Budget 2012 and it's impact of ECB on Affordable Housing
India’s Budget for 2012 has not left the real estate community, particularly developers, very happy. The budget has brought very little good news for the Property Market in India. The only positive news for the developers is related to allowing ECB (External Commercial Borrowing) for affordable housing. ECB implies that developers focusing on low-cost housing will now be allowed to borrow capital from overseas at substantially lower interest rates. The affordable housing segment is a low margin business for the developers and has been more a topic of discussion rather than actual activity on the ground. Affordable housing becomes attractive only if backed by large volumes. Thus, having better capital will not only ensure timely deliveries for the consumer, but higher volumes for the developer.
The interest to be paid on the ECB loan availed from the period July 2012 to June 2015 by the real estate developer is proposed to be subjected to a lower rate of deduction of tax at source of 5% from the existing rate of 20%. Further, investment linked deduction available for low cost affordable housing projects increased from 100% to 150%. This amendment may provide a much needed fillip to the affordable housing segment by way of getting a higher rate of deduction on capital expenditure though cost of land (which constitutes majority portion of cost) is excluded.
However, the ECB just for low cost housing projects would not help the real estate sector in a big way, as most of the existing projects would be outside the ambit of this announcement. Hopefully, with increase in liquidity and availability of higher deduction for affordable housing, the real estate sector may get some respite from an otherwise stagnant growth pattern.
Makaan.com’s take: Currently the government does not have a standard definition for Affordable Housing; so the applicability of ECB loan for affordable housing will be subject to different interpretation. Some of these norms already existed for SEZs but did not attract much capital. At best this may shift developers focus to Category C & D towns.