India’s real estate sector would need an investment of $ 257 billion by 2015, including Economic Weaker Section (EWS) housing, of which residential real estate alone would require $ 29 billion, says an EY-FICCI real estate report. “Investments required in the Indian real estate market by the year 2015, is approximately $ 42 billion (excluding EWS housing) and $ 257 billion (including EWS housing). Residential real estate alone will require an investment of $ 29 billion,” the report said. The Indian economy is ready to experiment with advanced funding options, such as real estate investment trusts (REITs) and provide industry players with a global competitive edge, said EY Tax partner (Real Estate Practice) Gaurav Karnik. “The contribution of the sector to country’s GDP has been estimated at 6.3% in 2013, and the segment is expected to generate 7.6 million jobs during the same period,” he said. However, due to macro-economic conditions, the Indian real estate sector across major cities is expected to see a mixed performance, the report said.
Buying a home does not only ensure financial security for you and your family, but also saves plenty of money that you would otherwise pay just for living in a rented house. During the past decade or so, home buying has picked up tremendously also because of the easy availability of home loans. Banks have, in fact, simplified the entire process of home loan financing in a bid to ride this wave, which comes with a huge sentimental aspiration.
Banks make money on the interest they charge on loans. Typically, up to 85% of the property value is provided as loan, while 15% margin has to be borne by the borrower using his/her own savings/resources.
A majority of home buyers take their purchase decision taking into consideration the EMI as their affordability factor. However, one pertinent question that usually haunts a home buyer is: ‘How much do I actually pay for my dream home?’
We are trying to answer this question with a real life example and for this we are decoding home loans under two heads — one is principal and interest, while the second one is tax implications.
Mr. Varma decided to buy a 3 BHK flat in an upcoming neighborhood in Hyderabad. The total cost of the flat, including amenities, was Rs 63, 00,000. As per norms, he paid 15% of the down payment amount using his cash reserves, which came to around Rs 9,45,000. He approached two different banks for availing a loan of Rs 53,55,000. One bank offered him the loan at 10.25% interest rate while the other loan was available at 10.15%. Obviously he decided to borrow from the bank which offered him loan at 10.15%. Duration of the home loan was 20 years, and the EMI came to around Rs 52,210.
|Home Loan amount||INR 53,55,000|
At the end of the loan tenure of 20 years – presuming that the interest rate remains the same — Mr. Varma would pay Rs 53, 55,000 as the principal amount, while a whopping sum of Rs 71,75,453 would be paid as interest. This means he would pay 135% of the total borrowed amount as interest alone!
The below table illustrates this:
|Time Frame||Interest Paid||Principal Paid||Outstanding Loan|
|1 Year||INR 5,39,560||INR 86,961||INR 52,68,039|
|5 Years||INR 25,94,942||INR 5,37,671||INR 48,17,329|
|10 Years||INR 48,36,315||INR 14,28,910||INR 39,26,090|
|15 Years||INR 64,91,618||INR 29,06,221||INR 24,48,779|
|20 Years||INR 71,75,453||INR 53,55,000||INR 0|
“From the table it is clear that the major component of EMIs paid to the bank in the early years of loan repayment is deducted as interest. At the end of the 5th year, Mr. Varma would pay an amount of Rs 25, 94,942 as interest, while the principal component is only Rs 5,37,671. If he continues to repay the loan over a span of 20 years, then the total amount to be paid to the bank comes out at around Rs 1,25,30,453,” says Nitin Vyakaranam, Founder and CEO, ArthaYantra, an online financial planning firm.
Now let us consider a situation where Mr. Varma has some surplus amount with him. Then he would have two options:
1. One, he can foreclose the loan by pre-paying it with his surplus amount. By pre-paying the loan amount, he will reduce the number of EMIs and can invest the amount saved from EMIs into diversified portfolios until he repays the loan.
2. The other option is he can continue with the same EMI and invest his total surplus amount into diversified portfolios.
