The finance ministry and the Central Bank plan to initiate some relaxations in the ECB norms. By this, they aim to boost affordable housing development.

The decision will be taken in the meeting which will be held by the end of this week. The officials of finance ministry and the Reserve Bank of India will attend the meeting.

External commercial borrowing is an easy way for the developers to raise fund for their projects. Moreover it is more economical as they are able to raise fund from the foreign investors who seldom charge higher amounts. In most of the times the cost of these borrowings are lower than the loans from India.

Last year too, RBI had relaxed some ECB norms for boosting affordable housing segment. This relaxation was implemented in December 2012. As per this revised ECB policy, the builders were permitted to raise funds through ECBs. They could raise funds up to $1 billion.

The available data with the Reserve Bank of India, Indian companies have raised $2.1 billion till February this year. However this is lower in comparison to the same period in the previous year. During this period, $2.6 billion was raised.

ECB is used mainly by the big corporates. However the public companies also use these schemes to raise fund.

One of the main attractions of this kind of borrowing is that they are more economical. While the interest rates are higher in India, it is lower in many other countries. So receiving loans from these countries, the big corporate and public sector undertakings can save a good amount.

The decision to relax ECB norms is highly significant in the current situation. The prime aim is to boost affordable housing. But the Indian economy as a whole may benefit from this decision.

While speaking about the new licensing policy of Reserve Bank of India (RBI), Finance Ministry said that the realty firms also should be given permission to run private sector banks. The RBI- Draft Norms came into existence in 2011 prohibits realty firms and broking firms from running banks.

The RBI- Draft says that any firm, acquiring ten percent or above of its total income from real estate business, is not permitted to run banks. The Central Bank of India said that the previous experience with the broking firms and realty firms have never been satisfactory. Moreover the apex bank stated that real estate and broking business are inherently risky and not suiting the sort of banking business.

RBI adds that the real estate business is against the nature of banking. Accordingly these businesses – both real estate and broking, are contrasting to the banking-model business. RBI brought to the light the global movement to relieve banking from all other businesses.

Finance Ministry suggested that these firms can be given license to run banks only under a number of conditions, so as to make banking and gaining loans an easier task for the subsidiary firms of the promoter. Ministry added that no subsidiary firms of the promoter shall be given any sort of loans. This will reduce the risks of the subsidiary firms to attain loans.

However it shall not be promoted and the Bank CEO should see that none of the partners or subsidiary firms is granted loans. In case if the subsidiary firms and partner firms are granted loans from the banks, then they will be able to raise funds easily. This shall not be happened as it is against the nature of pure banking.

Numerous repo-rate revisions by RBI, which led to upward revision of mortgage rates, tighter control on teaser rates earlier being offered by financial institutions to reduce EMI burden in the initial years of loan tenure, and inflationary pressures impacted end user as well as investor sentiment by the end of 2011. This coupled with supply pile-up lead to downward pressures on capital values across various micro-markets in these leading hubs. While the year 2012 started on a positive note with the central bank reducing repo rates by 50 basis points for the first time in several months (after increasing it 13 times in the last 2 years), the impact on demand rejuvenation might be limited.

“During 2011, we witnessed initial buoyancy in the real estate market as investor and developer sentiment improved, riding on the high residential demand wave. However with repeated interest rate hikes, rising prices and prevailing economic conditions, the market saw a dip in sales towards the middle of the year,” said Anshuman Magazine, Chairman & Managing Director, CBRE South Asia Pvt Ltd. This led to a supply pile-up in the key markets of NCR (National Capital Region), Mumbai and Bangalore, leading to capital values remaining flat across various micro-markets in these three leading hubs.

“While the recent rate cut by the RBI has helped generate positive sentiments in the market, stagnancy in demand will continue in the short to medium term unless there is an overall improvement in the economic scenario,” Mr Magazine added The NCR market witnessed considerable appreciation in capital values in the first half of the year, with premium markets witnessing steady demand from expatriates, high net worth individuals (HNIs) and executives from multinationals and Indian companies.

