Real Estate scenario post Budget 2011

Real estate sector is one of those important sectors which directly or indirectly affect us. This article briefs you about the post budget impact on Real estate sector. So, if you are an investor looking to invest in the real estate sector stocks then you should read through this article to understand the post union budget impact on the real estate stocks.

Post Budget Announcements & Impact on real estate sector

• There was an announcement in this budget that MAT will be applicable to SEZs. This will negatively impact the real estate sector specially companies like DLF etc which have around 7 mn square feet of SEZ space. Earlier there was a provision that the profits will fall under deductions for the first 10 years out of the 15 years from the year the SEZ has been notified. An application of MAT which is currently about 18.5% will increase the tax outflow resulting in impacting the earnings estimate severely.
• The existing scheme of interest subvention of 1 per cent on housing loans were extended to housing loan upto Rs 15 lakhs where the cost of the house does not exceed Rs 25 lakhs from the present limit of housing loan upto Rs 10 lakhs where the cost of house does not exceed Rs 20 lakh.  This will have a dual impact. On one hand it will benefit the developers which have more focused in tier II & tier III cities. On the other hand it will also benefit the banking sector.
• The ticket size for priority sector lending has been increased from Rs 20 lakh to Rs 25 lakh where the loan to value ratio is 90%. Again this announcement will have a positive impact on the developers which have projects in tier II & tier III cities. This will also benefit the banks providing housing finance.

The Budget did not bring much good news for the real estate sector. There were several expectations which were not looked into this year’s budget.  The inclusion of real estate taxation under the proposed GST would have given much needed relief in taxation. Policy measures relating to allowance of foreign direct investment (FDI) in the multi-brand retail segment could have been relaxed to give a boost to the retail trade. Some policy measures relating to Real estate investment trusts (REITs) and Real estate Mutual Funds (REMFs) could have been made.  Some policy measures relating to real estate regulatory authority and the model real estate regulation (Regulations for development) act could have been created.

Overall the budget has been more focused on boosting the demand of mid income housing projects in tier II & Tier III cities. Also the extension of MAT nullifies the non extension of Software Technology Park. The biggest advantage of setting up operations in SEZs is the tax benefits the company receives. However with 18.5% MAT, the very purpose of providing Tax incentive is defeated.