First dream home? You have something to cheer about!

If you have been vying on that dream home for a long time but were waiting for the right time, it has arrived! In the 2016 Union budget, the Finance Minister has proposed an introduction of additional deduction on interest for home loans up to Rs 35 lakh, with a rider that the value of the house doesn’t exceed Rs 50 lakh.

Isn’t it a reason to cheer for first time home buyers, especially when the costs of property units have increased manifold over the recent years?

As per Indian tax laws, a home buyer is entitled to claim both the interest and principal components of home loan repayment for tax benefits. Presently, interest payable on a ‘self-occupied’ house is subject to a maximum deduction of Rs 2 lakh under the head ‘Income from House Property’.

Real estate industry experts and tax payers were looking forward for the government to increasing the tax exemption limit for home loans, particularly in metro cities, by about Rs 1 lakh to Rs 3 lakh as the current limit of Rs 2 lakh is very trivial. Moreover, the interest, a component of one’s EMI that goes towards principal repayment is allowed to be claimed under Section 80C which can be claimed within the overall limit of Rs 1, 50,000 only.

Further, the government was also urged to consider creating a separate category of deduction for principal re-payment of housing loan, since the principal paid is currently clubbed under Section 80C with other tax-saving instruments, which is insignificant in terms of the relief it provides to the home buyer. If this demand is met, it would leave behind a higher disposable income in the hands of the borrowers, at the same time encourage investments in real estate sector.

Rs.1600 crore raised by Kotak Realty in residential projects

With a view to invest in residential projects across six cities over the next 3-4 years, Kotak Realty Fund has raised Rs.1600 crore from institutional investors. The private equity firm of Kotak Mahindra Group will be investing in residential projects in the six major cities of Mumbai, Delhi, Bengaluru, Pune, Hyderabad and Chennai.

Talking to PTI, Chief Executive Mr. Sriniwasan thanked the government for its clarifications as the same enabled the firm to structure the equity raised as an Alternative Investment Fund (AIF). Further he said, “Currently, there is enough liquidity for addressing debt requirements of the sector, so we felt probably there was need for equity as well. We feel this investment will help address the growing equity needs of the real estate industry in India.”

Discussing the recent development further, Vikas Chimakurthy, Chief Investment Officer said “We anticipate that the correction in the residential market will reflect in land values over the next few quarters, which will make the equity investment argument attractive.”

Budget 2016 will boost demand for affordable homes

Homes up to 30 sq metres in metro cities and 60 sq metres in other cities which fall in the affordable segment make up for 90% of the demand for houses in India. Several announcements in the Budget 2016 are likely to stimulate growth in demand for affordable housing.

Real estate experts say the exemption for affordable housing would bring in a 15-20 per cent upside on profits after paying the MAT tax for a developer constructing such a project, making it easier for the developer to attract foreign and domestic investment for housing projects.

“100 per cent deduction for profits to an undertaking in housing project for flats up to 30 sq. metres in four metro cities and 60 sq. metres in other cities approved during June 2016 to March 2019 and completed in three years.  MAT to apply,” finance minister Arun Jaitley announced in the budget, adding that “construction of affordable houses up to 60 square metres under any scheme of the Central or State Government including PPP Schemes will be exempt from service tax.”

First time home buyers will get deduction for additional interest of Rs 50,000 per annum for loans up to Rs 35 lakh sanctioned in 2016-17, where the cost of the property does not exceed Rs 50 lakh. This will encourage developers to reorganize funds into building more houses in the affordable segment.

Further, Jaitley has addressed one of the painpoints of the real estate industry by extending excise duty exemption, presently available to concrete mix manufactured at site for use in construction work, to ready mix concrete as well.

Shishir Baijal, managing director of property consultancy Knight Frank India says the realty sector will get a push from both supply and demand side. The FM has announced steps to address concerns from the supply side in housing to spur construction activity and employment connected to it.

To provide relief to persons living in rented homes, this budget has increased the limit of deduction of rent paid under section 80GG from Rs 24,000 per annum to Rs 60,000.

Increasing Demand in real estate

According to report of Bain, real estate consulting firm, “The demand in Indian real estate market for organized segment can reach up to 1.35 billion sq ft by 2020, however; currently, it is around 880 million sq ft and out of this 85 percent is for the residential real estate”.

