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| February 06, 2015 |
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| Weekly Facts | | | Close | Change | %Change | | S&P BSE Sensex* | 28,717.91 | -465.04 | -1.59% | | Re/US $ | 61.74 | 0.13 | 0.21% | | Gold Rs/10g | 27,900.00 | -250.00 | -0.89% | | Crude ($/barrel) | 53.17 | 6.91 | 14.94% | | F.D. Rates (1-Yr) | 7.25% - 8.75% | Weekly change as on on February 05, 2015
*BSE Sensex as on February 06, 2015 |
Impact 
The Securities and Exchange Board of India (SEBI) after having allowed Real Estate Investment Trusts (REITs) in India and issued guidelines thereto, has written to the Modi-led-NDA Government ahead of the budget, seeking easier tax rules for REITs.
So what is SEBI asking for?
Well, the capital market regulator has recommended:
- Abolishing capital gain tax on REITs; and
- Doing away with Minimum Alternate Tax (MAT) for sponsors of REITS and investors
The rationale behind such recommendations...
Exit from a REIT listing which have been held for the long term entail the levy of Long Term Capital Gains Tax (LTCG) to the asset owner (when one sells the units of REITs). This is unlike equity share and mutual which are currently exempt from LTCG tax.
Developers are not excited enough. They are finding the tax structure to be an irritant having many leakages. Developers are uncomfortable about the LTCG which they may have to dole out at the time of selling their units in a REIT. It is so ironical that there is no is no tax for developers while transferring their property to a REIT while of course the stamp duty and other levies they are subject to.
Another disjunction is that, since REITs are required to mandatorily distribute almost the entire annual income as dividends to unit holders, the underlying Special Purpose Vehicle (SPV) – which owns the project – would necessarily have to suffer dividend distribution tax (DDT) liability when it distributes income to the REIT. Moreover the SPV is subject to corporate income tax on its taxable income.
Although last year’s budget introduced provisions for tax deferral to owners at the time of a cashless transfer of assets to REITs in exchange of its units, such transactions could potentially attract MAT liability on such transfers.
So there are tax leakages that require parity and clarity. PersonalFN is of the view that unappealing post-tax returns is such a tax structure for REITs may turn to be a put-off which could slaughter the very purpose of REITs. Many players may hold back their plans of raising funds due to tax implication of REITs.
PersonalFN believes that REITs can be good investment avenue while you want to invest in real estate, especially in under-construction projects. With a minimum investment of Rs 2 lakh you could participate in India’s the real estate market (through your unit holding in REITs), which is otherwise may not be possible to do while buying real estate physically. One worthy guideline from SEBI, that not less than 80% of the value of the REIT assets shall be in completed and revenue generating properties; will help you manage risk well as you would already be having exposure to projects that could generate revenues in future as well. Since the dividends (which are subject to DDT) which you earn are exempt in your hands as an investor, you could fetch you a better yield along with the capital gains you clock over period of time. Moreover, the liquidity will also not be an issue as they will be listed on a recognised stock exchange.
But before you invest your hard earned money, it is vital for you to assess your risk appetite and take cognisance of the risk factors pertaining to India’s real estate sector. Also in the larger interest of all stakeholders, it is imperative that budget 2015-16 addresses to tax angle on REITs.
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Impact 
Skyrocketing property prices are pinching the pockets of the common man is getting evident. In a research finding by property research firm, Liases Foras, home sales across top 6 cities of the country have fallen 8% in the quarter ended December 2014. But paradoxically, property prices haven’t come fallen... in fact rose 6% in these cities during the period.
Total unsold inventory across the 6 cities stood at 832.09 million square feet, or 39 month’s level against 31 month’s a year ago, according to Liases Foras.
Of the 6 markets (which constitute Mumbai (MMR), Pune, National Capital Region (NCR), Chennai, Bangalore and Hyderabad), Chennai was the worst affected with a 48% on-year plunge in sales, while Bangalore and the National Capital Region (NCR) witnessed sales plunging by 25% and 15%, respectively .
Going forwards will home sales improve?
PersonalFN is of the view that with skyrocketing prices and a slow rise in household income (due to flagging economic growth), hopes of many aspirants are nipped in the bud.
Deep pockets of builders, play of black money in real estate and ill-regulated nature of the sector are among few factors that are responsible for stubborn property prices. Moreover, the exuberant phase of the Indian equity market - as what we are in at present - is encouraging many to invest in equities and procrastinate their decision of buying their dream home. But once interest rates start to ease, many may shift their money from a respective asset class to real estate, which may lead to see some uptick in the property sales.
Approach to investing in real estate...
PersonalFN has always believed that, if you are buying a primary house i.e. to live in with your family, any time is a good time. We recognise the fact that in India buying a house is filled with emotions, and more so, when one is moving in with family, making it a home. Nevertheless, while you are thinking of buying your dream home, please take into account financial and non-financial factors (individual needs and aspirations), to make a prudent and feasible choice for your and family's wellbeing. So, if you are taking a home loan ensure you have assessed your financial circumstances well, so as to take a wise decision. If you cannot afford to buy a dream house immediately to live in, explore the options of staying on rent. Remember, whether you are buying a house or staying on rent, you must take a wise decision.
