How some regulatory changes may increase cost of real estate for buyers
Sep 30, 2013
Source : The Economic Times


MUMBAI: In recent times, the real estate sector has seen several regulatory changes and more are in the works. While most of these changes are aimed at protecting buyers' interests, some of them carry a cost.

Here is a look at how they will affect your interests and your pocket.

New Land Acquisition Bill

The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Bill, 2012, was passed during the monsoon session of the Parliament. The basic goal of this legislation is to improve the compensation paid to landowners, whose land is taken over for industrialisation, infrastructure development and urbanisation. One key provision of the Bill is that the minimum payment to the landowner will be twice the market value in urban areas and four times in rural areas.

On the positive side, the major grievance of landowners—that they are paid a low compensation in lieu of their land—has been adequately addressed. Says Anuj Puri, chairman and country head, Jones Lang Lasalle India: "Litigation and related costs can be expected to decline."

Fears have been expressed that this legislation will raise the cost of land acquisition for developers and, hence, make real estate more expensive for the end-user. This is only partly true. The provisions of the Bill apply only if the developer is trying to acquire at least 50 acres of urban land or 100 acres of rural land. "Most residential, commercial and retail real estate projects are developed on smaller parcels of land," points out Sanjay Dutt, executive MD, South Asia, Cushman & Wakefield India. So, small acquisitions will be exempt from the provisions of this Bill.

A developer wanting to build a large township will, however, have to bear the brunt of the Bill's provisions. "The enhanced compensation clause and the R&R (resettlement and rehabilitation) clause will have a direct cost implication," says Puri.

The way 'market value' has been defined could also lead to an incorrect assessment of the price of land. "Since the market value will be determined on the basis of registered sale deeds, where the price is significantly under-reported, the Bill adopts an arbitrary multiplier to inflate the value," says Sachin Sandhir, managing director of RICS India, a company that deals in professional qualification and setting of standards in the field of real estate. He adds that for the land market in India to function efficiently, the Bill should have adopted internationally recognised valuation standards.

The Bill also requires that a private acquirer must get the consent of 80% of landowners. Getting the consent of such a large majority is always difficult. "The consent clause has the potential to delay the start of projects," says Puri.

Both higher compensation and delay in acquisition are expected to have a cascading effect on project costs and could lead to higher prices being charged from buyers in large township projects.

Due to the high rate of migration from rural to urban areas, developing a large number of new townships has become imperative in India. This is the only way to relieve population pressure building up in cities. However, as Dutt of CWI says, "The new Bill will make the task of developing large cities more difficult."

Ban on international investment


In May, the US Federal Reserve chairman, Ben Bernanke, announced that it may begin tapering its quantitative easing programme soon. In anticipation of tighter liquidity conditions globally, foreign institutional investors (FIIs) withdrew money from the Indian debt and equity markets. As a result, the rupee depreciated against the dollar. In order to stem its fall, the RBI in August framed rules designed to preserve the country's foreign exchange reserves. Besides reducing the amount that Indians could remit abroad annually from $200,000 to $75,000, the central bank also imposed a ban on investment in international real estate.

Since the RBI raised the annual remittance limit to $200,000, high net worth individuals (HNIs) from India have been investing in real estate in Dubai, Singapore, Malaysia and London. The primary purpose of such investments is to have a house they can stay in during their foreign trips, or where their children can stay while studying abroad. Some HNIs also invest abroad because the rental return is a more wholesome 4-7% compared to the paltry 2-4% in India.

One fallout of the ban on international investing could be that HNIs turn to options within the country. The premium and luxury housing segments are expected to benefit. Cities like Hyderabad, specifically its IT pockets, could receive increased investment flow, according to a recent note from real estate consultancy, Jones Lang Lasalle India. With the political issue in Andhra Pradesh having been resolved, the city offers strong growth prospects and relatively low entry points. Bangalore, Chennai and Pune, which have seen sustained investments by NRIs, could also receive more money from HNIs. Thus, these cities could offer good returns.

However, not everyone agrees that the investments meant for foreign destinations will get diverted to the domestic market. Says Anuj Nagpal, managing director, investor services, DTZ India: "An investment in a foreign destination by an Indian HNI is driven largely by the aspiration to own property abroad. It is unlikely that such investments will be diverted to the Indian market."

The current ban on investing in real estate in a foreign country may prove to be a temporary measure. It could be revoked once the rupee stabilises and forex inflow into the country improves. "HNIs are likely to adopt a wait-and-watch approach," says Nagpal.


Ban on 80:20 schemes

This scheme, and its variant, the 75:25, had become very popular in recent times and contributed significantly to housing sales amid the ongoing slowdown. It involves a three-way agreement between the buyer, the developer, and the bank. The buyer pays 20-25% of the cost of the house upfront to the developer. The bank disburses the balance 75-80% of the cost to the developer. In return, the developer pays the interest cost on the loan till possession is given to the buyer.


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