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Housing For All. Are We Prepared?
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PREFACE
In the Charter on Affordable housing presented last year in the CNBC Awaaz Real Estate awards, we highlighted the economic imbalance in real estate market and the lessons imparted by past mistakes.

In this paper, "Housing for All: Are we prepared?" we have traced the journey of the real estate sector to study the impact of the previous policies on the present day situation.

With continued inflow of capital, we stand with an inventory of over 10 lakh units today but what is worrisome is the current level of absorption and unaffordable prices. “Housing for All” is an ambitious goal and requires 18 times more inventory from the existing levels. However the big question arises, when the market and prevailing dynamics are not able to sustain with existing level of the inventory, can the developers take 18 times more commitments?

The sector requires an overhaul through enhanced urban settings and effective policy implementation. We have used our thorough analysis and judgement to suggest a few reforms that will go a long way in bringing discipline and efficiency. The impetus given to affordable housing on Union Budget 2016, has re-instilled our faith in the government. Nevertheless, it still has a long way to go and we anticipate that the path is characterized with more such concrete policies.
 
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Housing for All: Are we prepared?
Economic turbulence, change in government, myriad policy initiatives and the ever intimidating interest rate fluctuations - this sector has seen it all. The journey over the past decade has been nothing short of an adventure.

With a change in leadership last year, it’s time to take a hard look at reality. We trace the journey of the Indian real estate sector since 2002, when housing finance started being significant in a big way. After this, the Indian realty scene opened its arms to global funds as well in 2005. What followed was a roller-coaster ride and where it will lead is something that only time will unravel.

Timeline for developments in Real Estate
Pre-2005
Growth Phase
1987 Onset of organized
mortgage industry with the
establishment of National
Housing Bank (NHB)
NHB was set up as the
apex level institution for
housing under the Seventh
Five Year Plan (1985-90)
1999-2002 There was a surge of
housing finance companies
The interest rates reached
sub 9% level and the
SARFAESI act for asset
restructuring
2006-2008

Opening up of the economy
2005 Opening of FDI





JNNURM (Jawaharlal Nehru Urban
Renewal Mission-I)
Press note 2 released on the FDI policy for real estate which promoted 100% investment, based on certain conditions, under the automatic route in townships, housing, built-up infrastructure and construction development projects.

