Still waiting for that big boom
Short on housing stocks, but spiralling costs, regulatory systems play spoilsport
Nov 28, 2013
Source : The Hindu


MUMBAI: For all the changes that the sector has seen over the last two decades, buying or building a house still remains out of reach for a majority of the population. Not that renting one is any easier.

A house remains one of the most expensive and at the same time most sentimental investment for any family and buying one is so fraught with uncertainties that anything can go wrong. That does not prevent people from aspiring to own one.

When so much changed in most other sectors of the economy since the 1990s, the real estate sector has little to show, except the spiralling costs that put a house beyond the reach of most.

Key issue

Sure there are a range of problems in real estate development — expensive land, rising input costs, financial constraints, labour shortage… But the single largest issue is the absence of measures to scale up supply to meet demand. Put in systems that will support an increase in supply, costs will take care of themselves, say representatives in the real estate sector.

The issue is in housing. The commercial real estate sector is closely linked to the economic cycle and will happen as and when needed.

But housing is an essential that is needed irrespective of economic condition. If the policies support increased supply at realistic costs, the prevailing shortage of housing can be addressed.

Sadly, when the reforms process started a couple of decades back, real estate sector was left out. The Government, which freed up a range of sectors and cut down on its own role in them, cut down on public sector housing without commensurately supporting the private sector to increase its scale of activity. There is a cumulative shortage of about 18-20 million houses with the number only increasing annually. Little is being done to bridge the gap, say industry representatives.

Taxes and duties account for nearly a third of the price of a house. Project approvals can take up to a year or more and they further add to costs. Plus, there is huge demand for space in urban areas. Is it a wonder that houses are fast becoming unaffordable, ask builders.

Niranjan Hiranandani, Founder and Managing Director of Hiranandani Constructions, who is also on the real estate committees of leading industry associations such as FICCI, Indian Merchant Chamber and the CII, says the real estate sector has grown consistently at 15-20 per cent annually except possibly in 2009 and 2010.

Unmet demand

Despite that there is a huge unmet demand for housing. The sector has to grow faster. Real estate needs to experience what happened in telecom, aviation, automobiles and manufacturing in the early 1990s, when economic reforms took off. “We need that kind of a breakthrough in terms of scale of operations and the ability to meet people’s need for housing,” says Hiranandani.

Look at Mumbai, the country’s commercial capital and its richest city too. More than half the population lives in jhopadpattis, slums, 10-15 per cent in chawls and other dilapidated buildings. That means just about one-third in the city have a proper dwelling. A majority can afford the amenities of modern life. Someone in 200 sq. ft has a television but cannot afford a titled property. This lacuna needs to be filled, he says.

Affordability is the key to a house. That will happen when supply increases. Open up more land. No house is complete without water, power, sewerage, roads, public transportation, healthcare and education facilities and most of these can be supplied only by the public sector. According to Hiranandani, what the governments can do for real estate sector is free it from the leash of low Floor Space Index or Floor Area Ratio – the limit on built-up space in proportion to ground area. The ratio is small, often 1.5-2 in a city like Chennai. But globally FSI is not a norm. It has to change here too. This is the primary issue.

Look at Hong Kong, Singapore and China, he says they go up to 20 FSI. We need to unlock the power of the land to increase supply. “Enable more building in less land,” and cost will take care of itself.

Encourage home loans

Then there is the issue of adequate funds for housing. Why does not the RBI encourage or facilitate home loans, bring down interest rates, he asks. After all, NPAs in home loans are less than two per cent of the loans disbursed. Encouraging housing will have a multiplier effect as it impacts a range of industries in which it will drive demand and jobs – cement, steel, electrical and electronic, to name a few. The Government has not even tried, he says.

In the real estate sector, there appears to be a lack of intent to create surpluses. There is more avenues to raise funds and there are players that can think big and create large integrated townships. But without intent, nothing is going to happen.

Take a single concept–housing for all and work on it, is Hiranandani’s suggestion.

What is needed is larger scale of operations and increased speed of delivery.

Shekar Reddy, National President, Confederation of Real Estate Developers’ Association of India, says when it comes to freeing FSI, the benefit has been proven in Hyderabad. The limitation on built up space is not FSI but on parking space and road width. So as long as there is a demand, a developer can build a multi-storeyed structure of any height. Approvals are another major limitation to speed of delivery.

Reddy says new laws such as the Land Acquisition Bill and the Real Estate Regulatory Bill are a major concern. They drive up cost of land, bring in new approval and regulatory systems to the existing ones.

According to CREDAI, nearly 30-40 per cent of the cost of a house can be attributed to taxes and duties. What is needed is a single window system to speed up project approvals by the local authorities.

Commercial Space

Anshul Jain, CEO, DTZ India, part of a multinational property services company, says actual growth in commercial real estate space can only happen with GDP growth. Between 2000 and 2006 about 40-45 million sq ft of office space was leased annually. This has now dropped by to about 30 million sq ft. Bangalore alone accounts for one of every three sq ft of space leased. Chennai about half that quantity – four-five million sq ft compared to about seven million sq ft previously.

As of now IT is contributing to demand for space with outsourcing to India sustaining due to depreciation and lower costs.

Raj Menda, Managing Director, RMZ Corporation, a leading corporate space developer, says the rupee depreciation has actually helped things in commercial office space and that in turn is good for residential space. Cost of production is down 15 per cent in India for foreign companies – that is nearly two years’ worth of salary hike. Companies find it sustainable to move work to India even if the macroeconomic picture is not good. That apart a 12-14 per cent growth is forecast in IT.

In Bangalore and Chennai, the IT sector is doing well. For instance, all the buildings under construction by RMZ have been pre-leased – that is over 15 lakh square feet of space that has gotten off the ground. The company has twice that in the pipeline and there are people waiting.

‘IT’, good for realty

Taking a thumb rule of 100 sq ft of space for each employee in the IT sector that means it will drive demand for over 1,000 sq ft of housing space either in their city of work or back in the employees’ home town.

White collar jobs start at a salary of Rs 30,000-40,000 a month, Menda points out. An average IT employee considers buying a house after six-eight years of getting a job. This means an increase in demand for houses in the Rs 25-50 lakh range.

This is a feature that is unmatched in any other sector on such a scale. Definitely not possible in manufacturing sector in India where wages are not high in the blue-collar segment. They take over 15-20 years in a job before they can afford a house.

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