Realty sector loses Rs 6,480 crore in market value after Union Budget

Analysts feel removal of indexation may dampen investor sentiments, particularly in high-end segments

The listed companies in the real estate sector lost Rs 6,480 crore worth of market value till Friday after Finance Minister  Nirmala Sitharaman in her Union Budget speech on Tuesday announced the removal of indexation benefits on the sale of property.

Stock market data shows the listed stocks recovered part of their losses on Friday but ended the week with a net loss compared to the day before the Budget was presented. The total market valuation of real estate sector companies was Rs 6.98 trillion as of Friday.
 

Analysts say the removal of indexation may dampen investor sentiments, particularly in the high-end segments where returns are  10 per cent to 11 per cent per annum.
 

 

An analysis by rating firm IndRa says that for properties with expected returns below 10 per cent to 11 per cent per annum, investors may face higher capital gains tax outflows, leading to decreased investments in this segment. "The reduction in investor demand could make it difficult to take price hikes in the near term by developers, as investors may be wary of large exposures due to higher tax outflows," it said. Indexation benefit removal and lowering of long-term capital gains tax are unlikely to impact end-users who sell their existing house and reinvest in a new house, but it will impact investors who sell their house (investment) and reinvest in other asset classes.
 

“The removal of benefits may reduce speculative demand and increase supply, leading to some price corrections. In the short term, this could result in a notable price decline as sellers compete for fewer buyers,” said Prashant Thakur, Regional Director & Head – Research, of Anarock Group.

“However, over time, the market will regain stability and prices will reflect genuine end-user demand rather than demand by speculative investors. Developers may shift to affordable and mid-segment housing from the luxury segment.”  Thakur said.

According to CLSA, the new tax regime is likely to be negative for investors with a holding period of less than five years and where property price appreciation is moderate (less than 10 per cent per annum).