FY14 budget expected to give boost to real estate sector

The global environment remained volatile during the first quarter of calendar year 2013.  The timely bailout funding in Cyprus helped investor sentiment.

Despite the cut in repo rate by RBI, the bond markets sold off as RBI noted in the review that room for further cut in rates was “quite limited”. The political uncertainty at the Centre had a negative impact on market sentiments.

Lower inflation, slow growth and a reduction in trade deficit is expected to provide RBI with more room to continue with its monetary easing policy. Therefore, it is expected that RBI will continue to reduce interest rates going forward.

Indian Residential Real Estate Market

The budget of 2013-2014 is expected to provide a boost to the Indian Real Estate sector, particularly the affordable housing segment.

However, the reduction in abatement from 75% to 70% for luxury homes (costing over INR 1 Crore, or having a size greater than 2000 sqft) is expected to increase service tax by approximately 0.62%. In a move to increase transparency in real estate transactions, the budget proposed a 1% TDS (Tax Deducted at Source) on transactions over INR 50 lakh. This is expected to discourage the practice of ‘flipping’ in real estate transactions, a practice commonly adopted by speculative investors, and this could have a potential impact on property demand and hence prices.

In addition, an interest benefit of INR 1 lakh on first time home loans upto INR 25 lakh is expected to trigger demand for housing from first time home buyers across the country.

In Mumbai, select builders began cutting residential real estate prices in some of their projects. Sales slowed by 14% in January 2013 as compared to January 2012, driven by the Thane market which went down by 23%.

The NCR market witnessed a revival as absorptions increased by 46% in January 2013 as compared to January 2012. This was caused by sales revival in Greater Noida, Yamuna Expressway, Noida Extension and Faridabad due to the clearing of land acquisition issues and the highly affordable units available in the Yamuna Expressway and Noida Extension areas.

In Pune, prices of absorbed units increased by approximately 11% from January 2012 to January 2013 while absorptions declined by approximately 21% for the same time period. In Bangalore, absorption increased significantly by approximately 32% while prices were up 19%.*

The end user driven Chennai real estate market witnessed several high profile land sales in premium areas of Chennai, including Akshaya Homes purchase of 1 acre on Sterling Road for 93.75 Crore, VGN’s acquisition of 1.5 acres in Nungambakkam High Road for Rs.195 Crore and 10 Acres in Guindy for Rs. 273 Crore, and Ceebros acquisition of Atlantic Hotel (approx 1.65 Acres) for Rs. 160 Crore.  This was perceived as an indication of developer’s confidence in the market’s strength, particularly in the premium segment.

*Please Note: The market commentary has been compiled from various sources including third party research reports and newspaper articles" e.g  Source: Hindu Business Line, April 30, 2013