Is housing really infrastructure?

Feb 16 2013, 09:28 IST
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SummaryA long-standing expectation of the real estate sector is the coveted infrastructure tag.

A long-standing expectation of the real estate sector is the coveted infrastructure tag. Any proposal in Budget 2013-14 that favours the idea has to bring on board the central bank that has its doubts

With Budget day less than two weeks away, the real estate sector is hoping that the finance minister will blink this time around to its long-standing demand: giving infrastructure status. This is a demand stretching back at least two decades with an eye on the benefits that this coveted tag brings along. The single biggest benefit is the easier access to funds.

To date, the only industries that have enjoyed infrastructure status were roads and highway construction, ports, airports, rapid public transport systems, and so on. Real estate was not granted infrastructure status, despite the fact that it is a significant growth driver for the economy, generating countless jobs and directly catering to the needs of individuals. It is infrastructure in the truest sense, as it deals with building the very framework of the nation and its economy, says Anuj Puri, chairman and country head, Jones Lang LaSalle India.

An RICS study claims the sector would contribute about 18 per cent to the value add for the GDP by 2020.

Infrastructure status would immediately reduce the cost of loans from banks. The Reserve Bank of India (RBI) currently classifies lending to large segments of the real estate sector as a high risk category. This means banks have to set aside more capital for each rupee they give as loan to the sector. The only exception is loans to individuals for houses that cost Rs 10 lakh and below which come under that of priority sector lending.

In addition, there are two other benefits for the sector. Infrastructure sector enjoys moratorium period on repayment of loans along with concessional rates, which helps in making these investments attractive and the project viable. This move would attract more foreign direct investment as investors would take note of the special status, which assures them about the safety of their investments, says Sanjay Dutt, executive managing director, South Asia, Cushman & Wakefield.

Unsaid is another advantage. The tag would make it possible for real estate developers to sell their loans to long-term financial institutions. This will clean up their balance sheets, which means their debt overhang comes down.

Developers claim the move would enable them to pass on the benefits to home buyers. Easier financing options will help to bring down home prices and ensure timely completion of the projects. This will be hugely beneficial to consumers and help to address the housing shortage of 18.78 million households existing in the country, says Brotin Banerjee, MD & CEO, Tata Housing Development Company.

Problem of definition

But how is this status to be brought about? According to a report by the Secretariat for Infrastructure, Planning Commission, there exist multiple definitions of infrastructure.

The report quotes a 2001 report of the National Statistical Commission headed by Dr C Rangarajan that defined six characteristics of the infrastructure sector: natural monopoly, high sunk costs, non-tradability of output, non-rivalness (up to congestion limits) in consumption, possibility of price exclusion (whereby enjoyment of benefits is contingent on payment of charges), and bestowing externalities on society.

Based on these features, the Rangarajan Commission has classified certain activities as infrastructure: railway tracks, signalling system, stations, roads, bridges, airports, power generation, transmission and distribution, telecom networks, pipelines and canals etc.

The Income Tax Act has its own definition of what constitutes infrastructure for the benefit of tax breaks under Section 80-IA: electricity, water supply, sewerage, telecom, roads & bridges, ports, airports, railways, irrigation, storage at ports and industrial parks/special economic zones.

A taxing exigency

With a multitude of official definitions in existence, what do developers imply when they ask for grant of infrastructure status?

Basically developers are asking for tax breaks and cheaper and easier funding when they are asking for infrastructure status. Frankly, these ends can be met by other means also without actually classifying housing as infrastructure, says Pankaj Bajaj, president, CREDAI-NCR and MD, Eldeco Properties.

The tax benefits imply those available under Section 80-IA, where income from infrastructure projects is exempt from income tax subject to conditions.

The other benefit that was available to developers was under Section 80-IB, which gave a tax holiday for housing construction subject to conditions, that would end this fiscal.

The conditions were that the area of the plot be at least 1 acre and the housing unit having a maximum built-up area of 1,000 square feet within the city limits of Delhi and Mumbai and 1,500 square feet elsewhere.

The tax holiday under the Act is available only for construction of affordable housing or residential houses of small sizes. Most citizens still do not own houses and demand exceeds supply resulting in perpetual increase of real estate prices. Therefore, it is important to incentivise developers to construct houses of small sizes, so as to meet the demand and bring the prices under control, says Rupesh Jain, partner, Vaish Associates Advocates.

It is a moot point whether this incentive has really led to an increase in the supply of affordable housing. There are several examples of recent home owners being sold a property say a 4BHK apartment measuring 2,500 sq ft that would comprise one 2BHK apartment of 1,500 sq ft and another 2BHK apartment of 1,000 sq ft. The apartment would doubtless come with two front doors and two name plates.

Of course, there were some instances of the section being misused but largely it was successful in encouraging construction of large scale affordable housing. It should be brought back in some form in the coming Budget, says Bajaj. In our view, it is still necessary to continue with a tax holiday for housing, adds Jain.

Other stakeholders say that the focus of any incentive should be on affordable housing. Given that the relevance of housing as a social need has been recognised, the sector needs to be supported by adequate policy initiatives and interventions, especially with respect to the creation of affordable housing stock, says Sachin Sandhir, MD, RICS- South Asia.

The truth is that while affordable housing may qualify for the status, the luxury segment does not qualify in any way at all. One has to be therefore very careful. Putting affordable housing in the infrastructure category, would make funding would become soft and would attract a large number of entreprenuers to enter this segment in a dedicated manner, says PSN Rao, professor of housing, School of Planning and Architecture, New Delhi.

Puri says that one alternative would be to bring in the concept of special residential zones (SRZ) on the lines of the SEZ. A SRZ could be a model of affordable housing development that represents an economic microcosm tailored to attract developers via various incentives and tax breaks. A significant feature would be subsidised rates for land and construction materials. Moreover, the government would put in place the necessary infrastructure to make the SRZ approachable and inhabitable.

Hurdles ahead

In a recent move, the RBI turned down a proposal by the finance ministry to give the status to the real estate sector that was first reported by The Financial Express.

The central bank has cited concerns about the likely adverse implications of an increase in banks exposure to the risky sector, especially when banks non-performing assets (NPAs) are on the rise in a slowing economy. The report said that the central bank was keen to ensure that the banks risks on account of their exposure to the real estate sector are reduced so that there are no systemic problems. This is also the reason it restricted external commercial borrowings to projects rather than the sector as a whole.

RBI is against easy loans to the housing sector as it believes that this can lead to speculative construction as happened in recent times in Dubai or to some extent currently in China. While RBIs concerns are valid, we feel that we are nowhere close to a bubble stage in terms of number of houses under construction in India, says Bajaj. In fact the demand supply mismatch is largely responsible for the high housing prices in India. The LIG and EWS segments are completely under-served for want of funding.

Is there a way out of the impasse? Can the finance minister give what developers want irrespective of the status tag, and satisfy Mint Street at the same time and give a fillip to affordable housing?

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