Research : Housing revolution – A long march

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By AW Research

Decade of liberalisation of economy has finally started affecting lives of urban middle-class in terms of better availability of fast moving consumers durables including two and four-wheelers at affordable prices. At other level, telecom and road connectivity has made visible impact on infrastructure facilities. However, the most fundamental impact on middle-class is the pace of housing revolution and availability of affordable houses. Till 2000, Low Income Group (LIG) housing activity remained preview of various housing boards and other developmental authorities or boards. Mounting urban housing shortages and resultant proliferation of slums coupled with resource crunch of Government agencies to provide required finance created a situation calling for national housing agenda.

For the first time Ministry of Urban Affairs & Employment came out with ‘National Housing and Habitat Policy 1998’ with the aim of providing shelter to all by 2012, and declared housing for all as priority area. Housing has a high multiplier effect that passes on benefit to other sectors, having forward and backward linkages.

In terms of multiplier effect, it ranks fourth. It is estimated that a unit increase in housing should generated five times additional income.  Traditionally Indian real estate industry has been characterised pre-dominantly by need-based and end-user transactions, which is quite different from most of the international markets, where investment-related transactions constitute a significant chunk of the overall market activity. The absence of organised investment players and a structured market for the same has also been largely responsible for the lack of accelerated growth in the real estate industry. Last 5 to 10 years have however seen a significant change in the overall market and the overall growth.

The ‘Housing Revolution’ really commenced after presentation of Union Budget 2000-2001 with introduction of fiscal incentive in the form of a permissible deduction of interest outgo to the tune of Rs. 1,50,000/- from total income of individual. In addition, in budget of 1998-99, profit arising out of real estate housing business of developers on specified approved housing scheme is exempted fully subject to condition that the housing projects commenced on or before 1st October 1998 and completed by 31st March, 2001. Thereafter budget of 2000-2001 stipulated that, specified housing scheme is approved by local authorities on or before 31st March 2001, which was later on extended up to 31st March, 2005. It further stipulates that, (a) such undertaking has commenced or commences development and construction of the housing project on or after the 1st day of October, 1998, (b) the project is on the size of a plot of land which has a minimum area of one acre, (c) each of the residential units must not have a built-up area in excess of 1000 sq.ft. for Delhi and Mumbai towns or in its neighborhood of 25 kilometers. For other towns and villages, the maximum built-up area is of 1500 sq.ft.

Reserve bank of India (RBI) gave further impetus by declaring housing as priority sector lending for commercial banks at par with infrastructure, by its Circular No. IECD No. 22/03-27-50 dated 6th May 2002, prescribed lending to housing by fixing minimum ceiling of three percent of its incremental deposit.  This was in consonance with recommendation of ‘National Housing & Habitat Policy 1998’ of providing finance to housing.

At another level, scheduled Commercial banks were flush with funds in absence of demand from manufacturing sector. In retail housing loan they saw a great opportunity in making decent profit with hardly two percent non-performing assets. There are about 30 housing finance companies registered with National Housing Bank and there are more than 300 other players in this business.

Housing Finance behaves more like commodity business as major players have more or less attained high service levels and differentiation is difficult. Margins are typically low and volumes high. The added attraction in this business is that of enormous cross-selling opportunities available to companies with a good retail base.

Proof of housing revolution is evident from the fact that about 5 million people bought houses during 2002-2003 out of which 1.5 million were urban people. Rising income level and reduced interest rates have prompted young urban upwardly mobile couples to go for house buying. As a result, average age of house buyer has come down from 44 during earlier boom period to 30 at present. To these young people, home buying is not only creating a asset but a lifestyle. During earlier period, purchasing house was worth 12/20 times the annual income of a flat purchaser which has now come down to about 5/10 years. Affordability of price is the single most important factor in continuing housing revolution.

Real Estate experts say that satellite townships, next to metros, have gained from steep price fluctuation in the central business districts during the IT boom in mid-90s. Thereafter, it has been a constant tug of war during 1996-2000 period between property owners (who wanted consistent high rents) and tenants who wanted lower rents) and tenants who wanted lower rents in view of slump in the real estate market. As a result, satellite townships like Gurgaon and Noida near Delhi, Salt Lake in Kolkata, Thane, and Navi Mumbai on Mumbai outskirts are some of the hottest destinations for young upwardly mobile professionals as well as corporate houses who want to cut costs. In fact, according to a recent study undertaken by Cushman and Wakefield, a global real estate consultancy, prices are likely to remain stable in these townships as at the moment ‘supply outstrips demand’. Central Government has to take urgent steps, so that National Housing and Habitat Policy 1998 recommendation of National Shelter Fund to meet the requirement of low cost funds for housing needs of neglected poor is ensured. Needless to mention that boom in housing has ripple effect in other industries such as steel, cement, sanitary ware, fittings and fixtures, pipes, tiles, plywood, electrical fittings, wires, electric pumps, lifts and host of other industries with which it has backward linkages.

