. From lower TDS and special tax incentive, the flexi space segment was hoping for both financial and non-financial incentives that could help the young co-working space providers with economical rates and better flow of working capital.

Another dampener was the absence of proposed Development of Enterprise and Services Hub (DESH) Bill in Parliament to replace the special economic zones (SEZs) Act given the government’s reservation on another integrating the hubs with the domestic market, and focus on containing fiscal erosion and simplifying tax regime. Instead, it is proposed to provide a time limit for an SEZ unit to bring the proceeds from exports of goods or services into India. The filing of income-tax return is also proposed to be made mandatory for claiming deduction on export income.

The industry anticipated for some additional investment and focus on the deployment across the commercial and residential sectors, as well as a focus on luxury with affordability. The budget expected some changes to give a boost to the real estate sector by increasing the interest deduction on housing loans, which did not come as expected.

DEVIL LIES IN THE DETAILS

It is important to note that the budget has proposed some very tangible measure than can have a domino impact on real estate and influence in its growth in the long term. However, the key to success of this budget lies in the implementation. 

Announcement of amendments to the Banking Regulation Act, the Banking Companies Act, and the Reserve Bank of India Act and move towards democratisation of information, with the setting up of a National Financial Information Registry to serve as a central repository of financial and ancillary information, will support quicker and streamlined credit appraisals, monitoring for lenders and enhanced bank governance and investor protection. 

Playing a big role in the impact of the budget on Indian economy and Indian real estate as a result will be the effective execution of proposed measures, domestic and global market conditions, and other economic and political factors.

For real estate, it could have been a better budget but in all fairness, this year’s budget scores well on important aspects including leveraging infrastructure development, meeting green objectives, boosting MSME and Start-up segment. Right now, it is a wait and watch situation on how the budget aftereffects will pan out for the country.

Tags : Union Budget Analysis Real Estate initiatives Economic Survey housing construction activity