RBI Rules To Impact Real Estate

The realty sector is unlikely to be impacted adversely following the measures announced by the Reserve Bank of India on Tuesday aimed at tightening home loan regulations.

However, rising capital values can play a spoilsport hereafter as the RBI, through these measures, has alerted home buyers, developers and banks, industry experts said.

The RBI on Tuesday, as part of its monetary policy review, raised repo and reverse repo rates by 25 basis points each while keeping the cash reserve ratio and bank rates unchanged. It also announced reduction in loan-to-value ratio to 80%, which most commercial banks were keeping at around 85%.

RBI also increased the risk weights for loan of more than Rs 75 lakh to 125% from 100%, and raised provisioning requirement for teaser rates to 2% from 0.4%. According to Ajay D’souza, head of research at Crisil, increasing risk weights for loan of more than Rs 75 lakh may not impact the demand, as a large part of demand is for loans less than that.

However, borrowers with a loan above Rs 75 lakh may have to face a 150-basis point higher cost as a result of all the measures announced on Tuesday, said an analyst with a foreign brokerage.

Budget 2010 - Impact on Real Estate Sector

The pending housing projects have been granted a one year extension for completion, from the existing four years to five years, for claiming a 100% deduction on their profits under section 80-IB of the Income Tax Act, 1961 (“Act”). This extension is available for housing projects approved by a local authority on or after April 1, 2005.The industry players who have got their 80IB (10) eligible projects delayed can take comfort with the time for completion being extended to 5 year from current 4 years. Moreover interest subvention scheme of 1% on all individual housing loans upto Rs 10 lakh (Rs 1 million) for units costing upto Rs 20 lakh (Rs 2 million) till March 30, 2011 is a positive move to encourage affordable housing units costing upto Rs 20 lakhs.Since real estate sector is more interest sensitive this 1% subvention will reduce the EMI significantly and improves affordability. Further more and more developers will conceive projects in this price segment to tap the potential auguring well for the sector on a whole. However the impact of bringing rental of vacant land into service tax as well as other changes in service tax has to be seen.Since the demand for real estate being a derived one, the growth thrust as well as more money on middle class individual will benefit the industry by way of demand pickup.

In addition, under section 80-IB of the Act the built-up area of shops and other commercial establishments in housing projects has been relaxed to 3% of the aggregate built-up area of the housing project or 5000 square feet, whichever is less, from the existing 5% of the aggregate built-up area or 2000 square feet, whichever was less. A 4 month extension has been provided for setting up and commencing operations of hotels and convention centers in National Capital Territory of Delhi and specified surrounding regions. Such hotels and convention centers would now be eligible to claim specified deductions, where such facilities are set up and commence business by July 31, 2010.

Since real estate sector is more interest sensitive this 1% subvention will reduce the EMI significantly and improves affordability. Further more and more developers will conceive projects in this price segment to tap the potential auguring well for the sector on a whole. However the impact of bringing rental of vacant land intoservice tax as well as other changes in service tax has to be seen.

But inspite of the positives of budget 2010 like incentives to hotel business, housing projects, higher allocation under Indira Awas Yojana and other rural development/infrastructure schemes, is unlikely to meet the expectations of the industry primarily due to some of the service tax proposals.