Impact of land acquisition bill on the real estate scenario in India
The provisions of the Bill will be applicable in cases of land acquisition of 50 acres in urban areas or 100 acres in rural areas
Aug 31, 2013
Source : The Economic Times

 

DELHI: The LARR Bill is expected to majorly affect the development of large infrastructure development projects, industrial projects, integrated township projects and if they are brought under the ambit of this law.

While the populist objective is to ensure people losing land should be adequately compensated, the obverse that this will help the acquirers of the land to be more assured of the acquisition process and there by rule out problems of unwarranted claims and issues of inadequate compensations. The provisions of the Bill will be applicable in cases of land acquisition of 50 acres in urban areas or 100 acres in rural areas.

The compensation for land acquisition will now at least double in urban areas and will go up by 4 times in rural areas, according to the new LARR guidelines. Thus, the cost of land acquisition will surely go up for all projects irrespective of them being government or private or public-private-partnership (PPP) projects as they will have to adhere to the new norms. Further, the clause of mandatory consent of 80% of owners for private projects and consent of 70% landowners for PPP projects will delay the process of land acquisition and the projects in turn.

As land titles are not clearly documented in our country, it will take quite some time to change the current situation.

The bill is expected to add to the cost of a project substantially as the expected time taken for acquisition of land thereby delaying the entire process. Apart from the existing requirement of going through the regular the legal and regulatory process which usually adds up to the time and cost factor of any major large scale project.

Impact on infrastructure & urbanization

Infrastructure projects are the ones that will receive the sharpest blow. In many instances, this rise in input costs is likely to yield the projects unviable. As it is, the infrastructure projects are under pressure, especially those in the rural areas as it is difficult to monetize them; so the private sector is not interested in them.

The growth of India is largely dependent on the infrastructure development which the government cannot take up single handedly and co-operation of private sector becomes necessary. The consent clause will delay the start of the project; further making the required returns from the project difficult to achieve. Thus if India's growth story is to continue then a user development fee will have to be charged and the price of utilities like electricity, water etc. will have to go up to rake in the revenues.

All in all, this is a laudable reform by the government for providing equitable sharing of profits while also moving a step closer to laissez faire kind of environment.

The high rate of migration and natural growth rate of our population in urban areas highlight the need for building new cities as existing ones are overburdened. Satellite towns depend on the parent city for their work and employment requirements, while the need of the hour is to build self-sustaining urban centres.

With the LARR Bill developing cities on a large scale would be difficult due to the requirements of getting consent from 80% of project affected people, arranging for their rehabilitation and resettlement (R&R), as well as paying a premium price for land shooting up the overall budget to very high levels.

Higher cost of land acquisition & overall real estate cost

For the real estate industry too, the addition of R&R component will be a big financial burden due to which the LARR Bill has received flak from them. Post the Bill, the cost of land acquisition will increase across the board and the real estate developers intend to pass on this increase in input cost to the buyers.

So certain sections of the industry feel that an increase in property prices will ensue the LARR; thus negatively affecting the ordinary buyers. Considering the present scale of projects, most of the residential, commercial and retail real estate projects occupy an area of land smaller than the stipulated parcel size. Many big private real estate players have bought the land at market prices and with 100% consent of the landowners.

However, their input costs will rise as a result of the increase in compensation and minimize the profit margin. Since the developers will want to preserve their profits, we will see more joint development projects happening, wherein the profits as well as the resources and the risks will be shared. Already in many Tier-1 cities, joint development is route followed by developers, so this practice will now spread all over.

Looking at the current scenario, the Bill should exempt open market transactions from its aegis to avoid the decline in investments and undue rise in the price of land for private purposes, thereby adversely affecting economic growth.

The newly revised Land Acquisition Bill is beneficial to land owners. The scope of minimum required approval has been increased to 80% of the affected families. This consent is mandatory only for private enterprises.

Secondly, the Government's role in land acquisition has been curtailed as far as private enterprises are concerned. These enterprises can now enter into their own negotiations and arrive at the price to be set for acquisition.

Thirdly, different techniques for arriving at the compensation to be paid have been provided. With the intention of providing land owners with compensation which is closer to the existing market rates, the Bill now stipulates that local circle rates will now need to be doubled and further multiplied by a factor of two when it comes to land parcels in rural areas. This means that that the acquisition price for land in rural areas will effectively be four times that of the local circle rates. In urban areas, the circle rates will need to be doubled in order to arrive at the acquisition price.

The new Bill also requires a Social Impact Assessment (SIA) study to be carried out. This study will have to outline how the acquiring parties intend to use the land, and how the original inhabitants or owners will be rehabilitated. The Act now also puts very definite timelines on project completion and entire land utilization.

For developers, the cost of land is going to increase significantly, impacting their project costs and therefore margins. Land valuations are already high and by further increasing them, land acquisition becomes even more difficult. Anyone without an existing land bank will now be looking at vastly increased entry costs.

In the past, land acquisition by the Government for public purpose has led to a lot of heart-burns and controversies and in some cases, riots. The most contentious issue was the compensation to be paid to the owners of the land.

To address this, the Government has passed 'The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Bill, 2012' on Aug 29, 2013. The Bill tries to address the root cause of the opposition to land acquisition, the discontent among the public seen in recent years, by multiplying the compensation several fold and making the dispossessed a beneficiary in economic development. The bill proposes compensation of four times the market value in rural areas and two times the market value in urban areas.

The higher compensation is certainly welcome; however there could also be issues relating to the use of market value in determining the compensation, as the officially reported transacted prices tend to be a fraction of the prevailing prices. The Bill also stipulates mandatory consent of at least 70% of the landowners for acquiring land for Public Private Partnership (PPP) projects and 80% for acquiring land for private companies for public purpose. If this is merely done on the basis of the number of land owners and not on the total area of the land to be acquired, a large number of marginal land owners could hold a project to ransom.

The new Bill is expected to bring in more transparency to the whole system. In a bid to balance fair compensation to land owners and economic development of the nation, the Bill walks a tightrope trying to satisfy both objectives and succeeding to some extent. While an enhanced compensation package ensures that the land owners get their due, the same would make a project financially unviable."

 

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