It also generates demand for interior designers and decorators, furniture, housing loan providers, washing machines and other home appliances with which it has forward linkages. For the healthy growth of the Real Estate Industry, an integrated approach to housing and its related activities that include institutional support to the industry, amendment in land laws, registration laws, rental laws, foreclosure norms and quality standards are necessary.

Land as a resource has always been a precious commodity and with the increase in population, it is fast depleting. All the State Governments have to recognise the fact that for healthy growth of Real Estate Industry, elaborate Ownership Flat Act on lines of Maharashtra Ownership Flat Act is required to be enacted and enforced. Building Industry also needs to be revamped and recognised on strict enforceable rules and regulations since the lives of thousands of people depend upon the quality of buildings constructed by it. Economy at present is passed through times when the Housing Industry is just beginning to take off. However, it still has uncertain financial and institutional structure and these need to be brought in line with international standards.

It is high time Government recognised ‘Real Estate Industry’ as separate economic activity for the purpose of computation of GDP by delinking it from Banking and other financial services with which it is clubbed at present. This would be in consonance with the practice followed in matured economy. It is only then the health of economy will be measured with housing activities and establish direct linkage. The government will have to play a more proactive role as a facilitator. Land is the safest and best investment in today’s time.

The Indian Housing and Real Estate Industry in modern sense come into being after Independence in 1947, when the Country was confronted with finding shelter for large number of refugees from West Punjab. Initially it was left to Government, through various Housing Board, to accommodate these displaced persons. However, after 1954 ‘Ownership Flats construction’ commenced its operation through private developers first in Bombay and spread to other towns in subsequent years. The Indian real estate market as such is still in its infancy and is unorganized, dominated by large number of small players and very few Corporate or large players having national presence. Year 1975 was a ‘Watershed Year’ for Real Estate Industry when Urban Land Ceiling and Regulation Act was brought with the sole purpose of providing houses to all, but in reality implementation of this Act by State has ensured that the noble purpose is not achieved, ultimately resulting in repeal of the Act by Centre. However, pursuant to repeal of the Act by Centre, only Delhi, Haryana, Punjab, U.P, M.P, Rajasthan, Karnataka, Gujarat and Tamil Nadu, have repealed the Act. The Census of India 2001 indicates that the number of cities/urban agglomerations with population exceeding one million has increased to 35 in the year 2001 as against 23 in 1991. The total population of 107.88 million in these million plus metropolitan cities constitutes 37.8% of country’s total urban population of 285.35’ million. Real Estate Industry’s operation at present is restricted to country’s urban areas and that too in big cities. It can be categorized into markets in metropolitan towns like Mumbai, Delhi, Bangalore, Chennai and Kolkata having population of upto 10 million or more and other cities like Pune, Ahmedabad, Surat, Hyderabad, Cochin, Trivandrum and Nagpur having population of 2 to 5 million.

The draft report of the Sub-Group under the Working Group on Urban Housing formed by Ministry of Urban Development and Poverty Alleviation published in October 2001 has projected investment requirement as follows:

The Indian real estate market as compared to the other more developed Asian and Western markets is characterized by smaller size of development and lower levels of good quality, space

Till a few years back, Indian real estate market was very much a sellers’ market dominated and driven by residential sector basically because of acute housing shortage. The market is virtually controlled by very small number of big players.

No figures are available with any organization as to how many players are operating in this field in absence of any registration system. Recently, West Bengal and Punjab have brought an Act to regulate the activity of Developers and are registering Real Estate Developer & Promoter. Many of the present day Developers have entered the business after the share market decline due to scams and property market picking up due to various reasons including the opening up of the economy. The major entrants have been mostly in the residential sector and very few in commercial sectors. There is a small organized sector i.e. organizations and companies, which have developed over a period of time; though their contribution appears to be substantial, but is negligible compared to total requirement….

Industry is not able to have access to funds from Banks or Financial Institutions as is evident from the fact that out of total Bank Credit of Rs. 88,027 crores 1988-89, expanded to Rs.2,10,939 crores in 1995, credit to Construction Sector increased marginally from Rs. 1,140 crores to Rs. 2,886 crores during the same period. This works out to 1.30%  in 1988-89 and 1.37% in 1995 respectively. The builders and developers’ requirements of funds can be grouped as under:

(a)       For Purchase and development of land.

(b)       For construction of the building.

(c)       For holding the stocks after construction.

Government of India to overcome housing shortage recently announced 100% Foreign Direct Investment (FDI) in Housing. Experience of Thailand, Indonesia and Philippines in this matter is not good and hence it is suggested that, Government should take foreign exchange risk instead of FDI. Due to exchange risk, repatriation of this in future would create avoidable problem, in view of depreciation Rupee qua Dollar.