Let us evaluate the consequences in both the scenarios:
In this scenario let us consider that he prepays an amount of Rs 5,00,000 at the end of the 5th year. Then his outstanding principal amount (ie, Rs 48,17,329) will get reduced to Rs 43,17,328 and the EMI of Rs 52,210 will get reduced to Rs 46,791 where he can save Rs 5,419 every month, which he invests into diversified portfolios. At the end of the loan tenure, he will save an amount of Rs 22,64,732 (assuming the rate of return at 10%) from the invested amount. Additionally, he will also save Rs 4,75,420 on interest. So, on the whole, he will save Rs 27,40,152 at the end of the loan tenure.
In this scenario let us assume that Mr Varma invests his surplus amount of Rs 5,00,000 into diversified portfolios and continues with the same EMI for loan repayment. In this case he will save Rs 20,88,642 (assuming the rate of return at 10%), which is lesser than the amount saved in the first scenario.
“Therefore, out of the two options, it’s advisable to choose the first option because that will not only help you save more amount, but also reduce your liability to a great extent,” advises Mr Vyakaranam.
What is more, home loan repayments also attract tax benefits. So, under Section 80C of the I-T Act, tax deduction up to Rs 1.5 lakh can be availed for repayment of the principal amount. Under Section 24B, tax deduction of up to Rs 2 lakh can be availed on the interest paid for home loan for a self-occupied home. In case a loan is availed for a second home or property which is not self-occupied, then the actual interest paid for the year is allowed for deduction under Section 24B.
Taking a home loan is a long-term debt commitment. So, it is advisable to go for a home loan which you can manage with your existing finances. Although a lot of efforts are being made by the banks to make borrowing lucrative, but care should be taken to understand that there are a lot of hidden costs involved like pre-payment charges, processing charges, and foreclosure charges, among others. It is, therefore, always wise to choose a home loan which will not disturb your financial health.
Sanjeev Sinha, Economic Times
Real estate stakeholders in every Indian city are looking forward to the upcoming financial Budget 2015 to see whether it will provide any relief to the sector. Developers have their own expectations, because positive announcements for real estate buyers made during the budget will help increase the market sentiment, and therefore sales. The general hope is that the Union Budget this year will provide cheer to intending home buyers who have been deterred for various reasons.
Make home loans affordable
The Union Budget 2015-16 should make the rate of interest specific to home loans more reasonable. Currently, banks are offering interest rates ranging between 10.15-10.40%, and this is far too high. Paying so much interest has serious implications on the family budgets of most middle-class wage earners. It is not surprising that many of them currently shy away from home loans. The budget should bring the interest rate on home loans down to between 7.5%-8.0%. The new government has clearly stated that it wants to make Housing For All Indians a reality by 2022. It is impossible to achieving this goal if home loans do not become affordable to all, as well.
Additionally, the home loan interest amount exemption under Income Tax benefit should be increased from the existing limit of Rs 1.5 lakh to Rs 3 lakh. Further, this exemption should be made applicable for more than single property purchases. This is not an unreasonable expectation. In the current times and in many cases, a single home is not enough to accommodate all family members. The finance ministry should take due note of this fact and accordingly provide relief for both first home and second home buyers.
Eliminate multiple taxation on property purchase
The budget should also do away with the multiple taxes involved in the purchase of residential property. As of now, home purchasers are required to pay service tax and value-added tax (VAT) on top of stamp duty and registration charges. Goods and Service Tax (GST) should be introduced in the place of these taxes. Also, the real estate industry expects the Budget to finally make the Real Estate Regulatory bill a reality this year, so that the industry has the benefit of an apex body via which all concerns can be addressed transparently and efficiently.
Reduce cost of property registration
Another expectation from the Union Budget is a reduction in the cost of property registration. The recent hike in ready reckoner rates in Maharashtra has been a sentiment setback for the real estate sector. Stamp duty and registration costs are as high as 6% in most cases, and this needs to be reduced by a few base points to aid consumers. Alternatively, a slab-based approach should be introduced. Stamp duty falls under state government purview, but the Center can nevertheless issue a directive to reduce stamp duty costs.