Currently, the top seven cities of India that is Mumbai, National Capital Region, Bangalore, Pune, Chennai, Hyderabad and Kolkata together occupy 389 mn sq.ft of Grade-A office space. During 2010-11, a total of 38 mn sq.ft of new space was constructed in the top seven cities and it was 37 mn sq. ft during 2011-12. Office space absorption in India during 2011-12 was merely 2% lower than 2010-11 despite GDP growth slowing down from 8.4% to 6.9% during the same period. This is in sharp contrast to the popular belief that 2011-12 was a dull year for office market in terms of absorption. Healthy absorption rate ensured a drop in vacancy level to 21% by the end of Q4 2011-12 from 27% in Q4 2009-10.

Share of Banking & IT sector falls in absorption while manufacturing sector has witnessed an increasing trend over the last two years and contributed 19% in total absorption during 2011-12, higher from 13% in 2010-11. GDP growth of service segment is estimated to grow at 8.8% during 2012-13, much higher than industry segment growth of 6%. Absorption of space during 2012-13 is expected to be considerably lower than the previous two years and this will make it all the more challenging for developers to maintain existing levels of rent.

However, the latest move by Reserve Bank of India (RBI) of reducing the repo and reverse repo rate by 50 basis points (bps) each could provide the much needed impetus to the economy and help in reviewing the demand scenario for office space in the coming quarters.

The global debt worries have led to more and more uncertainty. In the last few months, the sector has been plagued by a potential liquidity squeeze. The situation is very unsettling and the fear is that we might end up looking at the year 2008 situation. It is certain that banks will get into selective lending with more strict verifications. In 2012, we are expecting that interest rates might get stabilized but disbursal of home loans will come down.

As RBI has been steadily increasing interest rates, debt for developers is becoming expensive. Also many banks are right now not keen to lend to real estate projects. Due to global uncertainty even private equity is cautious of investing in India. In fact, companies have started looking at alternative routes of fund raising. And many a deals are being done as structured debt deals hiding behind the facade of an equity structure.

In structured debt deals, the companies—investor and investee—sign two agreements. In the publicly announced agreement the investor—a PE or a VC fund—buys an equity stake in the company; and in the second contract they have buyback clause, which allows investee company to buy back its shares from the PE/VC fund at a price that will give the fund a return of about 20% per annum over the duration of the investment.

All signs currently suggest that 2012 would not be an easy year. As debt becomes more expensive and PE funds find it difficult to deploy cash due to global economic conditions, we would see higher number of structured deals taking place in 2012. Though these structured deals are being done, they have their share of problems. The problem is when the side-contracts are not honoured.

“For the real estate in particular, this is indeed a welcome step by RBI. While the sector was already reeling under the pressures of high interest rates, this will allow banks to lower down the interest rates significantly. Both buyers and developers shall get benefitted from this,” said Pradeep Jain, chairman, Confederation of Real Estate Developers’ Association of India (CREDAI).

Home loan buyers are currently paying a higher rate of interest in the range of 11.50-13 percent on floating basis. Customers, who had earlier opted for dual rate scheme and now just exhausted their fixed tenure rate, are paying the same rate of interest.

Other industry players like Unitech and real estate consultancy firm Cushman & Wakefield also welcomed the move, which they said would boost business confidence.

“This development will have a positive impact across the economy and particularly in the real-estate industry. Not only will the cost of borrowing rationalize, this reduction will also provide an impetus to growth and enhance business-confidence,” said Ajay Chandra, managing director, Unitech.

Cushman & Wakefield India said that the banks are expected to pass on the reduction in interest rates to consumers, which will provide a positive boost to market sentiments especially in the residential sales markets.

“We expect to witness some pickup in the volume of sales transactions. For the whole of last year, end buyers had to defer their purchase decisions as they were facing the double-edged sword of rising interest rates and stubborn price levels,” said Anurag Mathur, managing director, Cushman & Wakefield.

The RBI’s announcement also buoyed the BSE Realty index which grew by 32.50 points at 1,813.97 points around 2:50 p.m. Stocks of realty industry players also surged with DLF’s scrip growing by 3.75 points or 1.88 percent at 203.25 points.