The flagship project of the UPA government with an estimated budget of Rs. 50,000 crore was a big boost to the infrastructure
  2008 Repealing the Urban Land Ceiling Act 1976 This was done to provide for the imposition of a ceiling on vacant land in urban agglomerations, so as to curb speculative practices through concentration of land in the hands of few. Maharashtra, Gujrat and Jharkhand have scrapped it. Townships and large scale projects came in MMR only post 2008
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  2013 Land Acquisition Act Regulates land acquisition for industrial and infrastructure purposes and lays down the procedure and rules for granting compensation, rehabilitation and resettlement to the affected persons in India
  2014 Make in India The strategy of this campaign is to leverage manufacturing capacities in India to spur job creation and overall economic growth. Real estate, whether residential, commercial or retail cannot prosper if the economy does not grow.
  2014 Real Estate Investment Trust (REIT) A new source of financing for India's cash-strapped property developers. REITs are listed entities that mainly invest in income-producing real estate assets, the earnings of which are mostly distributed to their shareholders. The removal of Dividend Distribution Tax for REITS in this budget is encouraging.
  2014 Smart city project 100 smart cities in India are targeted to be developed to boost infrastructure through digital technology. First 20 cities have already been finalized
  2015 Pradhan Mantri Awas Yojana (Housing for All) Providing affordable housing to the urban poor. Government has also agreed to increase interest subvention to 6.50% on housing loans to beneficiaries belonging to economic weaker sections (EWS) including slum-dwellers and low income groups (LIGs).
The decade long journey has been quite eventful. One thing led to the other and defined the dynamics of the setting in which we are currently placed. The present state of affairs in the Indian Real Estate market is far from perfect. An overall sense of uncertainty is palpable across the value chain. Today, developers are burdened with cash crunch and numerous rounds of procuring approvals, buyers are grappling with high prices and project delays, while banks and HFCs are dealing with their share of mounting non-performing assets (NPAs). It is difficult to pin-point a particular reason because a scenario such as this is a product of unaddressed issues at multiple levels. Let us study the issues at the granular level and decode each aspect.
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Delay statistics across the main markets in India
(% of supply delayed)
Cities Less than 6 months 6 Months -12 Months 12 Months -24 Months More than 24 Months Supply as on Dec-15 (units)
Ahmedabad 54% 20% 19% 7% 1,74,411
Bangalore 64% 11% 16% 8% 2,74,192
Chennai 55% 15% 17% 13% 153,850
Hyderabad 30% 18% 20% 32% 93,624
Kolkata 55% 15% 14% 16% 68,944
MMR 43% 15% 20% 23% 4,64,677
NCR 29% 17% 24% 30% 6,00,773
Pune 47% 19% 22% 12% 2,53,069
Surat 72% 18% 7% 3% 64,509
Vadodara 76% 13% 10% 1% 59,819
Source: Liases Foras
  Developers are burdened with cash crunch Buyers are grappling with high prices and project delays Banks and HFCs are dealing with mounting non-performing assets (NPAs).
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With so much of funding in the country available for over a decade, why is the real estate still mired in issues?
The major cause for this is capital with high cost. Costly Capital does not promote affordable housing but only creates a vicious cycle. Since banks do not provide funds for land purchase, developers are forced to resort to informal sources or private equity for financing. PE funding demands returns to the tune of 25% to 30% p.a, thus making the cost of capital high. Economics of such returns doubles the price in two-three years, making it unaffordable. Only a miniscule portion actually goes in the creation of affordable housing. For the end-product to be affordable, the cost of capital should be low, or else it gets factored into the pricing of the product. Since the major requirement is funding of the land, the Government must acknowledge this and facilitate easier funding through banks and ECBs at low interest rates.

After procurement, optimum mobilisation of resources is the next critical stage. In the past developers used the borrowed finance to launch massive townships and luxury projects and sometimes even to pay off their debts. Not only this, the advances received in booking stage have not gone into completion of those projects but for creating a land bank. With this kind of opportunist behaviour, “housing for all” is a distant reality.

To create Developers are burdened with cash crunch Buyers are grappling with high prices and project delays Banks and HFCs are dealing with mounting non-performing assets (NPAs). housing within the reach of common man, developers are now offering affordable housing in the outer limits of the city. This is absolutely not in line with a regular working man's span of movement. Man lives in the cage of distance and time. If he has to spend more than half his time and additional costs in travelling to work and back, where is the time to enjoy the benefits of affordable housing? This also disturbs the economic balance in the city.
The vicious cycle of capital The vicious cycle of capital
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Massive capital inflow created huge inventory
City FY09 FY10 FY11 FY12 FY13 FY14 FY15 YTD
FY16
NCR 63,842 95,833 140,217 160,728 180,956 194,392 226,843 257,527
MMR 76,073 63,479 91,918 105,266 124,049 144,844 169,370 209,384
Bangalore 37,934 34,299 32,419 39,673 36,622 66,151 94,470 110,932
Pune 44,373 33,305 33,633 38,221 41,505 59,595 65,661 90,446
Ahmedabad       43,627 45,766 52,850 58,488 70,684
Chennai 17,204 20,156 28,173 34,568 49,915 47,760 52,415 57,703
Hyderabad 34,645 29,687 24,994 19,008 23,039 28,361 27,793 32,353
Surat         8,368 13,626 22,604 28,303
Kolkata       13,973 15,047 19,550 23,534 26,962
Bhopal           17,683 21,791 25,048
Vadodara         6,590 12,205 20,687 24,950
Lucknow         8,172 5,738 21,144 21,812
Jaipur         10,222 10,794 14,961 15,035
Chandigarh         10,904 13,067 14,013 13,242
Indore         6,501 5,330 8,809 8,262
Nashik         5,474 6,841 8,385 7,410
Bhubaneswar           5,486 4,829 5,381
Patna           4,994 4,858 5,094
Cochin         4,618 2,852 3,887 3,812
Mangalore         4,560 2,708 3,718 3,606
Coimbatore         3,456 1,318 2,382 3,512
Kanpur         2,733 1,890 3,090 2,678
Goa         1,766 2,150 1,956 2,557
Thiruvanantha
puram
        2,390 968 2,496 1,836
Total 274,071 276,759 351,354 455,064 590,263 720,185 875,688 1,026,693
Source: Liases Foras
Today the inventory across major cities in India stands at one million units, clocking in a growth of approximately 22% on an annual basis. Meanwhile, housing shortage as per NHB is estimated around 18 million units in Urban India.
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Therefore in order to meet “Housing for All”, this inventory has to grow 18 times. But the million dollar question is are we prepared for it? Since the available stock is not selling at current prices we have high months inventory. Today, the months’ inventory across 26 major cities stands at 40 on an average, and to come to the efficient level of 10, sales needs to grow 4 times. This is a pre-requisite for the inventory to be sustainable. In order to enhance sales there has to be rationalization of prices and economic efficiency. Unless sales gain momentum, market would never be able to take additional stock and there would be retardation in new supply.