According to the National Housing Bank (NHB) Residex Index, residential property prices show an upward trend in the second half of 2014. First half had seen property prices dip, as the weak rupee and high inflation had a negative impact on spending. Needless to mention that 2015 will largely be about recovery. The RBI will most likely cut interest rates and this will see more spending in the residential real estate segment. The Ministry of Statistics Program and Implementation and PwC Analysis predict a growth of 8 to 9 per cent. Added to this, the introduction of REITs, improved market sentiment and more efforts by the government to reduce project loopholes and bottlenecks in transactions will go a long way in clearing the way for positive trends in 2015.
In India, real estate plays an important role, from affordable housing to infrastructure and generating employment. Here are some of the reasons why:
- The Economic Survey of 2012-13 revealed housing to be the second largest industry that generates employment, after agriculture.
- With more than 300 linked industries like steel, transport, construction, cement and brick, real estate contributes significantly to the country’s GDP share and capital formation.
- NHB’s report places real estate as the third most impactful industry in India in terms of its effect on other industries and fourth in terms of employment generation.
- The residential segment, comprising residential buildings, townships, schools, colleges and hospitals and other projects, makes the maximum overall contribution in the real estate industry and commands the largest part of its market share.
- The real estate sector employs more than 35 million people, especially low and medium skilled labour
- Directly impacts manufacturing
- Attracts a lot of money in foreign direct investment (FDI)
Recap of 2014, its main events and economic drivers
- According to Colliers Research, Bangalore and Chennai witnessed maximum demand and growth, while Kolkata, Mumbai and Gurgaon were unchanged. Despite this, many developers launched new projects during the end of 2014.
- There is a backlog of unsold property. 2014 has seen delays in approvals, project clearances and targets, apart from debt commitment on property and government spending less in this area and a huge delay in finishing projects
- Construction industry has grown 2 per cent from 2014 to 2015.
Trends in 2015
- The Planning Commission estimates that by 2030, about 600 million people will live in cities. Affordable housing therefore is a huge demand and the industry has a large gap to meet, with shortage seen among the low income groups.
- International agencies like IMF and World Bank predict an increase in GDP.
- Real estate market is driven largely by sentiment.
- First half of 2015 will be largely recovery with property markets.
- ProjectVendor.com projects a 10 to 15 per cent increase in growth from FY14 to FY17 and 11 per cent growth in FY15. Residential and commercial projects, organised retail will contribute to this growth significantly.
- Real estate construction market is poised to grow by 20 per cent between now and 2017.
- Both large and specialised players stand to benefit and gain equally.
- Real Estate Investment Trusts (REITs) and commercial real estate will make significant impact. REITs will have a huge impact in 2015. It is an internationally tried and tested strategy, especially in the USA, Taiwan, South Korea, Singapore and Australia. An REIT is a trust that buys, sells, develops and manages income-generating real estate property such as malls, commercial office spaces and more, with the main intention of attracting investors who can manage an interesting array of properties. Corporate investors benefit from tax exemptions. It largely impacts small investors and encourages proper investment channels in large real estate accounts, and is a better alternative to investing in stock, due to its higher returns and a diversified portfolio of investments. Blackstone, Xander, Brookfield and more real estate funds intend to launch REITs in the country and DLF, Phoenix and Prestige are expecting to make use of this huge opportunity.
- The residential real estate space in India is divided into affordable housing, mid-level priced houses and the luxury segment. The onus on low cost housing is expected to put pressure on the luxury segment, but this is not significant. 2015 will focus more on recovery and clearing inventory, construction deadlines and backlogs.
- Pricing is very important. Affordable price points will lead to higher absorption levels.
- Easing pressure on the rupee will also impact the industry positively.
