It's no secret that all the major participants in the real estate market, namely developers and builders, consultants and even the housing finance companies haven't taken too kindly to the Kelkar committee's proposal in the gradual phaseout of tax exemptions on repayment of home loans.

And perhaps rightly so, as the real estate market was just about beginning to emerge from its long slumber after the crash since 1994-95.

But the Kelkar committee's proposal could strangle the growth of the housing sector which has been a key growth driver of the real estate market in recent times.

Apart from the steep decline in interest rates, easy availability of loans and affordable prices, the tax break on home loans has been an important factor which contributed to the recent boom in housing sector.

Consequently, real estate experts and consultants expect some slowdown in demand, especially for the mid-size housing segment of Rs 10-20 lakh (Rs 1-2 million) bracket.

"The mid-size segment contributes to around 80 per cent of the residential real estate market. So it wouldn't be surprising if there is a sudden slump in demand for residential property," feels Anuj Puri, managing director of the Mumbai-based Chesterton Meghraj International Property Consultants.

But interestingly, though many real estate consultants agree on the adverse impact on demand, they believe that it might not translate into any substantial drop in real estate prices.

The key reason for their optimism is the fact that prices are already close to the bottom.

"There is already an oversupply situation in most of the big cities in India. So the prices are more or less close to bottom," points out Ashok Narang, a veteran real estate consultant and proprietor of L Lachmandas and Company.

Even real estate advisory and research firms feel that there is little scope for further fall in real estate prices.

"Many builders are already operating on wafer thin margins of Rs 150-250 per square foot as compared to anywhere over Rs 800-1,000 charged in the heydays of 1994-95. The usual strategy is to concentrate on volumes rather than profit margins now," explains Puri.

Agrees Sandesh Savant, executive director of a leading Pune-based real estate consultancy firm Indiaproperties: "Take, for example, the property market in Pune where the average prices are in the range of Rs 1,100-1,200 per sq ft, while the cost of the land alone works out to around Rs 500 per sq ft. Now, add to this, the construction cost of about Rs 450-500 per sq ft. So how can the prices go down further?"

In fact, Indiaproperties' Savant is quite upbeat on the outlook for the real estate market.

He believes that residential real estate prices could actually grow by around 4-5 per cent this year, if the government doesn't tamper with the tax exemptions on home loans.

So if you include the average rental returns of 4-6 per cent per annum on residential property, it actually turns out to be an attractive long term investment opportunity for investors.

But there is another side to the story: real estate is expected to depreciate further in certain areas where basic infrastructure like water supply, transportation etc. is already under severe pressure.

One such example is South Mumbai. This apart, the release of around 2,000 acres of land with the Bombay Port Trust and sick textile mills situated in Parel and Dadar area could suddenly result in a huge supply overhang in Mumbai.

On the other hand, the price appreciation could be considerably much higher than average in certain pockets which are emerging as prominent commercial centres.

For example, while prices have declined steeply in most of the other big cities, residential property around business districts developed close to Delhi have witnessed appreciation of as much as 30-40 per cent in the last five years.

"Certain new emerging areas like Powai in Mumbai or Noida and Gurgaon near Delhi have gained a lot of popularity, leading to handsome gains for investors," agrees Tariq Vaidya, head - advisory services, of a leading consultancy firm Knight Frank.

More than residential property, market experts believe that commercial property would provide better returns to investors.

Apart from the shortage of quality commercial property, the booming retail and business process outsourcing sectors have only added to the demand growth in commercial property.

Some die-hard optimists estimate a 5-7 per cent price appreciation in commercial property in certain areas. The rental returns on commercial property are also more attractive.

"In addition to expectations of better price appreciation, the rental returns of 12-13 per cent per annum are also much higher in the case of commercial property," says V Hari Krishna, associate director, Jones Lang Lassalle.

But again, the price appreciation is expected to be limited to certain cities only.

To sum it up, well-researched and carefully planned investment in real estate could still easily outperform other classes of assets like bank deposits, bonds etc. So happy investing!

Creating ripples

Going by a key principle of taxation -- that if the income from a source is not taxable, then expenditure on that account should also be non-deductible -- the Kelkar Committee on tax reforms has recommended phasing out interest deductions of up to Rs 1.5 lakh (Rs 150,000) per annum on loans taken for self-occupied residential property.

According to the initial report, the committee suggested that the tax exemptions on interest paid be brought down from up to Rs 1.5 lakh to Rs 1 lakh (Rs 100,000) next year and finally be phased out by 2006-7.

But fortunately, with pressure from various groups, the exemption limit is likely to be scaled down to Rs 50,000 only and not phased out completely.

The logic being that a majority of the loans anyway fall within the category of interest payments of below Rs 50,000 per annum. The new proposal is expected to be favourable for home loans below Rs 5 lakh (Rs 500,000).

"The revised proposal of reducing the interest deductions for home loans from Rs 1.5 lakh to Rs 50,000 per annum will have minimal impact on the housing sector since 90 per cent of all home loans are below Rs 6 lakh, with maximum interest payments of Rs 50,000," points out Indiaproperties' Savant.

But, at the same time, it would discourage the upper middle class from investing in the housing sector.

However, these are just recommendations and it remains to be seen what will finally be implemented by the government.

Undoubtedly, real estate developers and builders will lobby hard to retain the concessions. Besides, with the next general elections around the corner, the government is expected to adopt a soft line.

More so, as the reduction in the tax exemption is expected to hit the vast middle class population.

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