‘Now’ is the right time to invest
Real estate
By Vasu

THE Property slump has been around for far too long. For over two years now, property deals across the country, especially in the metros, have nearly come to a halt. The only purchaser has been the minor segment of end users. Speculative purchases which fuel the markets have been absent with investors keeping their bruised hands away. Is the situation set to change? Is the end of the real estate slump in sight?

Gautam Gupta, a fund manager in the Capital, says, the end of real estate recession is near. The market is set to boom again and ‘now’ happens to be the best time for investing in property. The early signalling systems have been in place for some time and with the incentives offered by the Union Budget, a turnaround is likely, he says. Interest rates were lowered marginally after the Budget but unofficial lending rates have softened from about 24 per cent to 17 per cent in the last one-year. Medium and large-scale building projects lying idle have been reactivated, says Gautam.

Though a separate housing plan will be outlined soon, this year’s Budget has offered several sops to the housing sector though the major concessions that the industry was hoping for are missing.

Close on the heels of the Budget, the Housing and Urban Development Corporation (HUDCO) has launched its Hudco niwas scheme which targets the middle segment, offering housing finance at rates much below the existing market slabs. Targeting the lower end of the market where lower rates are applicable for lower value loans, the equated monthly instalment (EMI) is calculated on a monthly basis which turns out to be lesser than if calculated yearly. The scheme has other features, including the absence of penalty in case of foreclosure, flexi-payment options which include telescopic payment income-linked plan for young couples and schemes in which about-to-retire persons can pay higher instalments while serving, lump sum at the time of retirement and lesser amount after retirement. Even the processing charges are recycled towards the consumer in the form of housing and personal accident insurance. According to Managing Director of Hudco V. Suresh, Hudco rates for retail financing are very competitive besides creating new slabs to net in new segments. The corporation targets a disbursal of 55 per cent to the economically weaker section, lower income groups and 45 per cent to middle and higher income groups. Traditionally, even for repaying loans earlier a penalty was paid, Hudco has gone against the trend and will reward regular payees with the waiver of last two instalments and offers no penalty in case of foreclosure, the logic being to make the funds available for further borrowing, says Suresh.

Since the last Budget, the housing sector had gone further in a tailspin. House building activity had been on a decline, even as the housing shortage is expected to peak at 42 million units by the year 2001. As many as 25.5 million units will be required in both the rural and urban sectors and benefits in the form of tax sops will be required to prompt builders to push ahead projects which have been languishing due to paucity of funds. Last year the Budget had given builders a major concession in the form of tax-free profits from housing projects of one acre or more with housing units up to 1000 sq. feet, provided they were begun in October and completed before March 31, 2001. The limit has this year been increased to 1500 sq. feet with Mumbai and Delhi being the only exceptions. If the benefits are passed on to consumers, larger flats and apartments will become more affordable.

The benefits this year have been targeted to boost the cement and steel industry, says Hema Ramakrishnan, an analyst, with the FM, acknowledging the importance of boosting housing, considering its linkages with the cement and steel sector. The changes will also result in long term gains for real estate. Though prices of medium segment property may decline initially due to greater availability, in the long run more reasonable finance options, mortgage options and benefits to corporate houses for making homes available for their employees will make affordable housing a reality for the middle classes.

The cement industry is likely to be a beneficiary of the focus on housing and infrastructure of this year’s Budget, she says and industry estimates peg a 10 per cent growth in consumption as against the present 6 per cent. However, others point out that last year plans to add two million houses whose construction was slated to begin in September last year is still on the drawing board.

This year construction activity will pick up, says Pramod Gupta, a builder, as, unlike last year when the Budget was announced in June there was little time for implementation, this year most reforms relating to housing are already in place.

The benefits announced in this budget include exemption from tax on housing loan interest up to RS 75,000 for self-occupied houses, depreciation rate increase to 40 per cent for corporate houses who build for employees, 3 per cent of all incremental deposits of banks to be directed towards housing, reduced national housing bank interest rates for borrowers in small towns, amendment of NHB laws to simplify foreclosure laws to build primary and secondary housing mortgage markets and tax benefits under section 80-1A extended to 1500 sq. feet area.

As far as the middle class purchaser is concerned the 75,000 increased limit from the earlier 30,000 for tax rebate on housing loan interest on self-occupied property does not work out to be of much gain as even for those in the 30 per cent tax slab, the maximum benefit does not exceed RS 22,500.

This increase is aimed, more at getting people to take loans, especially those in the upper middle class segment. The incentives for housing finance companies and better foreclosure laws which are still to be presented before the Cabinet are all aimed at improving access to affordable housing but it will be several months before any effect is visible on the real estate markets, say experts.

The difference this time was that the Union Budget gave importance to housing and attempts were made to unravel the ambiguities which exist. Whether it will rejuvenate property prices is a query that remains unanswered for ‘as a property dealer puts it’ "you only get to know the end of a long dark tunnel once you emerge from it."

While the Hudco Niwas Yojna has better interest options for low value loans, in the higher segments HDFC scores better. Housing finance from LIC, SBI, PNB, CANFIN falls within the middle segment while the multinational banks have the highest rate of interest. However rates are likely to drop slightly.