Gain's real for realty, but outside city limits

We believe the Budget is largely neutral for the real estate sector. While continued measures to boost affordable housing as well as higher investments for rural housing and urban development (particularly for slum redevelopment) are positives, the higher cost of material (due to excise rollbacks), increase in MAT and the likely inclusion of service tax on construction activity could offset some of this impact.

Continued incentives to boost affordable housing include extension of the 1% interest subsidy on housing loans up to March 2011. The Budget has proposed extending the tax holiday under Section 80 1B (10) on approved projects, provided these are completed before March 2013, compared to the earlier March 2012.

On the positive side, there will be no extension of STPI benefits beyond March 2011. This augurs well for IT special economic zones in terms of faster leasing. Widening of personal tax slabs is a welcome move for the middle class as it improves affordability. This, in turn, should benefit the housing sector.

Among the negatives, the move to hike MAT to 18% from 15% will hurt companies engaged in airport redevelopment and slum rehabilitation. The likely inclusion of developers’ construction activity in the 10% service tax net is still a grey area.

Prima facie, we do not foresee a strong sector outperformance on the back of the Budget. The interest subsidy will benefit developers with a residential bias in Tier-II and III cities.

(Ashish Jagnani, vice-president, equity research, Citi also contributed to the comment.)