As per report of Bain which was titled with “Residential Real Estate in India: A new paradigm for success” finds that in present the sales of home is slow because of low consumer demand and high price. However; while going to forward, the business of Indian real estate sector will have to things very differently in an order to be successful with positive growth.  As per the statement of Parijat Jain, who work for Principal Infrastructure and Real Estate Practice at Bain and Co-author of the report, “The current business model of real estate is changing and it will continue to change more rapidly over the next few years. All the value that was attributable to a real estate firm was in land acquisition, agglomeration and managing approvals”.  The more he added that now people are building concrete businesses with sustainable and value addition inputs very good process and very good execution skills to manage real estate market.

In present, the real estate industry is seeing shift because of dynamics and competitive forces, which are giving rise to different business models in the market and regulatory environment are becoming more complex and apart from that the shift in profit is increasing and awareness among consumers are also increasing. However; the inventory level is increasing due to slow growth in real estate market, but still its challenges to sale the older inventory in market. Apart from that the newer projects are doing well in the market. According to Gopal Sarma, the Head Real Estate and Infrastructure at Bain for India Unit and lead Author of the Report, “It is combination where come part of sector are doing very well whereas; other segment is facing rough response from customers”. The more he added that there has never been value attached to discipline in the process to provide quality and best price to customer.

To be successful in the real estate market, real estate builder should keep themselves on three key aspects in mind; first, the real estate builder needs to select the business model with right processes in an order to deliver best service because with well defined processes and valuable chain from the pre-construction through the construction cycle, handover and beyond, can create alignment and increased ROI for companies. Second; real estate builder should decide that in which market they want to play in terms of geography and market segment because real estate is the business of local market, it is not the business of national and regional scale. Third; In most of the real estate market, customers are neither on front nor on centre, which means now onwards builders should think for customers.

Image Credits : DNA

In past few years, Pune and Mumbai have seen aggressive growth in term of property prices since year 2012 by 49.97 percent and 73.91 percent respectively, whereas; the second most pricey real estate market was Delhi/NCR as it was observed that in Delhi/NCR the marginal price rise was 9.13 percent since year 2014. According to reports, it’s clear that if you want to rent or buy an apartment, so Mumbai and Delhi-NCR are among the most expensive cities, especially than when you are from middle class, whereas; Hyderabad and Ahmadabad are still most affordable city to buy or rent house as per the reports of ArthaYantra, a Financial Life Management Advisory Firm.

According to reports, since 2012, Mumbai witness 73.91 percent, Pune witness 49.97 percent and real estate market of Delhi-NCR has observed the marginal price rise of 9.13 percent, whereas; reports showed that Bengaluru witnessed a price rise of 9.76 percent since 2012 and Chennai was with 5.55 percent  marginal price rise. However; when it comes to Ahmedabad and Hyderabad so they have a negative growth in price and it was -20.70 percent and -10.46 percent respectively. In terms of property prices the growth since 2014, Mumbai again led the pack with 16.04 percent rise in home prices and it was followed by the Kolkata with 11.27 percent, Chennai with 8.78 percent and Delhi-NCR with 6.37 percent. Whereas; Hyderabad, Ahmedabad and Bengaluru was among the cities which witnessed a negative rise in home prices since last year and it was -0.42 percent, -4.46 percent and of -2.55 percent respectively.

According to report of ArthaYantra, Ahmedabad has seen a negative growth since 2012 in terms of property rents and due to that to placing it on the top most position in affordability-to-rent city. Whereas; Hyderabad has seen reasonable increase in the rental values, but drop in the property price, so it’s sensible to place it on the top most position in the list of cities where property prices are affordable.  However; Bengaluru is more favorable towards renting in comparison of buying property as it has seen a drop in property prices due to its demand in real estate industry. When it comes to affordability, so survey showing that someone with the annual income of Rs 25 lakh cannot afford residential property in Mumbai, however; same person with same annual income can buy property in Delhi/NCR. Buying property in the city like Chennai is only suitable for those people who have annual income of over Rs 20 lakh, however; if you have annual income of above Rs 17 lakh, so you can attempt to buy property in Pune city too.

In present, Bengaluru is one of the most affordable buy destinations for people who have the annual income of over Rs 15 lakh, and people with the annual income of over Rs 15 lakh can also buy property in Kolkata. But when it comes to buy property in the city like; Ahmedabad and Hyderabad, so they are among the cheapest cities and due to that people with the annual income of over Rs 9 lakh can buy residential property.