What is confusing for many investors though is the tax structure on these real estate transactions. This article will explore the tax liability on such transactions, also known as capital gain (or loss depending on whether the investor made money on the transaction).

Capital Gain Tax Structure.

The income tax rules define gain in two broad categories; namely short term capital gain (STCG) and long term capital gain (LTCG). If investors buy and sell assets within 3 years, this comes under short term capital gain. If investors buy real estate, keep it for more than 3 years and sell, it comes under long term capital gain.

For short term capital gain, the gain from asset is added to the investor’s income and taxed as per the income slab they fall under. For example, if an investor falls under the tax slab of 30%, the gain will also be taxed at the rate of 30%.

For long term capital gain, tax calculation involves what is known as indexation. The acquisition cost or cost of acquiring the asset is recalculated based on indexation. Indexation is a concept, which factors inflation in its calculation by using a factor called cost inflation index (CII). The cost inflation index number is published every year by Reserve Bank of India (RBI) and people can use it to find out the taxable gain on the transaction.

Add to that the confusion created by the new DCR (development control rules). Many builders now have to make fresh plans to accommodate the proposed changes about FSI; and the worst affected are those whose projects are already underway. Many of the launches have been put on hold, and construction has been stalled in many places. And for people who have already invested in these projects, the longer the deadlock lasts, the more they have to pay.

Buy or not to buy? Despite a profusion of analyses and research reports on housing prices and their future direction, home buyers remain as confused as ever. So it is little wonder that 37 lakh of flats remain vacant in Maharashtra, of which 4.79 lakh are in Mumbai. The Census Directorate data says that even Thane district has more than 5 lakh vacant flats.

“Why doesn’t the government or RBI (Reserve Bank of India) understand that the more they squeeze liquidity by raising interest rates, it raises returns on black investments even higher. If our country can bring down black element out of property, rents will fall, property prices will fall,” said a commentator.

The home-buyer, however, is at a loss. The Budget came as a flop, and a recent Crisil report says that prices of steel and cement will go up, which will probably be passed down to the end-user. And then, there is the proposal to hike on leave-license, which is going to make rentals expensive. There are some who expect matters to improve.

Pankaj Kapoor, MD, Liases Foras also had echoed similar thoughts. “The high prices are not fault of only the builders. The hike in stamp duty was uncalled for and it is too revenue-centric and indicates a short term vision.” Read Maharashtra Stamp duty hike: “Neither can you afford to own a home, nor take it on rent”

However, as most experts say, one can buy a home any time. “You never know what will happen next. And honestly, there is little evidence to suggest that customers have waited for better home loan or price options when they have to buy a home—because it is a necessity. So if you want to own a home, there is no bad time,” said an analyst.

The festival is widely celebrated in the state of Maharashtra and as for common people in India, a home is a priced possession and they do not sell and buy residential properties often. They wait for an auspicious date to such transactions.

Keeping this in mind, realtors at Pune has organized Sakal Pune Property Show named as Sakal Gudi Padwa Grihotsav 2012. Across the just concluded quarter, residential prices in the outskirts of Mumbai have seen a positive slide.

With the Union Budget 2012 giving due consideration to the loans of affordable housing projects coupled with the positive feeling related to the festival, buyers and sellers expect to strike a great deal during this year’s Gudi Padwa.

The buyers mainly constitute the New Urban Family Sector. Moreover, during this festive season, realtors juxtapose the properties with attractive discounts and freebies. But with these factors only, nobody can lure customers today. They are more oriented towards the location of the property, the pricing and the quality of construction.

The recent years were not so good for real estate sector. The ever rising inflation rates and interest rates kept the buyers at the bay. But the recent decision of the RBI to cut CRR rates gives little bit of hope to the sector.

However real estate experts suggest that the sentiments related to a festival only cannot trigger the sector. But it is decisive in getting the real estate market on the right track after a gloom. Moreover, traditionally Gudi Padwa means birth of bhoomi and bhoomi is everybody’s shelter. We can hope and look forward for bright days for real estate sector ahead with this auspicious festival.

“We are in discussions with public sector banks for rescheduling our loans,” Unitech head of strategy and planning, R Nagraju said. Another company executive, requesting anonymity, said Unitech was seeking to restructure a loan of over Rs 800 crore.

