# ResidentialRealEstate: #The Govt. Policy Effect
by Mr. Anuj Puri, Jones
Lang LaSalle India
Post the 1991
liberalization policy, India began to welcome various multinational corporates
that were seeking permission to commence operations locally. Being the
financial and commercial capital of India, Mumbai was the first city to witness
a significant influx of large multinational firms.
By 1994-95, real
estate prices in the city increased to a point where companies started to look
for cheaper alternative locations, paving the way for other cities to grow
commercially. Demand for both commercial and residential real estate gathered
steam.
A policy-driven
bullish cycle culminated in an industrial boom, thereby also driving house
prices to a peak in 1995. At this peak,
some realities of the Indian economy (poor bank penetration, high interest
rates, non-transparent real estate market, etc.) came to fore, bringing a
correction in market prices.
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| Anuj Puri, JLL India |
As the Asian
Financial Crisis (AFC) erupted in the late 1990s, residential prices witnessed
a significant drop, returning to the levels witnessed in the early 1990s.
It took about 3 to 4
years for Indian real estate to recover from the AFC shock. A handful of
critical national employment-oriented policies and a reduced interest rate
environment instituted by the NDA-led government laid the foundation for a
revival in residential real estate prices during the early 2000s. Demand for
quality residential apartments began to rise, and was increasingly addressed by
developers, powered with money coming through the FDI route which had opened up
since 2005.
In 2005, the
Jawaharlal Nehru National Urban Renewal Mission (JNNURM), which facilitated
huge investments into building infrastructure to connect larger cities with 60+
smaller cities and towns, provided a fillip to overall real estate sentiment.
At the peak of prices
during 2008, what emerged was a large accumulation of debt with almost every
stakeholder – homebuyers (large mortgages accrued in the quest for buying more
houses in a rising price scenario), developers (large accumulation of land
parcels), and banks / lending institutions (exposure to outstanding loans to
the real estate sector, which was now looking overheated).
The ensuing economic
slowdown and risk of job losses led to halt of the price rally. Thus, the two
cycles of real estate that India has witnessed over the last 2 decades or so,
has seen policy stimulus in the beginning and an overheated market in the end.
Reforms Targeted At
The Real Estate Sector
Against the backdrop
of a rising economy and concurrent income growth, the real estate sector has
witnessed tremendous growth over the last 10-12 years. Government policies were
at the crux, providing the necessary stimulus.
However, while on one
hand these real estate policies improved the housing situation in general, they
also have elements that can be seen as detrimental to the real estate
industry’s business viability. With the advent of the union budget season for
2014, it is time to review these policies and highlight the gaps.
* Repealing the Urban Land Ceiling (ULC) Act of
1976
The Urban Land
Ceiling Act, 1976, was enacted with the intention of making land hoarding
impossible for individuals or corporate entities which had the capacity to do
so. The Act gave the state government the right to acquire and dispose excess
land (as specified in the Act) from individuals and entities, thereby serving
the common good. However, the Act became one of the main reasons for the short
supply of land and therefore led to unaffordable land prices.
Under JNNURM, 29
states have now repealed this Act while two others still need to do so. The
benefits of this reform are evident from the Gujarat and Nagpur examples. The
Gujarat government transferred their surplus land to urban local bodies at
nominal rates for projects focused on housing for EWS/LIG households. Likewise,
Nagpur witnessed an increased supply of land for development as well as for
investment after repealing the act.
Even while certain
states have adopted the repeal Act, there are concerns regarding the lack of
implementation by local authorities in certain districts. For instance, the
Maharashtra Chamber of Housing Industry contends that the provisions of the ULC
Repeal Act are still not in force, and are subject to discretionary
interpretation and insistence of NOC from competent authorities.
A complete repeal of this Act would unleash
positive changes in terms of larger land supply and relatively affordable land
prices. The budget can look forward to improve the implementation mechanism.
* Repealing the Rent Control Act
The Rent Control
Legislation has been in existence for almost a century in India. The common
intent of every state enacting the legislation was to protect tenants from
forceful eviction and unfair rental hikes.
