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Photo: Bloomberg
Photo: Bloomberg

Budgetary sops notwithstanding, demand revival in real estate sector remains elusive

  • Demand revival will come from lower interest rates that would make monthly instalments more affordable
  • The numerous tax incentives are unlikely to have a huge effect on realty firms in the listed universe

The benchmark BSE Realty index, which was initially euphoric over the budgetary sops doled out to the housing sector, finally closed a mere 1.3% higher on Friday. The Street was quick to reset return expectations from realty stocks.

The numerous tax incentives are unlikely to have a huge effect on realty firms in the listed universe. Here’s why.

The extension of the tax exemption for affordable housing projects by one more year until FY20 may spur more projects in the segment. As it is, between Q2 FY18 and Q2 FY19, about 55% of home sales were from units priced less than 50 lakh across eight tier I cities in India.

However, higher sales volume would be offset by a fall in the average ticket size of residential units. According to Crisil Research, “For ticket size above 1 crore, the share of units launched between 2017 and 2018 declined to 10-15%, compared with 30-35% before 2017. The timeline extension will only support momentum in affordable housing." Revenue and profit accretion would therefore take time, since this segment has much lower margins as well.

For that matter, even the relaxation of tax on notional rent of unsold housing units held by the developer for 24 months (from the earlier 12 months) will give marginal relief. The share of ready-to-move, unsold residential units is a small portion of the total unsold inventory, say analysts at Crisil. This means that very few firms in the listed universe would gain from this tax relaxation. Besides, the earlier outgo on this front was not very high in any case.

Graphic: Naveen Saini/Mint
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Graphic: Naveen Saini/Mint

The need of the hour is to propel demand for homes. Budgetary incentives such as raising personal income- tax exemption limit to 5 lakh from 2.5 lakh, higher standard deduction, higher taxable limit for rental income from homes and allowing capital gains proceeds to be reinvested in two homes instead of one (in a lifetime) may motivate homebuyers to own a second unit.

But tax incentives alone will not suffice. Demand revival in the sector will come from lower interest rates that would make monthly equated instalments more affordable. The trigger will ideally come from rate cuts by the central bank. Further, the tightness in liquidity due to the non-banking financial companies’ crisis is yet to ease. Meanwhile, property prices are still sticky in most parts of the country, which may also put buyers of a second home on the back foot.

Perhaps, lowering goods and services tax on under-construction projects—an expectation that was not met in the budget—will help bring down property prices.

Such measures are not necessarily linked to the central budget. Any positive news on this front would give a leg up to realty firms’ profits, as that could drive demand and consumer confidence in the real estate sector. Until then, equity investors in the sector may continue to be on a shaky foundation.

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