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Many positives for realty, end-users to benefit most written by Jackbastian Nazareth, Group CEO, Puravankara, published in Financial Chronicle. July 7, 2014

Anticipating enco­uraging announ­cem­ents in the budget, the realty sector hoped that the government would be able to re-establish the country as an economic force and boost consumer and investor confidence that will help spur growth of the industry, thereby benefiting the end-consumer.

 

These included the need to confer industry status to the realty, provision for single-window clearance and setting up of a regulatory authority to ensure planned and transparent development in the interest of customers in addition to reforms, rational taxation and positive policy measures.

 

In the budget, the government has proposed a tax pass-through for real estate investment trusts (REITs). We had been talking about the possibility of this coming through. Other positive developments include lowering of built-up area for FDI norms and tax relief for homeowners with mortgages while hike in the custom duty on flat steel products to 7.5 per cent from 5 per cent will add to the ever-rising construction cost.

 

The finance minister has allowed a complete pass-through for taxation purposes. To boost investment, the government intends to provide necessary incentives for introduction of REITs. He also said REITs would be given a tax pass-through status to avoid double taxation. A REIT-like structure for infrastructure projects has been proposed. But there seems no clarity on exemption of capital gains tax for transfer of assets from the balance sheet of developers into new vehicles, which can be listed as REITs.

 

REITs are expected to attract more global investment and bring transparency into the sector. However, stamp duties remain high (at 5-14 per cent depending upon state) and would need to be rationalised for REITs to become a reality.

 

Sebi had floated a draft listing guidelines in October 2013. We expect that Sebi would issue a final listing guideline incorporating the proposed taxation. With this the cap rates for commercial realty would compress. Large asset would also get benefit, as they will be able to list their portfolios.

 

Minimum size of built-up area for FDI investment has been lowered from 0.5 msf to 0.2 msf and value-wise from $10 million to $5 million with three-year lock-in. This has the potential to attract FDI in many more assets. Also projects committing 30 per cent of total space for affordable housing will be exempt from size and investment norms.

 

We think the budget provides some clarity on REIT listing. Relaxation of FDI into the sector is also a positive step for the industry as a whole.

 

( The author is Group CEO, Puravankara)