Also, there are so many deep-rooted issues which need to be tackled by fine-tuning the urban settings and inculcating policy level changes. There has to be a bridge between demand and supply. The reforms should be such as to bring about a phase of Discipline as well as Efficiency.

Recommendations for a better tomorrow

Increasing Government housing in affordable sector:

We cannot just rely on developers to come up with affordable housing. Developers are after all running a business for profit. When sales don’t happen, developers can introduce low-priced products for cash flow, but once the economy turns positive, they will again focus on earning profits and lose enthusiasm for those projects. The government has announced the policy for “Housing for All”, and it is its primary responsibility to increase the supply for affordable housing.

Incentivizing end-users

The Government must introduce policies where an investor driven market is toned down and actual end-users are encouraged. The current taxation regime encourages second home buyers and offers complete exemption on interest expense. Though the new budget introduced a norm as deduction for additional interest of Rs 50,000 per annum for loans up to Rs 35 lakh sanctioned in 2016-17 for first time home buyers, where house cost does not exceed Rs 50 lakhs, this is but a small step and the gap between demand and supply is huge. More reforms on these lines have to be introduced.

Passing of the Real Estate Regulatory Bill

The Real Estate Regulatory bill got the Union Cabinet’s nod in early December and now the entire sector is anticipating that it will come to fruition by 2016. Construction delay is a major hindrance to the Indian Real Estate sector and the cost of delay across 25 major cities impacts 1.32% of the nation’s GDP. However, the delay with which it is coming into place cannot be ignored. The most important factor of any regulatory change is right timing. The passing of Real Estate Regulatory Act (RERA) is overdue and it is likely that the Government realises that establishing an effective regulatory mechanism is the need of the hour.
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Reduction of execution delays

Delay in delivery of projects can have far reaching consequences on the realty sector. The responsibility of this lies not only with developers but also with the governing authorities. Deviation in project configuration can also happen when the governing authorities are making rules on a flawed basis. Sudden changes in regulations must be avoided and there should be a body to monitor the progress of each project with proper transparency (for instance the confusion in the MMR Development Plan (DP) 2034 had caused delays in approvals). Only then will the goal of timely execution be achieved.

The other side of the story says that many developers delay their projects on purpose. The usual practice of developers raising funds from pre-launches of one project and using them to commence other projects in the pipeline or paying off existing debt is a major issue. This ‘practice’ might work in situations when rapid sales are the order of the day. But in the current scenario where the sales velocity is poor, the money generated from pre-launches and initial sales should be utilized for faster completion of the project and enhancing the pace of sales.

