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Media Information
Affordable housing is the need of the hour

Published & Updated as on - 2010-02-18

Pranab Datta, Vice Chairman & MD of Knight Frank India has given pre-budget Suggestions and Expectations for the real estate industry in the Budget 2010-11.

The real estate industry faced a severe blow during the global economic downturn in the last year. However, this slowdown has also created opportunity in new segments that were untapped until recently.

Housing constitutes over 70% of the real estate sector and is amongst the three basic necessities of life viz. food, clothing and shelter however, it is largely ignored. By 2012, India will be facing a shortage of about 26.53 million houses. By catering to this huge potential demand base, we not only satisfy one of the basic necessities, but also create a multiplier effect on the economy. This is because of the backward and forward linkages of the industry. With this backdrop in mind our suggestions are primarily aimed to benefit the large but largely ignored segment of the populace.

Increase in income tax deduction on home loan interest u/s 24 (b):

A deduction to the extent of Rs.1,50,000 is available on housing loan interest payment. A large section of residential buyers purchase property by assistance from financial institutions and over 80% of the housing requirement comes from the lower and middle income segment.

Assuming an interest rate of 10% pa on a home loan, the current deduction benefits house buyers of up to Rs.15,00,000. However, the property value in cities is much larger than this amount. Therefore, providing higher benefit to assist the house buyer has its merit. We would recommend an upward revision of this limit from Rs.1,50,000 to at least Rs. 3,00,000.

The incentive should be need based rather than being a general incentive. Consequently, the benefit of interest deduction can be linked to the income of the beneficiary and only those individuals falling below a certain income limit benefit from this deduction.

Increase in income tax deduction on home loan principal repayment u/s 80 C:

An overall deduction to the extent of Rs.1,00,000 is available for home loan principal repayment. Various other investment avenues like PF, insurance, mutual fund, etc. are part of this section and therefore the share of benefit available to home loan buyers is insignificant. A separate deduction to the tune of Rs.1,00,000 should be provided for the housing loan repayment or the overall 80 C deduction should be increased to Rs.2,00,000. While the limit of deduction is raised, this deduction can be restricted to individuals up to a certain income.

Affordable housing is the need of the hour

Income Tax exemption u/s 80 IB (10) should be extended to include projects constructed after 31st March 08. While benefits are available under this section, these benefits do not percolate to the intended recipients. Certain loopholes were addressed by the 2009-10 budget. However, lot more has to be done so as to benefit the middle class. Along with the restriction on the size of housing units a restriction on the value of the apartment and eligibility of buyers based on income will also serve the cause. The scheme has to be redesigned in a manner that makes it user friendly and should be monitored so that it benefits the house buyer rather than maximizing wealth in the hands of the developer.

Higher FSI of 4 should be provided so that the high cost of land in cities can be offset.

Industry status for real estate sector

The recognition of real estate sector as an industry will benefit the sector immensely in terms of greater access to funds and lower cost of borrowing. The lower cost of fund should ultimately benefit the consumer.

Infrastructure status to the affordable housing and integrated township projects.

While we list housing amongst the three basic necessities of life, India is dealing with an acute housing shortage. Besides, shifting slum dwellers to proper houses solves several problems. It is therefore we advocate affordable housing and integrated township projects should be provided an infrastructure status. By providing this status these projects will have a better access to funds. For instance, these projects will also benefit from the increase in allocation to the IIFCL which lends to the infrastructure sector.

Relaxation of ECB regulations

External Commercial Borrowing (ECB) is allowed for development of townships and further extension of this will serve the cause of increasing the housing stock in the country. The cost of borrowed funds for the developers is high and the availability of long term loan is also not easy. Therefore, it will serve as a great incentive to increase the access to overseas funds at lower cost through the ECB route. Similarly, the deadline for ECB in development of township should be extended from the current date of 31st December 2010.

Encouragement to build green (sustainable) buildings

Green buildings are designed to optimize the use of energy, water and other resources. By reducing waste, pollution and environmental degradation these buildings also protect occupant health. The government should provide fiscal incentives that can at least neutralize the extra cost incurred on construction of these buildings. For instance, a weighted deduction of 110% of the amount spent on construction can be allowed for tax purposes.

Uniformity in stamp duty rates

The stamp duty rates on property transactions vary from 5% to 15% across different states. The centre should issue guidelines to bring uniformity in these rates across states. The rate of stamp duty should also be brought down. While the reduction in rate will lead to loss of revenue but it can be compensated by widening the compliance net.

Provide a boost to Rental housing

Moving from the concept of providing ‘housing’ to providing ‘shelter’ can be seriously exploited. For a successful rental housing model a strong legal system to ensure the right usage of the property is required. A vibrant REIT market would also help to setup an institutionalized residential rental market. For instance, Post Properties in the USA operates a very successful residential rental market.

Slum redevelopment needs a renewed focus

The central level policy to deal with slum redevelopment is required. The government has introduced a new scheme called Rajiv Awas Yojana (RAY) in the last year budget, to provide housing and basic amenities to urban poor. However, the aim of creating a slum free India in 5 years will need a renewed focus and greater monitoring of the scheme.

Guidelines to provide Microfinance assistance to the house buyers in the unbanked segment

The guidelines that a commercial bank has to follow before lending make it almost impossible for the lower income groups to borrow. This is because they seldom have the required documents. While these people have the intent to borrow and repay over time, their situation makes it impossible to avail a bank loan. With an average ticket size of Rs.3-6 lakhs, microfinance is the most plausible way to realize the potential of housing for the lower income group.


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