Listed companies in the real estate sector experienced a loss of Rs 64.8 billion in market value by Friday, following Finance Minister Nirmala Sitharaman's announcement in her Union Budget speech on Tuesday regarding the removal of indexation benefits on property sales. Although stock market data indicated that some of these losses were recovered on Friday, the sector still ended the week with a net loss compared to the day before the Budget presentation. The total market valuation of real estate sector companies stood at Rs 6.98 trillion as of Friday.
Analysts have suggested that the removal of indexation benefits might negatively affect investor sentiment, especially in high-end segments where annual returns range from 10% to 11%. According to an analysis by rating firm IndRa, properties with expected returns below this range could lead to higher capital gains tax outflows, which may result in decreased investments in this segment. The firm indicated that reduced investor demand could pose challenges for developers in raising prices in the near term, as investors might be cautious about significant tax liabilities.
The impact of the indexation benefit removal and the reduction in long-term capital gains tax is expected to be minimal for end-users who sell their current homes and reinvest in new ones, but it will affect investors selling investment properties and seeking to reinvest in other asset classes. Prashant Thakur, Regional Director & Head of Research at Anarock Group, suggested that the removal of benefits might reduce speculative demand and increase supply, potentially leading to price corrections. This could result in a notable price decline in the short term as sellers compete for fewer buyers. However, Thakur anticipated that the market would stabilize over time, with prices reflecting genuine end-user demand rather than speculative investments, and developers might shift focus from luxury to affordable and mid-segment housing.
CLSA indicated that the new tax regime could have a negative impact on investors with holding periods of less than five years, especially where property price appreciation is moderate (below 10% per annum).