However, the law
failed to make provision for receipt against rent payments, rent increase
against rising cost of building maintenance or inflation, repair work when the
residential structure is at peril, etc. which renders the act inefficient. In
an attempt to protect tenants, this Act has in fact created unfavorable terms
for landlords, thereby making the entire model of rental housing unviable and
inefficient.
To end the problems
associated with this archaic law, a Model Rent Bill was circulated by the
central government in 1992. It was an attempt to balance the interests of both
the tenants and landlords.
However, over the
last two decades, only seven states have implemented the changes suggested in
the Act. States such as Punjab and Goa have already experienced benefits from
implementing the suggested changes.
A further push from
the central government (possibly under the JNNURM scheme) would be needed to
expedite the adoption of the model Rent Control Act. Its repeal could unleash a
construction boom, as has been witnessed in many major cities all over the
world (after they repealed their respective rent control acts). This is not
only necessary to meet the growing unmet demand for housing but would also have
a very favorable effect on employment generation.
* The New Land Acquisition, Rehabilitation and
Resettlement Act
There have been
innumerable cases of land owners being either exploited or dispossessed by
force through diligently crafted contracts by corporate entities. The Land
Acquisition, Rehabilitation and Resettlement Act tried to ensure maximum
protection for land owners, who are often individuals and at times not fully
aware of the future consequences of disowning their land.
This Act has the
potential to unlock all the land which has been locked for several years due to
lack of ways and means that ensure fair compensation.
While the Act had the
objective of balancing the interests of land owners and land acquirers, the
final draft of the policy did not really deliver on this front. The clauses
that appear in the Act not only ensure that land costs go up for the acquirer,
but it also renders the acquisition process more complex and time-consuming.
This is evident in
the clauses pertaining to obtaining mandatory consent of 80% of the owners,
future incremental gains from land transactions to be shared by the land
owners, and different resettlement procedures for different sections of the
population (such as scheduled castes/tribes).
* Service Tax Abatement On Construction
Activity
In June 2012, the
Ministry of Finance provided an exemption from service tax on construction activities
related to single residential units or low-cost housing (carpet area of 60 sq.
meters or less). The policy of levying service tax on construction services of
under-construction apartments (which do not have completion certificates) added
to escalation in cost to buyers. Due to non-availability of large capital sums
and easy accessibility of EMI finance, the urban populace invests in real
estate by taking loans. This includes the inbuilt costs of overdraft, which is
further compounded by the imposition of service tax.
Exemption from
service tax is provided for construction of residential complexes which are a
part of the JNNURM and Rajiv Awas Yojana (RAY). JNNURM and RAY are flagship
schemes of the government of India to provide shelter for the poor and the
disadvantaged.
Consolidated FDI
Policy..
The Indian real
estate industry has been on a roller-coaster ride since 2005. Consequent to the
government’s policy to allow Foreign Direct Investment (FDI) in this sector via
Press Note 2, the sector has witnessed a boom in investment and developmental
activities. The FDI channel was opened up under the automatic route in
townships, housing, built-up infrastructure and construction development
projects.
The main intention
behind opening up the real estate sector to 100% FDI was to bridge the huge
shortage of housing in the country, and to attract new technologies into the
housing sector. The sector not only witnessed entry of many new domestic realty
players but also the arrival of many foreign real estate investment companies -
including private equity funds, pension funds and development companies - all
lured by the high returns on investments.
However, lack of
consistency in rules relating to the development of SEZs, increased monitoring
of the sector by regulatory agencies, tightening of rules for lending to the
real estate sector and increase of key rates by the RBI several times during
the last one year have arrested the growth of the real estate sector.
There is a very
clearly defined need to streamline government policies and introduce reforms.
The key challenges that the Indian real estate industry is facing today are
lack of clear land titles, absence of title insurance, absence of industry
status, lack of adequate sources of finance, shortage of labor, rising manpower
and material costs and a snail-like project approval process, among others.
About the author..
Mr. Anuj Puri,
Chairman & Country Head, Jones Lang LaSalle India
For Media Contact
Mr. Arun Chitnis
Head – Corporate
Communications & Media Relations
Jones Lang LaSalle
India
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Website:
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