>INDIA PROPERTY (CITI)

Incentives to Boost Affordable Housing – Sentiment Positive, but Financial Gains Limited

■ Sops for affordable housing — The Finance Minister yesterday announced a few incentives to boost housing, in particular the affordable housing sector: 1) 1% interest subsidy for 1-yr on housing loans up to Rs1m for properties worth < Rs2m; 2) tax holiday u/s 80IB (10) for developers on projects approved by local authorities between 1st Apr’07 to 31st Mar’08, provided these are completed before 31st Mar’2012 – more an extension of the holiday provided early on for projects approved before Mar’07 and completed before Mar’10 for houses of 1000 sf built up area within 25km of municipal limits of big cities and 1500 sf in other cities.

■ What does this mean for the sector? — 1) Renewed focus towards low-cost housing; 2) increased supply of affordable homes as most developers re-configure their projects; and 3) Higher sales volumes; however near-term profitability will be under pressure – as low-cost housing is a low margin (18-23%) business compared to current avg. housing margins of 28-35%.

■ Sentiment positive, but financial gains limited— We view these initiatives as sentiment positive. However, the financial impact is likely to be limited as – 1) subsidy is nominal and benefit is available only for a year; 2) its difficult to quantify the gains from tax holiday for developers given lack of details on no. of projects eligible for these benefits – but given the slow down had largely set-in during this period of Apr’07-Mar’08, the no. of projects approved/launched were low during this period.

■ Likely beneficiaries — Prima facie, we believe interest subsidy would benefit smaller developers, with residential bias in tier-II and tier-III cities. However DLF, Unitech and few small developers, could benefit from a tax holiday on a few of their launches in FY08 (Figure 1) subject to necessary approval/completion conditions.

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