Union Budget 2010 -11: Concessions to rental housing critical

Today yields in rental housing are so low (at about 5% or 6%) that nobody wants to invest in it. Moreover, the legal system is such that getting a flat back (from a tenant) can be a problem. Both these have to be addressed.

With the Union Budget just a few days away, DNA Money invited some realty sector stalwarts to understand what they wanted from the Union finance minister. Excerpts:

Would better rental norms help develop a Reit market in India?

Pranay Vakil, chairman of Knight Frank India:
I think the two are inter-related. You either have Reit or Reit-like products — both will serve the purpose of organised rental housing. There is not a single developer creating rental housing in an organised fashion in India. See, every city has a 20-30% floating population, which doesn’t necessarily want to buy a flat. They are subjected to brokers who just give something, they don’t even know if the titles are clear; then they worry if they’ll get their deposits back. If you have rental housing backed by the government, it will make repossession possible. That is the need of the hour.

Pujit Aggarwal, managing director of Orbit Corporation:
A Reit-like structure will bring down rentals and there is also an automatic passthrough as far as taxes are concerned. We are asking that Reits be given mutual fund status so that they become more attractive and developers would create more for-rent properties. This structure has proved to be one of the biggest drivers of housing in Europe and America.

Mayur R Shah, managing director of Marathon Realty:
The problem is that we can push the issue but the decision has to be taken by the finance minister. If I do a rental business today, how do I exit from the market? The typical exit is a Reit, which buys flats from a developer. If the developer is given a tax break, he would be inclined to do rental housing.

Vakil:
Another confusion is on whether service tax is applicable on rental housing. The high court says it is not, but I can show you internal instructions of the tax department which say it is, and the department is actually telling its people to go and recover service tax despite the HC order. What we want is clarity and consistency.

What about Section 801B?

Lodha:
A lot of us have abused the section. We have done 4,000 sq ft flats and showed it as 4 flats. We hit ourselves by doing such things. But where the cases were genuine, where you are really providing affordable housing, it has to be there because otherwise the IRRs aren’t there.

Moreover, that is where the bulk of the population wants housing. When you look at Mumbai’s demographics, we have a shortfall of 200,000 units every year. And last year 18,000 homes were delivered. Out of the 2 lakh units, 130,000 is in the Rs 10-40 lakh segment and here there are not even 10,000 homes under construction. So you just see the supply-demand gap.

The cement per sq feet that goes into construction of a Rs 20 lakh home is no different from that which goes into a Rs 10 crore home. But the multiplier effect is much more in the affordable segment because you are spending a much higher amount as construction cost compared with the sale value. So confidence about the continuation of Section 801B — and not making it a year-after-year extension thing —- is necessary. Clarity is very important.

Vakil:
One of the major objectives of Section 80 IB is to give a tax holiday for affordable housing. That would take out the black money from the system.

How is that?

Vakil:
Why does a developer take partly in cash and partly in cheque? If he takes cash, it is not disclosed to the government and therefore there is no tax on it. But when what you disclose is not subject to tax, why would you take cash?

To read more, please, visit dnaindia.com

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