The Reserve Bank of India (RBI) recently allowed banks to restructure loans taken for commercial real estate without turning them into non-performing assets (NPAs). The RBI directive had come following intense lobbying by realty firms, which were finding it difficult to service debt, as sales had dried up and fresh debt was not available.

Most developers are hopeful that banks will reschedule their loans. “It makes sense for banks to reschedule loans, as it will help them show lower NPAs on their books. If banks were to re-possess land, given as collateral by developers, they may get in trouble,” says a Delhi-based mid-sized developer, who didn’t want to be named.

“Land in most cases was over-valued, and prices have been falling since the loans were disbursed. Moreover, in a market, where you have no buyer for land, banks are unlikely to recover even half their cost,” the developer added. Unitech is also expected to pay Rs 200 crore by March for the land it purchased earlier. Mr Nagraju says the company need not pay land dues immediately, as it is yet to get possession of the land.

Unitech is also banking on the sale of its assets, including hotels, office building and land parcels to raise cash. While any deal on its hotel in Gurgaon or office building in New Delhi is yet to be finalized, the company has reportedly sold off a few land parcels meant for institutional use. The company recently sold one school plot for around Rs 30 crore.

Unitech is also looking at raising funds through private equity infusion at company and project levels. Unitech is holding an extraordinary general meeting (EGM) on January 19 to seek shareholder approval to raise Rs 5,000 crore by issuing fresh equity or convertible instruments. The RBI had raised the ceiling for FII holdings in Unitech to up to 100% in November 2007.

The company has been holding negotiations with multiple PE players to raise between $300-$500 million by issuing convertible debentures at the company level and around $200 million by selling stakes in mid-income housing projects.

The index, to be launched by the National Building Organization (NBO) under the ministry of housing & urban poverty alleviation, will offer reliable data to RBI and other government agencies, facilitating speedy decision making.

A senior NBO official, who asked not to be named, said the index would be released on a quarterly basis. It will be made available on a monthly basis later. The base year of the index is 2003-04.
All major economies use similar indices to assess economic activity using demand and supply data on the housing sector. As housing is a sector with high forward and backward linkages, the proposed index will be useful in assessing demand and supply situations in other sectors, such as cement and steel.

An advisory committee constituted by the central bank will meet by the year-end to review the implementation of its directive, said the NBO official.

DR Dogra, deputy managing director with credit rating agency CARE, said that lack of a reliable database on housing hampered decision making in the country. The data for the proposed index would be collected on the basis of building permits issued by local authorities.

For all those who cannot still make a decision if or when to press the play button, there would soon be pools of money like mutual funds, called real estate investment trusts (REITs), to invest in.

REITs invest in properties and earn rental income from them, besides the appreciation in the property rate itself. They could be rolled out by either real estate players who have large rental assets, or by mutual fund houses. The income brought in as rent is given out as dividends.

The properties would be assessed at regular intervals and accordingly, the net asset value (NAV) arrived at, much like in mutual funds. The NAV, however, would not be declared daily, but annually.

The REIT corpus would go into together commercial and residential property. It may also spread the risk into urban, semi-urban and even rural land, thus curbing losses, if any.
Lease or rental agreements on commercial properties are usually spread over several years. As a result, REITs would also have a lock-in of a few years.

In the meanwhile, if you are in need of cash and wish to exit, you would have an option to sell the units. This cannot be sold to the REIT issuer as the money has to grow. But, REITs would be listed on the exchanges and units can be sold there.

SEBI has also issued guidelines for dedicated infrastructure funds, which would be seven-year closed ended funds investing in infrastructure projects. These funds, too, would be listed and would have a Rs1 lakh tax exemption over and above the usual Rs1 lakh of exemption under Section 80 (C).

Ved Prakash Arya, managing director of Milestone Capital Advisors Pvt Ltd, says, “Globally, REIT is the most sought after platform for investment in real estate market by retail households. I expect the same to happen in India as well. Another big benefit of REIT is that it will bring in a very transparent valuation mechanism and will also help remove other anomalies like cash transaction and arbitrary pricing prevailing across the country.”