Budget 2021: Measures to improve affordability critical for demand recovery in residential realty

Post the onset of COVID-19, a steep reduction in home loan rates, together with other state and Central government incentives, such as time-bound reductions in stamp duty by few states, has further supported affordability and in turn, housing demand, thereby stimulating some recovery from post-Covid lows. In order for the uptrend to sustain though, additional measures by the central government to support housing affordability through the upcoming budget would be critical.

In this regard, expansion of the income tax benefits on loans availed for house purchases would be a key area through which affordability and housing demand could be boosted, with measures such as increased deductibles for principal and interest payments.

The limit for eligible loss from housing property for set-off against other income could also be enhanced, particularly for first time buyers, keeping in mind the ticket size for housing loans in metro cities and the interest during the construction stage. On the rental end, enhanced income tax sops for income from renting of housing properties and removal of taxation on notional rental income could incentivize the purchase of new properties while making the housing market more efficient and accessible for prospective tenants.

On the supply-side, intervention would also be required to ensure adequate availability of economically priced units. While the Pradhan Mantri Awas Yojana (PMAY)has already been instrumental in providing “Housing for All”, and the Central Government has recently increased the budgetary allocation for the scheme by Rs.18,000 crore, further financial support would enable the scheme to better achieve its objective in a timely manner.

Moreover, flexibility in the definition of affordable housing through the location-based determination of price-related caps could widen the scope of projects covered under schemes targeted at affordable housing, especially in metro cities. Such flexibility would also enable enhanced coverage under the credit-linked subsidy scheme, which has played an important role in improving affordability in the low and mid-income segments. Income tax holidays could also be extended for developers of affordable housing projects, both within and outside the purview of PMAY.

Raw material costs could also be rationalized through reduced import duties on technology and materials such as MIVAN designs and aluminium shuttering or through provision of GST rebates on cement and steel used for the construction of low and mid-income housing. Further, unlocking the value of land parcels held by government agencies and other central PSUs through partnerships with affordable housing developers could mitigate high land costs, while also supporting revenue generation for the government.

Another key issue plaguing realty supply has been the rising number of stalled projects and unmarketable projects, particularly in the affordable and mid-income segments. Projects undertaken even by certain large developer groups have failed to reach the delivery stage due to funding and/or promoter related issues. Other projects, despite being completed, have remained unmarketable due to peripheral locations with poor connectivity and infrastructure.

These two issues have significantly contributed to the build-up of the high inventory overhang that is prevailing today. While the Government has already taken cognizance of these matters and taken measures to address the same, more remains to be done. The creation of the SWAMIH fund, with a corpus of Rs. 25,000 crore, has been a significant step towards the resolution of stalled projects, and enhanced funding and quicker disbursements could enable the fund to further its objective.

Now, with COVID-19 having disrupted supply chains and overall project execution, it is even more important to ensure need-based credit availability for impacted developers to avoid any build-up installed projects especially considering the curtailed funding available from NBFC channel as well. Along with enhancing the scope and improving the efficacy of the fund, income tax benefits specifically targeted at housing loans taken for completed properties could also be provided to enhance the demand for such projects, thereby complementing the funding support available under the fund.

It would also be important to further streamline the insolvency and bankruptcy process as far as it relates to real estate projects, given the complexities brought about by the nature of funding projects through customer advances. Quick resolution of stalled projects would be critical for both home buyers and lenders in such projects, and also for reviving customer sentiments towards the sector. For peripherally located projects, public-private partnership models aimed at developing the road and social infrastructure could be beneficial in enhancing marketability.

Overall, a focused attempt through budgetary provisions to address affordability via reduced housing costs for the home-buyer and rationalization of project costs for the developer would allow for the recent demand uptick to continue, and thereby enable the recovery of housing demand to pre-Covid levels. Private market participants would also need to keep the focus on affordability and alignment of products with market demand, especially in terms of price.