Bulk buyers will find steel and cement significantly cheaper now. This comes as good news for the construction sector

Some of the sops announced by the government, reduction in service tax, for example, promises to bring some cheer to the realty industry. There has been a cut in duty on bulk cement from 10 to eight percent. The excise duty on steel has been reduced. Also, there has been a cut in service tax rate from 12 to 10 percent in case of rent. This move, coupled with reduction in interest rates, will do the realty industry good.

The reduction in service tax will benefit those who are on rent in large commercial complexes. For example, a tenant paying Rs 10 lakhs as rent annually for an office space would have paid Rs 1.2 lakhs as service tax. Now he saves Rs 20,000 annually.

Excise duty cuts are usually passed on by companies in the form of price cuts or discounts. When the excise duty was cut last time, the steel companies passed on the benefits to their customers.

The sops will have a positive impact on people's sentiments. The duty cut can bring down the cost of construction by around 1.5 percent. This will make a significant difference to large projects.

The reduction in steel prices mean a reduction in the construction costs of a house, and lower input costs. Domestic steel makers have raised the production from the low levels of last quarter of 2008. The reduction in excise duty in the present economic condition will be beneficial. It will increase demand and give a boost to the economy. Steel companies will pass on the excise duty cut to customers.

A two percent cut is significant. After a continuous, steel is currently selling at Rs 26,500 a tonne. A two percent excise cut will mean that prices will fall by Rs 500-600, if companies pass on the full benefit.

The government's move to reduce excise duty on bulk cement from 10 to eight percent will result in a marginal drop of Rs 3-4 per 50 kg bag at the retail level. Prices for bulk buyers, like ready mix concrete (RMC) batching units, will drop significantly. The drop would be between Rs 60 and 70 a tonne for bulk buyers like construction companies and RMC units.

The reduction in excise duties on steel and cement is expected to boost the realty sector, at least to an extent. Both steel and cement constitute essential elements for construction of property. Moreover, as there has been a reduction in excise duty, there are all the more chances that the steel and cement manufacturers will pass these on to the consumers. The bulk buyers will gain in particular, because for them the savings would be enhanced because of volumes

The realty sector has been one of the worst hit sectors in the recent past due to variety of reasons. The bad times for the realty sector commenced with rising cement and steel prices, coupled with the Reserve Bank of India raising the interest rates to combat rising inflation. Thereafter, the global financial crisis brought with it an economic slowdown. All of these reasons resulted in a quick slump in demand for residential and commercial properties.

During the last year a lot of realty firms had raised money from the capital markets and through private equity with RBI policies making it tough for the realty firms to raise bank finance. However, these alternative funding sources have dried up since the global financial crisis broke out. Realty firms finding themselves at the receiving end of the bloodbath on Dalal Street made matters worse for the realty sector.

These things clearly signaled a serious crisis for the sector which resulted in the industry leaders in the sector requesting for a Government intervention. The realty firms expected the Government to take steps to bring in more liquidity into the sector by easing lending norms and also requested for a reduction in housing loan interest rates to boost the demand.

The RBI provided a breather for the sector last weekend by announcing a slew of measures especially for the real estate sector apart from 100 basis points cut in the interest rates. One of the most important announcements includes Rs 4,000 crore refinance facility for National Housing Bank. The RBI has also decided to grant "priority" status for housing loans upto Rs 20 lakh and for loans given by banks to housing finance companies for on-lending to individuals for purchase or construction of homes of upto Rs 20 lakh.

As per the existing RBI norms, every bank is required to set aside 40 percent of its deposits for lending in the priority sector. As a part of the policy announcements on Saturday, the RBI has also clarified that banks can classify housing loans up to Rs. 20 lakh as "priority sector" advances, subject to a ceiling of five per cent of their total priority sector limit. The above moves are expected to provide a life line to the realty firms who operate in the low-cost housing segment. This measure would also help the housing sector and the realty firms which operate in the nonmetros or the Tier II cities.

The other major measure announced by the RBI on Saturday has been the relaxation of asset classification norms for commercial real estate advances. It may be recalled that the RBI had, earlier this year, issued a directive requiring the banks to classify advances to a property developer as a Non Performing Asset (NPA) the moment the advance was restructured. This directive of the RBI had made raising bank finances difficult for developers whose loans were classified as NPA by other banks.

The RBI has now relaxed the asset classification norms for commercial real estate advances, by granting concessional treatment to commercial real estate advances which are restructured upto June 30, 2009. This one time measure grants a relaxed treatment of non-classification as NPAs to second restructuring done by banks of real estate advances before June 30, 2009. This step would surely relieve the realty firms of the liquidity crisis. This move would also encourage the banks to increase their exposure to real estate sector. The 100 basis point rate cut should also ease the cash crunch situation if the banks lower their lending rates.

Though some of the realtors have voiced their opinions on the measures announced by RBI not being sufficient, these measures are intended to boost the demand for low-cost housing and also ease the cash crunch situation which the realtors are facing. These measures together with the Rs 30,700-crore fiscal stimulus package unveiled by the Government aimed at guiding the economy away from a possible downturn.