Feeling grounded

BUDGET & BUSINESS

REAL ESTATE: Reverse mortgage, withdrawal of pass-through benefits to venture capitals may see capital fly from the sector.

THE MEASURES
The Budget is a mixed bag for real estate, proposing measures ranging from the formation of a mortgage guarantee company for housing loans to 12.5 per cent service tax on commercial property rentals and a proposal for reverse mortgage facility for senior citizens.

The revised duty structure on cement will have a direct impact on construction cost. The pass-through benefits to venture capital funds investing in the sector have been withdrawn.

THE CONTEXT
The industry had been asking for clarity on tax concessions to special economic zones and proposed investments in urban infrastructure and is disappointed.

The sector has been reeling under spiraling land prices, with large swathes of land being acquired by developers for SEZs. Ambar Maheshwari, director - investment advisory, DTZ, a real estate consultancy, said, "The sector was expecting a direction on whether IT parks, whose tax exemptions end in 2009, will get an extension or will they be allowed to convert to SEZs."

For many months, developers had been claiming that cement manufacturers had been keeping the prices artificially high.

The industry was also expecting a greater clarity in terms of the infrastructure development plan for large metros like Mumbai.

THE IMPACT
The Budget has revised the duty structure on cement, besides imposing a service tax on commercial property rentals, surprising most industry watchers.

Industry observers predict that Chidambaram's measures will not have the desired effect of curbing the rise in prices or bringing greater transparency into transactions. The reverse mortgage scheme and the withdrawal of pass-through benefits to VC funds may actually see capital fly away from the sector.

"Although the finance minister talked about reducing the cement prices, he has actually made prices go up by hiking the excise duty on cement selectively. Combined with service tax at the rate of 12.5 per cent on commercial property, this could push real estate prices further," said Kumar Gera, chairman of the Confederation of Indian Real Estate Developers.

The reverse mortgage scheme for senior citizens is expected to move capital from real seat to healthcare, FMCG or financial services as senior citizens will be able to borrow against property to finance a better lifestyle.

The withdrawal of pass-through benefits to real estate investments by VC funds could also affect the industry, as investors will received lower returns.

"The returns for realty venture capital funds could be affected by the non-inclusion of real estate among the sectors in which they can enjoy pass-through benefits," said Jai Mavani, executive director, KPMG.

The real estate sector has received significant private equity funding, but venture funds been reluctant to fund it.