Reform in Land titling system

India's land titling system is dated and time has come for a much-needed overhaul for the same. Lack of clear land titles and title insurance in India makes it difficult for developers to acquire suitable land parcels and often results in long-drawn and expensive litigation for them.

We advocate the Torrens system of land titling in India wherein there is a direct registration of title in a central registry based on identification of land parcels and ownership. It will be the ultimate proof of the ownership of property and bring about simplification and transparency in land dealings. UK, Canada and many East European countries are already following this system. The draft of the Land Titling bill prepared by the Government in 2011, called for creation of a digital infrastructure for land records. Though this a herculean task and demands huge funds, the clearance of this deferred bill is the need of the hour for long-term benefits.

Unique Property Registration number

Currently properties in most of the cities have a unique identification number for taxation purposes. However, once records are digitised and there are proper linkages established between registration, property taxes and titular records, chances of fraud and scams related to property will be very less. This will enhance accountability and transparency. In the Union budget 2016, the government plans to re-launch its national land record digitisation scheme and fund it with Rs 150 crore.

Focus on land productivity instead of monetisation

Urban bodies should focus on land productivity and not on land monetisation. The current approach of land monetization has created urban economic imbalances. In fact, government should help moderating land prices through Public Private Partnership (PPP) model and higher FSI.

Vacant Land Tax

Today current prices of land are not viable. We need moderation in land prices and that is what leads to the requirement of Vacant Land Tax, to make land productive. High land prices pushes away affordable housing and does not cater to the city needs. Land has only two uses: agricultural yield and urban yield. By hoarding on the vacant land, the developers are restricting both these yields and this can be detrimental for the country’s economy at large. Moreover, Vacant Land Tax is the only tax that is productive. It is not merely penal instead it is aimed at maximizing yield of land.

If the tax is imposed on unused land, it will encourage landowners to develop vacant and under used land properly or allow others interested in development to take over. The tax on unproductive land will have a positive domino effect for the Government also. In a move to avoid tax, vacant urban land will be utilized for various purposes such as construction and creation of infrastructure on which the Government can impose property tax.
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A dynamic approach to policy implementation is the key
It is important to be aware that the real test comes in the implementation of these policies. Though these look extremely promising, achieving desired results is an enormous challenge. While the Government is looking at rationalisation of the demand and supply side, what is most important is rationalisation of price. We definitely need supply and demand efficiencies. However all the corrective measures and policies must be aimed at attaining an economic equilibrium in the long run. This will only be achieved when the sector moves towards maturity and end-users garner a major share as compared to investors. It is also important to note that as a nation’s economy passes through phases, so does real estate. The policy that is suitable for a bust phase, may not augur well for the boom phase. So the government must adopt a dynamic approach. This implies that it must act with alacrity at all times and recalibrate decisions according to the situation. The best example of this is China. When the market was getting overheated, Beijing introduced regulations to curb purchase of second homes. There was a ban on single households doing so and down payment was increased for others. However, these guidelines were relaxed as the property market began to slow down.

Introduction of Section 80 IBA in the Union Budget 2016, highlights the Government’s intention to promote “Housing for All”. 100% deduction for profits to developers opting for flats up to 30 sq. metres in Chennai, Delhi, Kolkata or Mumbai and 60 sq. metres in other cities impacts the sector in many ways. There is likely to be a surge of 1BHKs and compact 2BHKs and cities like Pune and Bangalore which are home to many migrants are likely to be the biggest beneficiaries. The Government seems to be on the right track and has instilled a strong belief that it will do complete justice to this ambitious project.

As they say “Rough seas make good sailors”, we believe that the real estate sector will sail through with some fine-tuning and a dynamic approach towards policy implementations.
 
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Founded in 1998, Liases Foras is a non-brokerage research centric firm that offers data and advisory services. Our works on industry and scientific prognosis of the local market is highly regarded. We have an organized and structured data source on real estate and property trends in India, which is updated on quarterly basis by primary market survey.

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