Real Estate investors / speculators in India historically benefitted from full offset available on house property income loss (property rent - home loan interest). However budget 2017 has capped the loss offset to Rs 0.2mn inline with self-occupied interest exemption.
Based on our analysis, the move increases funding cost by 30% with investors return lowering by 3-5% in the first year. In addition clause introduced on reducing holding period for long term capital gains from 3 to 2 years will reduce the exit cost for investors.
We believe these provision will significantly impact investor demand (already declining) and increase supply in secondary market as house economics worsen materially (4% capital appreciation required to break even) leading to headwind on property pricing. For completed unsold apartments, developers have been given an year’s exemption for tax on notional rentals.
Affordable Housing Darling of Government
Government gave infrastructure status to affordable housing which will result in better access to funding (including land funding), longer tenure loans and lower cost of funding. In addition tax incentives for affordable projects were made inline with practice as 1) size definition changed from built up to carpet. 2) period of completion of project for claiming deduction increased from existing 3 years to 5 years (more realistic timeline in our view). We expect more players to focus on this segment as these clauses could improve return profile by 15-20%.
