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'Budget: No direct positives for real estate'

March 01, 2007 16:13 IST
In an hour-long chat with rediff.com on Thursday, Kekoo Colah, executive director, Knight Frank (India) Pvt Ltd, talked at length about the impact of this year's Budget on real estate. 

Here is the transcript:

Kekoo Colah says, Hi, this is Kekoo here and I will attempt to answer questions relating to real estate and the recently announced budget
Manju asked, what will be the impact of Service tax on Rent of Premises
Kekoo Colah answers,  at 2007-03-01 15:08:46Extending Service tax to include renting of properties used for commercial or buiness purposes (with some exceptions) cold be very counter productive and will significantly negatively impact the market. One will have to study the details to understand and access the full impact. Some imediate uncertainties would be whether this service tax is applicable on existing agreements or will be introduced only with prospective effect, what happens if occupant / licensee does not agree to pay this service tax, what would happen to domestic real estate venture capital funds which have already put money in income yielding assets, etc. Income from rentals, falls under the head Ïncome from house property"and due to certain exemptions available under the Income Tax Act effective rate of taxation is lower. The proposed service tax will negate this benefit, which was always available on housing income for decades. All in all, a very negative provision introduced in the budget.
DD asked, Hi Kekoo, what is your take on the service tax being introduced on the renting of commercial prperties? Wouldn't it add to the pressure of already burgeoning RE prices? What rationale do you see behind such a policy initiative?
Kekoo Colah answers, I have already answered the question. None of us in the industry can also try and figure out what would be the rational for such a counter productive extension of service tax particularly as any kind of renting / letting out of premises was never included in the ambit of service tax because there is really no "service" being provided in such an activity.
rjha asked, Hi kekoo, what do u think after budget real state price will go up or down?
Kekoo Colah answers, The sentiment in the industry immediately post budget is quite negative and this may have some negative impact on the real estate sector in the short term. Construction costs also likely to marginally go up because of the increase in excise duty on cement which is an important raw material.
nag asked, is everyone affordable to buy house? or only rich people
Kekoo Colah answers, Real estate prices, across all sectors and not restricted to house properties only, have gone
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up very substantially over the last two years certainly disproportionately compared to rise in median salaries over the same period. To that extent, the "affordability" has been adversely affected. But this has nothing to do with the budget announced yesterday and simply because the demand has hugely gone up and not the supply of real estate because of various factors including gestation time for real estate projects, plethora of permissions required, uncertanty in some regulations, etc
Anand asked, Hello Mr. Kekoo, as the current senario for real estate is very booming Will the interest rate increase more......
Kekoo Colah answers, It is generally expected that interest rates will either remain at present levels (which are significantl higer than about 2-3 years ago) or marginally go up. This has already affected many people with existing loans and further increases will negatively impact demand growth particularly in the lower price brackets.
Neeraj asked, Hi Kekoo, what do u think about the next 2 year horizon for real estate markets in india? is the current growth justified or is it a bubble? Is it going to be impacted negative becuase the increate in interest rates?
Kekoo Colah answers, The outlook for the next 2 years and possibly even beyond is positive becuse of the strong growth of the Indian economy and the continuing focus and emphasis on infrastructure spend by the govt, private sector and through public private partnerships. Our gross domestic capital formation has consistently exceeded 20-22% per annum. Improvements in road connectivity, ports, airports and other key areas are all important for the real estate sector.
pepsy asked, Is it a good idea to buy a second house for investment purpose. In this scenario of rising interest rates and slowly moving realty prices
Kekoo Colah answers, Probably not from purely investment perspective as prices have ramped up very significantly in the recent past and rental yields for residential properties varies between approx 3% - 6.5% per annum, lower than current interest rates. Thus, if you do not see good capital appreciation in your investment over the next few years, it may not be such a good idea.
ff asked, This is an insipid Budget. What do you think?
Kekoo Colah answers, From the real estate perspective, there are practically no direct positives (increase in infrastructure spend, increase in highways outlay, marginal increase in allocationsfor Jawaharlal Nehru National Urban Renewal Mission are all indirect positives) and a few distinctly negative announcements. Could certainly have been a much better budget for real estate and construction sector given the really important role they play in the economy.
Kekoo Colah says, Thank you, Kekoo

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