Union Budget and the realty sector

Real estate sector is one of those important sectors which directly or indirectly affect us and hence it is essential that this forthcoming union budget address the concerns of this sector. If you are an investor looking to invest in the real estate sector stocks then you should read through this article to understand the fundamentals which drive the sector and the impact of union budget on the stocks.

Wish list for the Indian real estate sector

Taxation: To make things simple for the Indian real estate sector, it is highly essential that the taxation system is simplified. Currently the tax rates differ among states and the transactions costs are really high. It is subjected to multiple taxes both at state and central level viz. service tax at construction services and state VAT on building material used in a works contract. Apart from this, stamp duty and registration fees are also levied on purchase of property. Also the industrial sector is not given any credit for taxes. Therefore if the Government takes on initiative to include real estate taxation under the proposed GST and hastens the implementation of GST then the real estate sector will get the much needed relief in taxation.

Also as per the revised DTC for special economic zones, it is proposed that the tax benefit can be availed only when the SEZs notify before March 2012 and become operational before March 2014. If the deadline is relaxed, it will significantly boost the demand for commercial real estate from the IT and manufacturing indus­tries. This in turn will have a positive impact on the real estate stocks.

Policy norms related to FDI in Multi-brand retailing: Policy measures relating to allowance of foreign direct investment (FDI) in the multi-brand retail segment should be relaxed to give a boost to the retail trade. Provision for 100% FDI in multi-brand retailing will benefit the food processing and textile sectors apart from the international retail corporations. There is a high chance that government announces the policy measures relaxing foreign direct investment norms in multi-brand retail in this union budget after floating a discussion paper in July last year. Though any relaxation in policy norms will have political ramifications, a positive step in this regard will be appreciated by the real estate sector.

Focus on REITs and REMFs: Real estate investment trusts (REITs) and Real estate Mutual Funds (REMFs) are the best way for you to get an exposure in the real estate market. It helps you to get a diverse portfolio which de-risks from the single asset ownership. India doesn’t have an organized valuation system and no consensus has been reached at on the valuation norm. Hence it might take another year or so to launch the REMFs. However if the Budget proposes to hasten this process, the real estate stocks will definitely see an upsurge.

Transparency and accountability: It is essential that the interests of residential apartment buyers are protected and hence there should be a regulatory body to enforce the legal framework. Therefore the real estate regulatory authority should be created and the model real estate regulation (Regulations for development) act should be enacted. If proposed in this budget these policies will be a boon for the residential apartment buyers.

Overall it seems that there might be a few changes related to allowance of FDI in multi-brand retailing. So, you can try your luck in the real estate sector stocks as the Budget might be favorable for real estate this year.