The Times of India (TIMES PROPERTY), Pune - March, 2007

Analysts believe that the withdrawal of tax incentives under section 80 IB could put a further squeeze on construction of small flats, says K Raj

Madhav Joshi is going nuts! This 25-year-old Model Colony-based marketing executive is planning to get married in May. Ever since he and his girlfriend Sunita decided to take the plunge, four months ago, they have hunting for a 1 BHK flat that will fit their budget and will not be too far at the edge of the city.

“We did not want to buy a resale flat since I believe that most of them are not maintained well. But there doesn’t seem to be a new 1BHK flat to be had for love or for money. The choice really is to either buy a flat in re-sale or move to some far off area,” Madhav says.

If like Joshi, you are looking around for a 1 BHK flat, finance minister P Chidambaram has made you life more difficult. In his recent budget, he has withdrawn tax incentives under Section 80 IB which were designed to promote housing for the masses.

Developers across the country were eligible for tax incentives for construction of flats below a specified area – 1000 sq. ft. in metros like Mumbai and Delhi and below 1500 sq. ft. in cities like Pune, provided they got their projects approved before March 31, 2007 and completed them before March 31, 2011.

The industry widely expected the FM to extend the March 31, 2007 deadline. But rather than doing that the FM has gone and withdrawn the incentives. The consequences, say most real estate analysts and developers are going to be completely contrary to the government’s stated objectives of promoting housing for the masses.

Arvind Jain, MD, Pride Housing says the with the withdrawal of the tax incentives more developers would be inclined towards building bigger flats to protect the profitability of their projects.

Analysts point out that given the high land prices and the limited buying power of the lower and middle classes the profit margins on projects with smaller flat areas are much lower. Giving builders tax breaks was a way of encouraging them to build for this section.

Rajesh Choudhary, MD, Prestige Developers also seems to concur with this view and points out that the Intention of 80 IB was to create housing for the masses. Its withdrawal will definitely act as a disincentive, he says.

Some analysts also believe that the move is also probably not well thought out. They point out that a developer does not generally need four years to complete a project. Even if the government wanted to remove the incentive, it could have very well made 2011 as the cut off date for completion of projects, irrespective of when they were approved.

As a few developers point out, earlier a lot of builders were scrambling to put up projects below 1,500 sq. ft. But now they will start coming up with bigger flats. “They will decide that if they have to pay taxes, they might as well build bigger flats that can be priced at a premium,” they say. Obviously this may curtail the supply of smaller houses.

While not all developers were using section 80IB, when land prices were higher, the developer still could make it affordable because of this incentive. Hence by default it got passed on to the people. Due to Section 80IB, prices were controlled to some extent. Builders will now try and normalize their profits by passing on at least part of the cost to the final customer.

In fact most analysts believe that the finance minister should have at least retained the incentive for constructions in the extended suburbs. They point out that in large parts of the city, it already very difficult to find a 1BHK flat, since almost all new projects have a higher configuration. Buyers in this segment had to either go to the distant suburbs or had to rely on the re-sale market, which has seen an element of cash creeping in. with the tax incentives withdrawn, new 1BHK or even 2BHK flats would now be difficult to come by even in the distant suburbs.

Real estate source point out that in a booming market, it is simply cheaper for the developer to construct and find a buyer for a 2,000 sq. ft. flat at Rs. 4,000 per sq. ft. than build four flats of 1,000 sq. ft. and sell them at Rs. 2,000. Without the tax incentives a developer will now be even less inclined to do so.

Developers like Rohit Gera, Director, Gera Developers Pvt. Ltd., fear that one outcome of this withdrawal could be a further increase in real estate prices. “The 80 IB incentives were brought in when the industry was going through a recession in the late 90’s. That time the developers passed on the benefits to the customers and that still continue to do so. But now with the tax element coming in for the builders, there is going to be a likely impact of price rise of Rs. 75 to Rs. 300 per sq. ft. in the upcoming projects,” he says.

His fears are echoed by developers like Atul Chordia, MD Panchsheel who feels that the withdrawal could lead to a 10-15% hike in prices.

Not all developers are however bothered with the FM’s move. A P Singh, MD Omega Promoters Pvt. Ltd. Says that builders like him who were not in the small flat segment will be unaffected.

Not everyone also believes that the withdrawal of the tax incentive will lead to price hike or even decreased supply of small flats.

“In areas premium areas where the builder can charge more and still not encounter serious resistance, the prices might go up, but that is unlikely to happen across the board. That is because after a certain level buyers would simply refuse to buy,” a PBAP official says.

Experts like Akash Deep Jyoti, Head, Corporate and Infrastructure Ratings, Crisil also believe that the FM’s move need not necessarily impact supply of small flats.

“Given the burgeoning middle class and the lack of affordability for high-end residential apartments, the demand is expected to be the strongest for the mid-sized apartments. As a result, irrespective of the tax incentive, the interest of the developers is expected to continue in this segment. Overall, the robust-demand-led volumes growth will also ensure that the earnings of the developers will continue to grow impressively, despite reduced profitability,” he says.