Analysis | Budget 2021 mildly positive for realty sector, most expectations remain unmet
Some positive impact is also expected on Real Estate Investment Trusts, given the permitted flexibility to raise debt from Foreign Portfolio Investors, which broadens funding avenues and enables lower cost financing.
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The real estate industry was expecting major support, demand boosting announcements in the Budget, but barring extension of a few existing sops; and broadening of REITs financing avenues, most expectations have remained unmet. The industry has been grappling with steep demand fall during the first nine months of the current financial year (FY2021), wherein housing unit sales declined by 35 percent in the major metro markets as compared to the corresponding period of the previous financial year. Though there has been some recovery from the lows of the quarter ending June 2020, when sales declined by 67 percent year on year, the sales are yet to reach the pre-COVID level. It was against this backdrop that the expectations regarding considerable additional measures by the central government were high so as to enable the real estate industry to recover from the impact of the COVID-19 pandemic. However, announcements have been limited and are likely to have only a mild positive impact on the sector.Over the past few years, the Indian government has been laying increased emphasis on the affordable housing segment, in recognition of the weak affordability and acute housing shorting prevailing in the country. The Union Budget 2021-22 continued this focus by extending the additional income tax deduction of up to Rs 1.5 lakh for interest paid on loans borrowed for the purchase of an affordable house by one year, i.e. - up to March 31, 2022, keeping the total tax deduction available on such interest at Rs 3.5 lakh per year. This is expected to support demand in this category. Moreover, segmental supply is also expected to be favourably impacted by the one-year extension in the tax holiday currently available to developers of affordable housing, as well as the announcement of a tax holiday for developers of Affordable Rental Housing Complexes (ARHCs). 100 percent of the profits derived from affordable housing projects approved by the competent authority until March 31, 2022, as against March 31, 2021, are now tax deductible under Section 80-IBA of the Income Tax Act. However, the definition of a “rental housing project” is yet to be notified and, therefore, the scope of the tax exemption for this section remains to be seen. The finance minister also announced the proposed establishment of an SPV for monetisation of surplus land with government ministries/departments and public sector enterprises. Effective unlocking of such land, and utilisation of a portion of the same for housing projects, would also aid real estate development by provision of land at low costs, and serve as a win-win for the government and the housing industry.