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Stressed realty sector won't see major benefits from Budget

Industry experts say homebuyers may no longer get heavy discounts from builders, who will now prefer to hold on to their unsold stock for another year rather than engaging in distress sales

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The government once again made an attempt to revive the real estate sector in the recently-announced Budget, but the actual benefits don't look so promising even as the financial situation of several realtors remain precariously placed. Secondly, the price appreciation will continue to evade homebuyers, say industry experts.

On February 1, finance minister Piyush Goyal made slew of announcements like doing away with the notional rent on second self-occupied house, raising tax deducted at source threshold on rent from Rs 1,80,000 to Rs 2,40,000, rollover of capital gains for section 54 to be increased from one residential home to two residential homes for capital gains up to Rs 2 crore but once in a lifetime, deduction under 80IB(8) extended by one more year for affordable housing, and lastly extended exemption on notional income on unsold inventory from a year to two years.

Post the Budget announcement, Santhosh Kumar, vice chairman, Anarock Property Consultants is of the view that only 9% of the existing unsold housing stock will benefit from the tax relaxation announced.

"Just when the real estate industry was preparing to give the Budget a complete thumbs down, the finance minister sprung a surprise 'bonanza' for the sector in the last 10 minutes of his speech. Or so it seemed. Without a doubt, affordable housing gained amidst what was essentially a mass-appeal Budget. However, it was the extension of tax relaxation on notional rent for unsold inventory for another year that cheered developers. However, under closer scrutiny, it is unlikely to benefit a majority of them as on date," said Kumar.

Hence, the already-stressed industry and developers are likely to be under the same situation for a longer duration. There will also be some setback to homebuyers who are considering ready-to-move options. "They may no longer get heavy discounts from builders, who will now prefer to hold on to their unsold stock for another year rather than engaging in distress sales. Thus, while this new tax exemption will benefit some developers, buyers may have less power to negotiate on their properties," Kumar added.

The data with Anarock shows that the current unsold stock across the top seven cities is 6.73 lakh units, of which merely 85,000 are ready-to-move-in. Moreover, of this ready stock, only 63,000 units can avail the benefit of the new tax relaxation on unsold inventory. The remaining 22,000 ready units, which have been completed before 2017, will still have to pay taxes on notional rent.

Against this sombre background, the liquidity crunch post the non-banking finance company (NBFC) crisis continues to cast a shadow over the immediate and mid-term prospects of the realty industry.

Speaking about the liquidity issues plaguing the sector, Liases Foras Real Estate Rating & Research is of the opinion that developers need to scale up the sales by 2.5 times to service the debt, a view contrary to Anarock's Kumar who said developers may continue to hold on to unsold stock.

"IL&FS default and ongoing speculations about DHFL have made industry stakeholders anxious yet again…In the past 10 years, while the value of the sold stock has increased by 1.56X, the value of the unsold stock has become 4.72X. In terms of units, volumes of sales have gone up by 1.28X while inventory increased to 3.33X between 2009 and 2018. In the same period, lending to the real estate sector has gone up from Rs 1.2 lakh crore to Rs 4 lakh crore," reads a report by Liases Foras.

The report has analysed the performance of close to 11,000 developers. It was also noticed that out of the total kitty of Rs 2,40,000 crore of business, top 90 developers in the country accounted for about a third of business and generated Rs 78,879 crore. Hence, exposure to both top 90 listed and unlisted developers was focussed upon for the study.

According to Pankaj Kapoor, managing director, Liases Foras, the existing scenario has exposed the inefficiency within the sector. While debt has grown in a monumental manner and so has inventory, sales did not go up in the same proportion. With borrowed money from different sources, developers kept adding housing stock into the market without any productivity. Since sales remained abysmal all this while, developers are finding it difficult to meet their debt obligation at this point.

"Having extracted important nuggets, we decided to dig deep to analyse the burden on the developers with respect to total lending on the sector. We examined the performance of close to 11,000 developers for a holistic view. It was also noticed that out of the total kitty of 2,40,000 crore of business, top-90 developers in the country accounted for about third of business and generated Rs 78,879 crore.

"Total disposable income of all developers (including their rental income from different properties) is expected to be Rs 57,000 crores but repayment required on their part is Rs 128,772 crore. In order to fulfill obligations, all developers will need to increase EBDIT by 2.26 times. Additionally to make a profit of 15% the developers will need to increase the EBDIT to 2.60X or need to increase sales by 2.6 times," the study said.

The total disposable income of top 90 developers (including their rental income from different properties) is Rs 23,564 crore but the total repayment required is Rs 45,128 crore. Due to the gross mismatch, it seems current debt levels are not serviceable.

"Thus it feels that the situation of developers is akin to an elephant in a well which is unable to come out on its own. Somebody needs to replenish the well. But can we find cheap capital to refill the well? The existing scenario signifies that the industry is at an inflection point and is staring at long-due price correction in order to improve sales," said Kapoor.

But is there a scope to bring down prices? This is a point where Kumar and Kapoor are of the same view. Price correction does not seem plausible.

But, in order to be in the business, someone would have to take a hit or a haircut. It seems in certain situations it would be the developers who would have to bite the bullet, while the lenders may be at the receiving end.

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