MUMBAI: The policy directives elucidated in the Union Budget 2017 are credit positive for realty developers operating in affordable housing segment, said ratings agency Moody’s Investors Service.
The biggest and the most impactful policy directive for the real estate sector is the granting of infrastructure status to affordable housing. This will allow developers to borrow at lower interest rates and provide tax exemptions to the construction industry that has witnessed a reduction in launches and sales these last few years, Moody’ said in a release.
The Budget has proposed reducing the holding period for capital gains on immovable property, land and buildings to qualify as a long-term investment has to two years from three. At the same time, the base year for the calculation of capital gains with indexation benefits has changed to 2001 from 1981.
These steps will reduce the capital tax burden on property sellers, thereby spurring the secondary real estate market. This result may in turn increase investor activity in the residential market. However, the benefits from this measure may be offset to some extent by the negative impact from applying a cap on the amount of losses that can be off-set against annual income.
According to Moody’s, the Budget policy directives will be credit positive for its rated developers Lodha Developers and Indiabulls Real Estate. Moody’s has ‘B2 negative’ rating on Lodha Developers and ‘B1 stable’ rating on Indiabulls Real Estate.
Policy directives will have a positive impact on the affordable housing segment but the positive impact will be muted in the luxury and mid-tier segments of the market. Lodha Developers and Indiabulls Real Estate have developments across all segments of the market, Moody’s said.
According to management, Lodha Developers has about 40%-50% of their projects, by sales value, in the affordable category as defined by the new budget. Indiabulls Real Estate too has some developments that can be categorized in the affordable housing segment of the market, the release added.
The two companies will also benefit from a one-year exemption on notional rental income from unsold inventory. Effectively, this means that they will receive tax relief, given the reduction in sales post the demonetization exercise. Lodha Developers and Indiabulls Real Estate will also indirectly benefit from measures introduced to reduce the capital gains tax as this development will help the secondary real estate market. A more liquid secondary market will in turn benefit the primary market, the release said.
Both Lodha Developers and Indiabulls Real Estate credit profiles will remain exposed for the short term to the prevailing weak operating conditions, Moody’s added.
A proposal in the budget includes setting a cap on the amount of set-off losses from residential property against annual income at Rs 2 lakh per annum. Previously, all the losses from residential property including interest paid on mortgage to buy the property could be set-off against other sources of taxable income, which brought down the tax payable. The proposed move will adversely impact demand for property as the tax benefit on buying a property for investment purposes comes down.
The introduction of the cap on the amount of losses that can be off-set will continue to keep the investors away from the mid-tier and high end segments of the market, the release said.
Credits ET Realty