Real Estate-- Issues in India

RESEARCH REPORT:5 DATE:4 MAY 2007


REAL ESTATE TO INVEST OR TO SHY AWAY?
The housing industry in India has been struggling along since independence the government has to be blamed for the current plight of the industry, but the role of real estate developers and builders was also not conducive. Several groups and experts like McKinsey Group have proposed many changes and plans for rescuing the ailing industry. India needs to implement these changes strongly and immediately. This in turn will give an impetus to the Indian Economy and help in posting a double digit growth rate. If all these reform are implemented, we could see growth rate in the economy at 10% in the coming decade.
Real Estate Issues

URBAN LAND CELING REGULATION ACT(ULCRA):
The central government has repealed this Act in 1999/2000 but the state governments also need to follow the directions. States like Rajasthan, Gujarat, UP, MP, Haryana have already repealed it. But on other side states like Maharashtra, Kerala, Karnataka, West Bengal, Orissa need to act upon it. It is very essential to release the huge land banks with government and semi government bodies to reduce the land cost which constitutes around 50% of the price of the real estate property in India which is unlikely as compared to developed countries like USA the land cost is around 37% and material and labor costs at 30%. The government needs to release land to reduce speculative demand due to shortage of land.

CLEAR TITLES:-
In India one of the drawbacks is the fact that 90% of lands in India do not have clear titles, which is barring the entry of foreign capital. This is due to poor record keeping and complicated slow and outdated processes. All updated records must be computerized to facilitate transparency and attract foreign and domestic capital. Fast track courts needs to be set up to clear the disputes to release land and reduce the shortage. This will also help in reducing costs as the prices of real estate will lower, due to increase in supply.

STAMP DUTY AND REGISTRATION FEES:-
The other factor dampening the growth is high stamp duty charged around 10% to 5% or lower. This will encourage actual valuations and discourage under valuation and thus create conducive environment for FDI in this sector. Some states have already lowered duty to increase revenues and attract FDI. The registration process should also be made quick and transparent and simple.

RECOGNITION OF HOUSING AS AN INDUSTRY:-
The GOI should realize that housing needs to be given its due weight and recognized as an industry. The direct impact of recognition to this industry will help in attracting FDI, tax incentive, easy access to capital, which will help in getting good growth in the sector. The GOI can also provide other incentives such as lowering tax rates, larger depreciation and increased equity support from HUDCO and NAREDCO.

INFRASTRUCTURE:-
Infrastructure is one of the key areas needs to be addressed. In developed markets like Mumbai and Delhi, people need to shift away from cities to other smaller areas near cities, but this calls for great infrastructure in terms of gas, sewage, drinking water, schools, power, and especially public transport and roads to reach workplace from these places fast and at low cost like in developed cities of Shanghai, New York or London. Privatizing municipal corporations and state electricity boards is very essential. The government can consider levying infrastructure cess provided it is used for promoting the infrastructure and increasing the growth rate. Moreover, when India is looking to disinvest from public sector it is very essential for government to
promote growth by spending on infrastructure and essential on PPPs and BOOT.

FDI CONDUCIVE POLCY:-
Loads of money is waiting outside the country to enter and develop the real estate market. The government needs to introduce FDI conducive policies and a sense of stability in the future. This would reduce their perception of risk and help them to invest in Indian markets at lower returns expectations. FDI will help in providing real estate developers with needed capital and technology and expertise. GOI needs to address issues of REIT, mortgaged backed securities and real estate mutual funds. In the future with government reducing constraints on limits the investment in real estate could flow in Western corridor especially from Japan where more than 50 companies have signed MOU with government to develop real estate in India.

DEVELOPMENT AND PLANNING:-
Another area needs to be issued is the new cities and integrated townships must be developed and ensure that all these are endowed with all modern state of the art facilities. Professional services must be used for planning and execute all developments plans for cities and towns, with the future development in mind. The government should focus on zonal development as it is easy to channelise efforts on one area as compared to whole of India. This strategy has been followed in developed economies like Malaysia, Japan. Similarly in India we see Western corridor capable of being the industrial hub in future. States like Gujarat, Rajasthan, Haryana, Maharashtra, and Punjab could benefit from it.

RENTAL LAWS:-
Two major sources of income from real estate investments are in form of rents and capital appreciation. In India one of the major concerns is the lack of power to raise the existing rent levels for the existing tenants. The rental laws must be amended to protect the owner and his property from tenants. The GOI should ensure support for termination of old tenancies, remove increase on restrictions on increasing rentals and empower owners to reclaim their properties without any court proceedings which are time consuming and costly. Once these amendments are made, we could see huge FDI flowing into real estate especially commercial sector. The owner must be given chance to earn the market rate of rent on his investments.

FORECLOSURE LAWS:-
Though the level of foreclosures for the housing finance companies(HFC) are relatively low at around 1.5-2%, the foreclosures law must be revised and made up date to suit the current situations. The laws for non payment of EMI and consequent foreclosure and repossession of the property must be revised, so that the financing companies have the final rights on the property, which is the collateral for the housing loan. Once enacted, these laws must be enforced. This will further boost the housing finance business.


Summary:-The present contribution of housing construction industry in India is small when compared to developed economies. This sector contributes only 1% of GDP in India as compared to 3-6% in other economies. If these issues are addressed India could reach and sustain a growth rate of 10% on the coming decade. The housing sector would grow at 14% and create over 3.2million jobs over the next 10 years.

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Recent stories going in the markets suggest that more than $50 billion are to be invested in the North Western sector to create country’s biggest industrial hub, freight lines, integrated townships and growth zones. So in coming years we could see a lot of capital appreciation in this corridor. States like Gujarat, Rajasthan, Haryana, Maharashtra, Delhi, is going to benefit. But more than 2/3 of benefits will be cornered by Gujarat and Rajasthan. Gujarat is expected to get 2 ports, one 4000MW ultra power project and 6 airports. Moreover it is also benefit from Golden Quadrilateral and highway expansions and also from ICD and container traffic. More than 50 Japanese companies have signed MOU with Indian government for the same purpose. But it should be noted that one cannot time the current downside going on. Real Estate is high risk and high reward Investment Avenue and one should have at least a time horizon of 4-5 years if one looks for investment in this sector and correctly evaluation the properties will help a lot. Moreover one could consider more investment in areas near highways because they will be demanded for industrial purposes and for creating new cities and townships and as they are cheap.