Affordable Housing: 'Panacea' for the Realty sector

After euphoric times 'Realty sector' seems to have hit a low in the past one year. There are very few takers for the super luxury apartments offered by the Realtors. Caught with severe cash crunch and falling sales most realty firms are busy selling their land banks to improve cash flows. The murmurs about 'Affordable housing' are now being heard in the Board rooms of the real estate developers. Those companies that have announced new affordable housing schemes have got a better response in the recent past, whereas those offering premium housing are still looking for clients.

According to research firm 'Knight Frank' there will be an additional demand for 45000 affordable housing units in NCR region alone in the next 2 years. The research also says: largest contributor to this demand would be the Rs.3-6 lac income group. The maximum affordability for a household is around 5 times its annual income, for example a household with an annual income of Rs.3 lacs can afford a house worth up to Rs.15 lacs. If households buy more expensive houses, the chances of default in repayment are higher. The unit area for a affordable housing project is between 600-1200 sq. ft. (average size of the apartment is around 850 sq. ft.). But many companies are still offering units above 1200 sq. ft. which are not really affordable. Real estate firms will have to catch with the ground realities and start offering real affordable housing. After all there is no dearth of demand by genuine buyers. The interest rate scenario points to a stability in interest rates in the near term, which is a great impetus to the dream of providing affordable housing to the people of India.

Prices will need to become more realistic if developers have to succeed in finding enough buyers. As land costs need to be sufficiently lower for an affordable housing project, most of the affordable housing projects are likely to come up in suburban areas, given the prohibitive cost of land in cities. There is also an urgent need to develop innovative ways to reduce construction costs without compromising on the quality of housing. There is also an urgent need to look at the use of newer, energy efficient, environment friendly materials and innovative construction technologies. This will help construction companies/ builders improve demand and will eventually help them improve their cash flows.

ULIPS made more attractive

Unit Linked Insurance Plans (ULIPs) are set to become attractive long term investment plans w.e.f 1st October, with the proposed changes announced by the regulator IRDA. IRDA believes that ULIPs are akin to Mutual Funds with an added insurance cover thrown in. Emphasising on the long term nature of ULIPs, IRDA proposes to increase the lock-in period in respect of ULIPs to 5 years as compared to the existing lock-in period of 3 years.

The regulator had earlier announced capping of fund management charges on all insurance contracts to 135 basis points. The other charges payable by the investors are: premium allocation charge, policy administration charge, mortality charge and charges for additional 'riders' included in the policy. The regulator proposed the overall charges on insurance contracts to be capped at 225 basis points for contracts over 10 years and 300 basis points for contracts up to 10 years. It implies that if the earning of the fund is 15% a minimum return of 12% must be payable to the policy holder. However, keeping in view the nature of an insurance contract, mortality charges have been left out of the overall ceilings announced. The mortality charge varies with the age of the client/investor - mortality charge is higher as the age increases.

As ULIP products directly compete with Mutual Fund schemes, the recent changes in the load structure on MFs (Entry load on MF schemes has been abolished from 1st August 2009) announced by SEBI has prompted IRDA in making the necessary changes in respect of ULIPs, positioning them as a long term investment alternative.

Model Direct Tax Code: Taxation Simplified

The Govt. recently unveiled the 'Model Direct Tax Code', which is likely to replace the Income Tax Act 1961, by 2011. This signals simplification of the tax system, improving efficiency of the system and expansion of the tax base. It is a step towards tax reforms in India and may grant independence to tax payers after 50 years of introduction of IT Act. The main architects of this code are:

• Pranab Mukherjee, Finance Minister, who has fulfilled his budget promise.
• P. Chidambaram, former Finance Minister, considered to be the brain behind the code.
• Arvind Modi, Jt. Secretary, Tax Policy & Legislation, CBDT.
• Anita Kapoor, Jt. Secretary, Foreign Taxation, CBDT.

The salient features of the Direct Tax code are:

• Liberalisation of Tax slabs - Up to Rs.10 lacs (10%), Rs.10-25 lacs (20%), beyond Rs.25 lacs (30%). The basic exemption limits to continue.
• Classification of Tax payers - The separate categorisation of Resident but not ordinarily resident (RNOR) to be abolished. This will lead to increase in number of tax payers.
• Introduction of EET regime - The exempt-exempt-tax (EET) method would entail tax on withdrawal of savings including PF. The existing savings in the funds up to 2011 will not be taxed.
• Increase in deductions - The limit for deductions (currently at Rs.1 lac under sec 80C) will go up to Rs.3 lacs, but deductions on repayment of Home loans will not be available.
• Allowances will be taxable - Allowances such as HRA, LTA etc. will be added to income and will become taxable. Interest paid on Home loans will not be exempt from taxes.
• Removal of Surcharge - The tax system will be simplified by removal of surcharge
• Revamp of Wealth tax - The current exemption limit of Rs.30 lacs will be enhanced to a whopping Rs.50 crores. Thereafter, wealth tax will be levied at a fixed rate of 0.25%.
• Corporate tax reduction - It it proposed to levy a uniform tax of 25% on domestic as well as foreign companies.
• Computation of MAT to be simplified - Basis of levying Minimum Alternate tax (MAT) will be shifted from profits to assets. Even loss making companies will be liable for tax.
• Long term & Short term Gains: The distinction between the two stand removed, tax on capital gains will be charged at normal rates. It will result in higher cost of investment transactions.

The code promises to usher in an era of greater transparency in taxation matters, and hopefully will make the life of Tax payers hassle free.

Market correction: An opportunity to buy for long term

Stock markets world over are being driven by excess liquidity, but the valuations seem to have been stretched too far at this point in time. But based on fundamental analysis, the 'Margin of Safety' for a large number of stocks, especially the front line stocks, is under threat. Is it the time to buy for long term? Serious long term investors can wait for markets to correct around 10-15% from current levels to buy for long term.

Incidentally, market participants have a tendency to factor in the good news immediately. The good news about a possible revival of World economy by early next year, good set of quarterly results, have already been factored into the stock prices. But the markets may still continue to rise in the short term because of the comfortable liquidity position. However, markets tend to ignore the negative news for a great length of time. 'Behavioral Finance' would tell us that people tend to be in a denial mode for long before bad news actually catches with them. Remember, the signals for an impending global crises were ignored by the markets in the early part of 2007, when the sub prime crises broke out in the US. The after effects and the magnitude of the crises are known to all of us now.

At this juncture Indian markets are ignoring 2 important factors which may have far reaching impact on Indian economy:

• Failure of Monsoon: It is almost certain now that we are heading towards a deficient monsoon year (the worst in past 8 years). The impact of this could lead to a decline of GDP by 0.5-1%, depending on the distribution of the rainfall in the remaining part of the monsoon season. The 'El Nino' factor could worsen things further. rural demand may suffer, which is bad news for FMCG and Auto companies.
• Spread of Swine Flu: The speed with which the cases of Swine flu are being reported is likely to create a panic like situation. Some sectors like Hotels and Aviation would become the necessary victims of the spread of swine flu.

We continue to be in a denial mode about the likely impact of these two events. However, whenever reality dawns on the markets, they will correct substantially from the current levels. That would be a great buying opportunity for long term (long term means a holding period over at least 2-3 years).