Pleasant news for the cash strapped banking sector as  RBI reduced the cash reserve ratio (CRR) by 75 basis points (from 5.5% to 4.75%). This will release Rs. 480 billion into the economy. This is a preemptive move to inject liquidity into the economy prior to the cash outflow due to advance tax payment by several companies. RBI had maintained a tight monetary policy to control inflation and asset price bubble in the last couple of years. However, the inflation is tamed and as the economy shows nascent signs of weakness it is a welcome first step to pump prime the economy. We expect over time the benefit of this monetary easing will be passed down to the economy as a whole (by lenders) including the real estate sector.

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Other news highlights

Debt Overload Fear for Indian Real Estate Companies

In March, 2012 the total bank debt of real estate forms is Rs. 2 lakh crores and with Rs. 35,000 crores coming due for four big developers. Last year this time the debt was restructured with a deferred payment plan and repeat of last year is unlikely. The developer borrowed heavily at high interest rate with the expectation of a rising housing market that has witnessed slowdown with resultant inventory buildup. New constructions were built without any regards for the viability of the projects and many constructions were accompanied by false assumption of complementary infrastructure which never materialized. A strong (perhaps bitter)  lesson here is to do a proper valuation/feasibility study of the new construction to avoid this type of scenarios.

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Chennai, a bright spot in Indian property market

During 2008 downturn when other big cities saw massive correction (above 20%) in house prices Chennai only experienced an 8.3% drop. Moreover, according to NHB, the property value has doubled from 2008. Chennai is considered a market with limited supply and a huge untapped demand (a dream for any real estate investor). The booming commercial segment and increased prominence of IT sector has fueled the demand for real estate across the board, and add the  limited supply and you have a nice housing bubble. Based on the price rise we expect the development of suburbs as buyers move beyond the city limits for affordable real estate.

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Industry Status for real estate sector in the forthcoming Budget?

Industry status will ease long-term and short-term financing for developers. This will be particularly helpful at a time when developers are reeling under heavy debt due to high interest rate. Moreover, the affordable housing should be treated as infrastructure sector (thus receiving priority sector treatment in bank lending). According to a key player in this sector, the affordable housing should also receive tax rebates, stamp duty waiver, and excise duty relief. Other items in the wish list include:

·         Last year 1% tax subsidy was available to only affordable housing; there is a further desire for this to be applied to a wider population to benefit the homeowners.

·         Real estate tax now constitute 35% of the property value, bringing it under proposed goods and services tax will bring down the tax burden and may result in a price reduction of 20% (thus more affordable to future  home owners).

·         Including real estate under single tax regime will simplify transaction cost computation and developers will get tax benefit for construction material and services.

·         Repatriation of profit by foreign investor is currently not allowed for three years. Relaxation of this will attract much needed capital to the currently weak housing sector.

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Real Estate and Black Money: A nice old policy that should be brought back

It is common knowledge that there is an unholy marriage between black money and real estate purchase (be it new construction or the purchase of the used one). Till 2001, Indian govt. had a nice rule to foil black money in case of purchase of an used home. According to that rule, for all properties above Rs. 50 lakh the tax authorities had to be notified of the sale and the govt. had the option (which was often exercised) to purchase the property at the price the seller advertised. Any impact of prior underhand money exchange was nullified if the government exercised the option. It is time to bring it back.

Read more at http://tinyurl.com/79evqde