PersonalFN is also of the view that, if you want to invest in property and not buying a house to live in, one should think again taking into account the current level of unsold properties and existing nitty-gritties. Don’t be under the impression that real estate prices never fall. Consider that while investing in real estate you are parting with a huge portion, and thus even a sideways movement of property rates could hurt your overall portfolio assuming you are overweight on real estate. Hence, allocating your assets wisely across asset classes and investing in right avenues therein is imperative for successful investing.
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Impact
After a surprising rate cut of 25 basis points (bps) in mid-January 2015, the Reserve Bank of India (RBI) kept policy rates unchanged in its 6th bi-monthly monetary policy statement, 2014-15. This was a surprise to those who expected the central bank to do another round of rate cut now that inflation had mellowed and looked benign.
So, what led RBI to cut to keep rates unchanged?
Well, Dr Raghuram Rajan flagged certain worries on the global and domestic economic front which held him back from reducing policy rates further.
Macroeconomic assessment...
- Inflation:
The retail inflation measured by the year-on-year changes in the Consumer Price Index (CPI) bounced a little in December 2014 on the expected reversal of favourable base effects that had tempered upside pressures since June 2014.
Inflation bounced up a little...
Data as on December 2014
(Source: Office of the Economic Advisor, PersonalFN Research)
A slight softening of cereal prices and a sharp seasonal fall in vegetables prices moderated the trajectory of headline inflation, but persistent firmness was seen in prices of protein-rich items such as milk, meat and pulses. In view of the central bank, seasonal increase in vegetable prices which typically set in around March, have to be monitored carefully.
The RBI cited that while the inflation declined faster than expected due to favourable base effects during June-November 2014, the upturn in December 2014 turned out to be muted relative to projections.
- Global economic concerns:
In the macroeconomic assessment the central bank cited that since the 5th bi-monthly monetary policy statement (held on December 3, 2014) the International Monetary Fund (IMF) has revised its forecasts for growth in 2015 and 2016 downwards, although they are higher than the estimates for 2014. In the U.S., growth moderated towards the end of 2014 with the boost to consumption demand from the fall in crude prices more than offset by the drag on net exports from a strong US dollar. Speaking about the Eurozone, economic conditions have deteriorated in an environment of deflation, political tensions in Greece and still-elevated levels of unemployment. While the European Central Bank (ECB) has announced quantitative easing in an attempt to reinvigorate economic growth in the Eurozone, it highlights the pain in the Euro zone.
Along with the growing belief that the U.S. Federal Reserve would hold on to rate for longer than previously thought, bond yields have fallen to their historic lows in Advanced Economies (AEs). Nevertheless the financial markets remain vulnerable to uncertainty surrounding monetary policy normalization in AEs.
To read more about this news and PersonalFN's views on it, please click here.
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Impact
In times where cost of living is on a rise, many of us consciously save and invest our hard earned money with an expectation of wealth creation to meet our financial goals. But in this prudent act care should be taken to ensure that you aren't indulging in doing something illicit (sometimes unknowingly) which attracts the attention of the Income Tax department.
Many a time households do not declare their income or assets not realising that they are taxable. For instance the interest income earned on savings bank account and investments in post office schemes, fixed deposits is often not declared while filing the income-tax return. Some believe that since the tax is deducted at source (TDS), they have done with the liability and thus do not need to disclose. But what they fail to recognise is that banks deduct TDS at the rate of 10%, while the final tax liability on interest income is as per the marginal rate of taxation or to simply put, one’s tax slab.
To know more about this story and to read our views, please click here
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- Since the Modi-led-NDA Government has come to power the Indian equity market has delivered a roaring return of 19.7% thus far on an absolute basis. At present S&P BSE Sensex is hovering below the 30,000 mark and the bulls are seemingly in power. But this time amid the exuberance, retail investors have remained cautious.
The demat account additions thus far this financial year have been a only a-fourth of that in 2007-08 – again a period of an exuberant bull run. From the period of April 1, 2014 to January 31, 2015 about 12.9 lakh new demat accounts were opened, compared to 50 lakh additions in the financial year ending March 31, 2008.
What is the reason for this?
Investors have become wary after having swayed by the exuberance and burnt their fingers in the aftermath of the U.S. sub-prime mortgage crisis. Moreover as inflation has mellowed and moderated with prudent policy actions, it appears that investors have opted not to risk their capital and thus invested in Fixed Deposits and Non-Convertible Debentures (NCDs) which offered decent yields. Also no big ticket Initial Public Offers (IPOs) seem to have kept them away.
But the aforesaid scenario is likely to change soon as interest rates begin to ease, as it would have rippling effect on rates offered on FDs and NCDs.
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Special Purpose Vehicle (SPV): Also referred to as a “bankruptcy-remote entity” whose operations are limited to the acquisition and financing of specific assets. The SPV is usually a subsidiary company with an asset/liability structure and legal status that makes its obligations secure even if the parent company goes bankrupt.
(Source: Investopedia)
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Quote : "Long-term investing has gotten so popular, it’s easier to admit you’re a crack addict than to admit you’re a short-term investor." - Peter Lynch
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