June 2014

Real estate hits spring board

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realstate-hitsWith the change of a ‘pro-development’ government, realty sector hopes to finally eject itself out of the morass it has  been stuck in since the 2009 economic downturn, writes Rajesh Sharma of ENN

That the realty sector in India is rising seems obvious now. India is the world’s seventh largest landmass and the second most populous. While the land area remains limited, the population is growing, leading to a space crunch.  The stress on land is more in the cities, where people are increasingly migrating for work. As India urbanizes, by  2030, 600 million people will inhabit its cities and it will have 68 cities with a population of over one million.

With growing urbanization, land and its acquisition has become a contentious issue. Builders rush to buy large swathes of limited land for future development, thereby pushing its price up. But they are held back by the  acquisition process,hence delay in getting all the clearances to develop the land further.

37“The depressed real estate market is now expected to rise and rise soon. In fact, the sector itself is predicted  to become worth about Rs 18,000 crore by 2020”

The Land Acquisition, Rehabilitation and Resettlement (LARR) Act introduced in 2014 was a watershed legislation that did away with the 120-year-old  Land Acquisition Act, much to the cheering from both the industry as well as the land owners. It promised better  rates to the land owners, while easing the purchase of land for the builders. The legislation removed the ambiguities and arbitrariness of the previous law, at the same time introducing some new ones. For example, while the law increased the compensation for land owners, it also closed any hope for a future revision of rates in case the market prices appreciated.

The response from the real estate sector has been mixed.  Though they appreciated the Act brought clarity in the land transfer process, the increased compensation also puts a burden on the realty builders, who in turn would  pass on the increased costs to the consumer, thereby defeating the purpose of the Act.

The 2009 economic slowdown affected the realty sector adversely and many projects came to a halt. The then government was unable to do much in the onslaught of the global markets. With the change of government in 2014,  the depressed market seen today is expected to rise. In fact, the sector itself will be worth about Rs 18,000 crore by 2020.

The real estate sector of India is projected to post annual revenues of Rs 18,000 crore by 2020 against Rs 6,680  crore in 2010-11, a compound annual growth rate (CAGR) of 11.6 per cent. The demand is expected to grow at a  CAGR of 19 per cent in the period 2010-2014, with Tier I metropolitan cities expected to account for about 40 per cent of this growth. As of now, Mumbai, Delhi-National Capital Region (NCR) and Bengaluru cater to 46 per cent of total office space demand in India. This demand is expected to rise sharply in Tier II cities such as Kolkata and  Chennai in the period 2010-14.

A major area of area of growth in realty is expected to be malls. Though not as bullish on the growth of malls as  earlier, the demand in mall space is expected to grow in keeping pace with the changing shopping habits of the  urban population. About 53 per cent of demand for total mall space is projected to come from the country’s top  seven cities, namely Delhi-NCR, Bengaluru, Mumbai, Kolkata, Pune, Hyderabad, and Chennai, in the period  2010-2014.

The coming of the BJP-led NDA has enthused the realty sector. PM Narendra Modi comes with a strong development agenda, and the industry is looking at him to fulfill the promises he made of building 100 smart cities.  Should PM Modi succeed in it, the realty industry is in for a windfall.

Sanjay Dutt, executive Managing Director South Asia, Cushman and Wakefield said, “A stable Government will lift the sentiments of the investor community, which will impact housing and office space sales. Hence, both end users  and investors are expected to increase their investments in the sector and contribute to its growth.

But though the markets have reacted positively to the coming of PM Modi, but the task ahead for him is tough. Though 100 per cent foreign direct investment in the construction sector is permitted through the automatic route,  the Department of Industrial Policy and Promotion (DIPP) is looking at relaxing the FDI norms further to encourage investment. It has proposed a reduction in the minimum capitalization for wholly-owned subsidiaries from Rs 54 crore to Rs 27 crore, and from Rs 27 crore to Rs 10 crore for joint ventures with Indian partners.

The land acquisition act is a watershed legislation that does away with the age-old law for acquiring land, much  to the cheering from both the industry as well as the land owners

The Ministry of Housing and Urban Poverty Alleviation (HUPA) under the NDA Government is expected to carry  forward UPA’s scheme of affordable housing for the poor in urban areas via the Jawaharlal Nehru National Urban Renewal Mission (JnNURM). Also, demand for space from education, healthcare and tourism sectors has opened up opportunities in the real estate sector. The higher living standards mean that Indians are demanding better  infrastructure, which is good news for real estate builders.

The biggest roadblock in the realty sector’s ascendance, ironically, is the legislation that was aimed at helping it,  namely the LARR Act. Confederation of Indian Industry president, S Go- palakrishnan has voiced serious concerns over some of the provision of the Act. He says that the higher cost of land acquisition has pushed the overall costs  up nearly 3-3.5 times. The clause requiring a builder to start developing the land within five years of acquiring it or risk losing ownership puts undue pressure on the companies to rush into projects. Sunil Mantri, president, National Real Estate Development Council (NAREDCO) has a solution. “Farmers,” he says, “should be empowered as    stakeholders in what comes up on their land and should not be alienated. Moreover, a special purpose vehicle (SPV) could own the land, wherein the farmers could own half of the SPV and the other half by project developer. The project could lease the land from the SPV and the rental income would flow to SPV shareholders. As the project matures, the SPV would go up in value and farmers could, after a lock-in period, sell their shares to encash the  appreciation.”

There is a renewed optimism in the Indian realty sector owing to a recovering world economy, a new business  friendly government and an interest in the Indian markets foreign investors. The question now is whether the industry will rise up and grab the opportunity that it is due.

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