Due to such financial constraints, Developers have to depend for their working capital requirements on investors or buyers. The developer would take 20% of flat price as deposit from the investor or buyer and then start work on the foundation; by the time he reached the first floor, he would take a further 10% from the investor or buyer and build a few more floors, and so on. This was possible because sales were high in value terms and thus capital requirements were low. Now at present only readymade flats are being sold necessitating huge investment with longer gestation period.

The builders and developers’ activities have some unique features in as much as the land is either in the name of the owner of the land who enters into a contract for development of property with Developer or the developer floats one or more companies to enter into agreement for purchase of land from small holders because of the State laws fixing a maximum limit on land holdings by any individual, firm or corporate entity. Therefore, Developer enters into series of agreement with various agencies, but ultimate purchase of land is not affected simply because of very high incidence of stamp duties in all States. Thus, there is multiple numbers of documents and ownership is ultimately transferred to a society or a condominium after development.

Flow of surplus money from stock market into real estate market as a form of investment, witnessed an investor-led boom during 1993-1996, resulting in prices reaching astronomical figures both in residential as well as commercial segments. Real Estate Developers flush with funds from investors went on property-buying spree without consideration of prices, location and other difficulties. This artificial boom could not sustain itself any longer and stagnation on price front set in by end-1995 and continued from 1996 onwards to be followed by price slump right up to 1999. Between 1996-1999, real estate demand reached its nadir; as a result prices fell by 40% to 60% from their peak level.

It is unlikely that the kind of speculative boom which was seen through 1993-1996 in cities like Mumbai, Bangalore, Pune, Surat and Delhi would be seen again in the near future. In fact, such speculative ‘boom periods’ are not healthy for the market.

The market in foreseeable future will not be as lucrative as the builders have seen in the years 1993-1996. Competition will be on the increase and the demand will depend on better designs, better quality of construction, timely delivery and better upkeep and maintenance of building and other added features. Many observers feel that, demand for fully finished homes is likely to be a reality very shortly. Developers of large projects will have to provide not only bare homes and office buildings, but complete living and working lifestyle with social infrastructure like schools, hospitals, clubs etc., so as to make these mini-townships self sufficient for their need.

There is no doubt that there is a huge requirement and backlog of housing and in commercial segment and other social infrastructure facilities in the country and more particularly, in the Metros, it would ensure the sustenance of demand for a long time. But the real estate prices are still not within affordable limits. Hence, developers have to offer affordable housing suitable to customers’ requirement and income levels. Developers with good brand equity and customer focus and having an efficient organization will always be able to enjoy reasonable profits.

Considering the recent trends, real estate markets in the future will witness increased innovations in retailing and entertainment sectors with emphasis on customization to meet large corporate’ requirements and an attempt to match international standards of development. Smaller cities at present are very much driven by needs of the residential segment, whereas major metros are seeing a lot of demand for commercial offices, integration of retail and entertainment facilities under one roof. However, it be stated that this demand is more for rental housing and not for ownership housing. As the Industry matures in the span of next 10 to 20 years, the necessity to start Realty Mutual Fund would become necessary.

Real Estate Industry to grow will have to provide affordable housing. For this, it has to take a leaf from the experience of automobile industry, which created huge demand by offering loans at attractive rate of interest of longer repayment duration to consumers. Similarly, Real Estate Industry by working in conjunction with National Housing Bank, Housing Finance Co. and other Financial Institutions will have to offer innovative packages with lower interest rate having longer repayment period.

Real Estate is not recognised as a industry in India and hence there is no formal statistics available nor any institutional finance is available for operations nor for development. The biggest problem of Indian real estate is funds. Because of no standardisation in real estate development process and transaction process, region wise, real estate practice differ.

No player can prove perpetual succession on a single balance sheet because of civil and criminal liabilities can be imposed even after project is completed. When Bandra Kurla Complex in Mumbai was developing, the authority invited bids to sale the plots in the business district with conditions like one single balance sheet must be in perpetual succession and a turnover of Rs500 crore in 2001-02. Unfortunately very few players could do it. The plots went to corporate who were having met these two main conditions.

How many dwelling units needed to house millions of homeless people? We don’t have stats because real estate is not an industry. People confuse between infrastructure and real estate. Housing millions is for sure but in what percentage between Urban centres and Rural centres? How much in which metro and what are migratory trends? Who will construct and what will be private sector role? All these questions remained unanswered till today. Every five year plan allocated a reduced percentage for housing and set target to house which never reflected in annual Union Budget.

In 2001, a mile stone Union Budget came where housing interest and principle were allowed as deduction from Income to be taxed. People instead of paying tax preferred to pay EMI enhance a spurt of real estate investment started all over the country. This shows how important housing finance is for real estate sector.

Another aspect of real estate funding was when capital market, which is formal market and well disciplined market married informal real estate market. Private equity and debt funds started pouring in. The liberalised regime of funding option for real estate started since 2001. Housing finance market also recorded a growth of 73% yoy basis as reported by National Housing bank.

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