Union Budget 2015-2016: Ease The Home Buyer’s Tax Burden

Kishor Pate 2Kishor Pate, CMD – Amit Enterprises Housing Ltd.

The Union Budget 2015-16 should remove the multiple taxes that are associated with home purchase. As of now, home purchasers are required to pay service tax and value-added tax (VAT) on top of stamp duty and registration charges. Goods and Service Tax (GST) should be introduced in the place of these taxeas.

Also, the real estate industry expects the Budget to finally make the Real Estate Regulatory bill a reality this year, so that the industry has the benefit of an apex body via which all concerns can be addressed transparently and efficiently.

Another expectation from the Union Budget is that it will announce a reduction in the cost of property registration. The recent hike in ready reckoner rates in Maharashtra has been a sentiment setback for the real estate sector.

Stamp duty and registration costs are as high as 6% in most cases, and this needs to be reduced by a few base points to aid consumers. Alternatively, a slab-based approach should be introduced. Stamp duty falls under state government purview, but the Center can nevertheless issue a directive to reduce stamp duty costs.

Leveraging Land Holdings To Improve Cash Flows

Kishor Pate 2Kishor Pate, CMD – Amit Enterprises Housing Ltd.

Even in these times of gradual revival, many developers continue to battle the problems of curtailed liquidity. Many developers with large land holdings are not able to launch projects on these land parcels solely with their own capital, and therefore look to either partner with better-capitalized developers or those looking for development opportunities in an asset-light model by giving them development rights in such projects.

In such an arrangement, the incoming developer can develop a smaller project while the main developer gets relief by way of bringing in multiple partners. This also improves his cash position by giving him access to money as part of the Joint Development, or in case the incoming partners buy a smaller piece of the larger land parcel.

Also, developers are keen to hive off land parcels which they do not intend to develop in the immediate future, or simply lack the financial muscle to develop.

Developers are partnering in the following ways:

Undertaking joint development agreements – The incoming partner develops and markets the project, while the main developer only gives away development rights while retaining ownership of land

Sale of partial land holdings in townships – The developer sells off smaller parcels of the main land bank to many developers to execute smaller projects, while creating the total township project

Outright sale of land parcel – The developer sells off lands that he is not developing in the near future, primarily with the object to improve his cash position.

land for sale

What This Means For Home Buyers

On the surface, a jointly-developed project may not appear to present home buyers with any special situation to be aware of. However, especially in the case of townships being developed jointly with another developer, buyers must be more vigilant for quality variations.

On the plus side for buyers, the main developer may often offer significant discounts in buildings falling in his own share of the project if his cash constrains were the reason for the partnership in the first place.

The Statistics Driving Pune’s Real Estate Market

Kishor Pate 2Kishor Pate, CMD – Amit Enterprises Housing Ltd.

Like any other city’s Pune’s real estate development pattern is driven by its demand profile. The demand profile is defined by the type of buyers who are on the market for buying real estate. Residential real estate demand in Pune is driven by two broad categories of buyers, namely end users and investors.

Approximately 25% of buyers in Pune are pure investors, meaning that they purchase properties solely for the purpose of benefiting from rental income and capital appreciation. Speculation, which is the opportunistic buying and selling of real estate in short periods of time, is actively discouraged by Pune’s developer community. Long-term investors tend to stay invested for at least 5-6 years. The remaining 75% of buyers are the end users who purchase homes for their personal use.

If we take a cumulative look at the geographic origins of both end users and investors, it turns out that 60% originate from Pune itself, while as much as 30% are from neighbouring Mumbai. Pune is a very attractive market for property buyers from Mumbai, both as investments and for personal use, as this city presents a very attractive counterpoint to the very expensive Mumbai real estate market.

The reason for this high interest from Mumbai is that real estate investments in Pune show a much better growth than what is seen in the financial capital, and many Mumbaikars are also intent on relocating to Pune. The remaining 10% of buyers for Pune real estate is comprised of NRIs living abroad who invest in Pune properties either for the use of their families, their own eventual self-use upon return to India or as investments.

AEHL-proectApart from the demand pattern, developers who are catering to the demand for homes in Pune also take their cue from the city’s economic profile. If we look at Pune’ economic profile as it stands today, the city can be roughly stratified into the primary, secondary and tertiary sectors.

The primary sector, which is comprised of agriculture, or income generation based solely on agricultural land ownership, and other forms of base goods supply such as mining, accounts for only about 5%. This segment does not influence Pune’s real estate development pattern significantly, except in terms of low-cost housing in the rural and semi-urban areas.

The secondary sector, encompassing manufacturing industries such as automobiles, electronics and machine tools, accounts for about 40% of Pune’s economic activity. This sector is very influential on Pune’s real estate market, as it gives rise to the bulk of demand for mid-range homes priced between Rs. 30-40 lakh. The MIDC belt in the Pimpri-Chinchwad Municipal Corporation is the predominant influence zone for such housing.

The tertiary or services sector, which includes but is not limited to IT/ITeS, BPO, KPO, banking and retail services, accounts for roughly 55%. The services sector, particularly the IT/ITeS segment, drives the demand for homes in the more developed urban areas.

These homes tend to be in the price bracket of Rs. 50 lakh to 1.5 crore, and around 65% of the housing projects in Pune are currently aimed at this sector. The resultant projects see a balanced demand from both end users and investors.