Adani Realty, a subsidiary of Adani Enterprises, has entered into an agreement with New York based, India-focused investment firm Brahma Management to jointly develop a 150-acre township in Gurgaon, said three people aware of the development. “Both the partners have been in talks and have signed the agreement recently,” according to one of the sources. “Adani Group is looking to expand its real estate business and is actively scouting to enter into joint development agreements or buy land. The group has recently bought properties from builders, who need cash to repay debt.” Adani Realty declined to comment for this story. Emails sent to Brahma Management did not elicit any response till the time of going to press. Brahma is an FDI-funded asset management group that focuses on the Indian real estate sector and has over $500 million of assets under management. It acquired the land in Gurgaon’s Sector 62 and 63, just off the Golf Course Extension Road, for the project, christened Brahma City, for Rs 650 crore in 2010. The company had planned to develop town homes and villas as well as educational, leisure, recreational, service, commercial, retail and other ancillary areas and facilities. The total development potential of the project is estimated to be 5 million square feet.”Brahma bought the land at Rs 3-4 crore per acre and has obtained licence from the Haryana government for building a township,” said a senior executive at a global real estate brokerage firm. “The development cost of the project is around $200 million.”Recently, the 50,000-crore Adani Group’s realty arm launched a luxury residential project at Four Bungalows, a posh area in Mumbai’s Andheri suburb. The project is coming up on two acres of land the Adani Group bought from Mumbai developer Housing Development & Infrastructure (HDIL) for Rs 900 crore.
If you’re in the market to become a homeowner but the prices are just too high, you might be interested in getting yourself a tiny house. And, remember, just because it’s small doesn’t mean it can’t be luxurious. Designer Chris Heininge has found a way to turn 280 square feet into a beautiful safe haven equipped with everything from a kitchen and bathroom to a second story bedroom.
With a large number of offices and ITeS segment growth apart from residential growth coming from small tier II and tier III centres, the development of smart cities can bring opportunities for real estate developers, investors, end users and well as the housing loan sector.
On expected lines, the real estate sector and the infrastructure sector were the focus sectors of the government in the annual union budget of 2014-15. The finance minister announced a series of measures to bring investment into the sector while giving special emphasis on affordable housing. The announcement that Rs 8000 crore will be earmarked for rural housing along with a series of dedicated proposals augers well to the future of the realty sector in the country. Market analysts and real estate experts have given the budget a big thumbs-up as is focuses evenly on housing and development with both domestic and foreign investments in the sector.
Finance Minister Arun Jaitley in his first Budget proposed changes to income tax laws related to capital gains from property sale. The finance minister put a cap on the amount of tax-saving by investing long-term capital gains from property sale in specified bonds, also called as capital gains bonds. Mr Jaitley also clarified that investment should be made in one residential house property situated in India for availing long-term capital gains benefit.
As per the current income-tax rules, long-term capital gains on sale of a property held for three years, attracts 20 per cent tax. Exemptions are granted under certain conditions. These the proposed changes to the income tax laws.
Property giant DLF has set in motion a strategy to concentrate on ‘core’ operations, launching a 1.2 million sq ft luxury residential project in Gurgaon, ‘ The Skycourt’. This comes a day after it announced the $300-million sale of Aman Resorts, minus the Delhi property, part of the company’s non-core asset divestment agenda.
The launch of the 19-floor luxury apartment project in Gurgaon’s Sector 86 is the first big project from DLF this financial year. Apartments in The Skycourt are priced between Rs 1.14 crore and Rs 1.53 crore. There are 674 units spread over 13 acres and it is learnt DLF got a little over 700 applications right on the first day.
Gurgaon, September 13
A three-hour meeting of officials of Delhi-Gurgaon Super Connectivity Ltd (DGSCL), National Highway Authority of India (NHAI), the district administration and the Gurgaon traffic police failed to yield any concrete plan to decongest the eway.
A majority of the array of solutions suggested by DGSCL failed to get consent from the other three parties.
Claiming that the widening of the toll plaza was the need of the hour, the company suggested acquisition of more land to add more lanes, but the NHAI rejected the proposal.
“The simplest way to deal with the jams and congestion is to create more lanes and we need the support of both HUDA and NHAI for that. While HUDA supported the idea, NHAI did not approve of it and suggested the alternative of staggered lanes,” revealed an official of DGSCL.