CA Srinivasan Subramanyam

CA Srinivasan SubramanyamIn his maiden Union Budget, Finance Minister Arun Jaitley announced a number of positive measures for the real estate sector, be it easing the foreign direct investment (FDI) norms, clarity on taxation of real estate investment trusts (REIT) and boosting urban as well as rural housing.

The three major promises made by the National Democratic Alliance (NDA) in their manifesto having direct implications for the real estate sector include (i) development of 100 new cities; (ii) implementing a new land use policy; and (iii) planning for low-cost housing. Prime Minister Modi’s pledge to ensure ‘Housing for All’ by 2022 which presents an INR 9 lakh crore opportunity for the sector to service the housing deficit of 18.8 million housing shortage in India.

The biggest move was the grant of pass-through status to Real Estate Investment Trust (REIT) from a taxation perspective. Although this was already expected, the clarity now sets the stage for more concrete alternative fundraising routes for real estate developers.

Affordable housing


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Affordable housing has become the buzz in housing sector today and is directly proportionate to the demand of household in different income ranges. What is affordability? It is gauged as the ratio of cost of housing to income of the household.

The RBI has tweaked the definition of affordable houses and has said home loans up to Rs 50 lakh in metros and Rs 40 lakh in non-metros given by banks from the proceeds of long-term bonds will qualify as affordable housing loans.

Banks can issue long term bonds for affordable housing and there is no restriction on quantum of bonds that can be issued by the bank. However, the regulatory incentives i.e CRR, SLR and priority sector lending will be restricted to the bonds that are used incrementally to finance affordable housing.

In addition, the Union budget has a proposal to set up a mission on low cost housing to be anchored by National Housing Bank – NHB. In the budget a provision of Rs.4000 crores has been earmarked for the NHB with a view to increase the flow of cheaper credit for affordable housing.

 Here’s what it means for the housing sector:

Under the current regime, housing loans up to Rs 25 lakh in metros and Rs 15 lakh in non-metros are considered as affordable housing loans and fall under the priority sector lending category for banks. This definition has now been tweaked such that housing loans up to Rs 50 lakh in six metros (Mumbai, Chennai, Kolkata, Delhi, Hyderabad and Bangalore) and up to Rs 40 lakh in other centres have been included under this. This means interest rates could come down on affordable housing loans given out of proceeds of long term bonds.

While the measures taken by RBI make home loans more attractive, we have to wait and watch as to how this will impact the lending rates as most banks are already extending home loans close to their Base Rate. Base Rate is the benchmark rate below which banks are not allowed to price their loans; finance minister in the Budget had said that banks would be allowed to float long-term bonds for lending to infrastructure. Explaining the rationale to extend this facility for housing, the RBI said “Apart from what is technically defined as infrastructure, affordable housing is another segment of the economy which both requires long-term funding and is of critical importance. Accordingly, the Reserve Bank intends to ease the way for banks to raise long-term resources to finance their long-term loans to infrastructure as well as affordable housing. This will help promote both growth and stability, as well as improve the supply side.”

While it is believed that banks will pass on these benefits to real estate developers and they will be able to raise funds for housing projects only time will tell whether these benefits will actually percolate down to the developers and finally the customers.


The Budget has proposed reducing the minimum built-up area requirement in FDI-funded real estate projects to 20,000 sq mt from 50,000 sq mt. Apart from this; it has also proposed reducing the minimum paid up capital requirement of wholly owned subsidiaries of foreign partners to $5 million from $10 million.

These definitive steps will give much needed impetus to realty sector and will boost housing sector in tier 2 and tier 3 cities. These cities were struggling to develop such large projects and developers were wary of taking up such risky ventures. Making them smaller and more manageable will provide a big impetus to attracting FDI and expertise in setting up new townships and cities.

All this will not only create affordable housing but also help in easing liquidity requirement for developers, the industry experts said.

Moreover, projects with at least 30 per cent cost allocated to low-cost affordable housing projects are exempt from limitations of capitalization, minimum area requirement and lock-ins.


What is REIT?

A REIT is a type of security that is sold like a stock on an exchange and invests and owns real estate assets that produce a stable rental income for shareholders.

The Securities and Exchange Board of India(SEBI) has already issued guidelines for REITs and now with taxation structure getting clear in the annual budget, real estate sector is going to become a direct beneficiary of such trusts.

The biggest move was the grant of pass-through status to Real Estate Investment Trust (REIT) from a taxation perspective. Although this was already expected, the clarity now sets the stage for more concrete alternative fundraising routes for real estate developers.

Further the introduction of REITs would spell scores of opportunities for developers, private funds, financial institutions and other investors, as they can be used as an exit vehicle to rotate funds as desired.

Emphasis laid on Affordable Housing

The government’s policy in easing of FDI norms are being seen as one big beneficiary move to bring affordable housing back on track. With expert reports suggesting a shortage of around 18.8 million houses in the country, the finance minister has allocated Rs 4,000 crore for low-cost housing alone apart from Rs 50,000 crore for urban housing. With Slum development being made a part of CSR activities, the government seems to have its heart in the right place.

This segment is underserved and scale is important to beat cost of construction. The Construction technology is fast evolving in the Indian real estate market and in order to make housing affordable the TAT (Turn around Time) in casting slabs should be reduced to half compared to the conventional techniques. Once such technique is to use the MIVAN technology as this offers higher efficiency close to zero wastage and the resources required for construction. Another technology is to use of prefabs. Therefore, change is inevitable in the real estate industry and innovative technology is to be a big game changer in cutting down the cost and make housing affordable.

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June 2021