Real Estate Development –
Engine for Economic Growth
By V Suresh*
It is necessary that real estate development in the country takes place in a very healthy and efficient manner. The boom in the market in the early nineties led to mushrooming fly-by-night developers who were driven by the motives of profit-maximisation with little commitment to the trade. The hideous nature of their operations left an irreparable dent in the market, which has been perceptible in the period of recession. The slump in real estate market that started in the mid nineties growth in the genuine real state development in the encouraging. There is a major growth in the genuine real estate development in the economy, and any amount of property developed in the range of Rs 5 lakhs to Rs 20 lakhs is being increasingly sold out in the market. Where the projects are not selling easily is in the segment of luxury housing and properties developed with costs of Rs 50 lakhs to Rs 1 crore which have been developed as a speculative investment opportunity akin to investments in the share market, gold etc.
Many real estate players all over the country have already adopted a business process re-engineering and have done commendable work by offering products with substantial demand such as customized housing, office complexes, shopping complexes/malls, multiplex/ theatre complexes etc. A few of the developers have also tapped rental market to a limited extent by marketing the built space as serviced apartments or commercial assets on lease. Large corporates are mulling the prospects of investments in commercial properties for lease revenue. The recent acquisition of built space already under lease in cities such as Bangalore, Hyderabad and Pune on account of the lower risk and assured revenue from lease-rentals.
There exists a huge demand for housing and infrastructure in the Indian scene. With Indian population crossing 1027 million as per census 2001, over 200 million houses are needed for achieving the goal of ‘Housing for All’, and we need to build nearly 30 million houses both in urban and rural areas. The real estate has a catalytic role in fulfilling the demand for housing for the various socio-economic classes. Equally important is need to provide the back up infrastructure covering utility services such as water supply, sewerage, drainage, roads and transport requirements as well as social infrastructure like schools, health and recreation facilities, commercial infrastructure like markets/malls, office complexes, technology parks etc. The cumulative effect of these demands places the onus on the real estate and construction sector, which providing an excellent opportunity for conferring social benefits, could act as a major vehicle for kick-starting the economy.
On the account of the substantial thrust on the housing sector evident in the consecutive housing savvy annual budgets of the country, the investments into the housing have picked up in major way. The volume of housing finance by the HFIs recognized by NHB has clearly shown a growth in the last few years, as reflected by the disbursements increasing from around Rs 5768 crores in 1997-98 to Rs 12,637 crores in 2000-2001 and further to Rs. 14,805 crores in 2001-02. Given the positive trend in institutional credit offtake and increasing contributions by the banks, the disbursements are expected to have crossed Rs. 17,000 crores in the year 2001-2002.
The production of cement and finished steel in the country have also registered a spurt in the last five years on account of the increased thrust on housing and construction activity.
Production of Cement and Finished Steel in India
(in million tonnes)
Finished Steel Cement
1991-92 14.33 50.61
1992-93 15.20 50.72
1993-94 15.20 57.96
1994-95 17.82 62.35
1995-96 21.40 69.30
1996-97 22.72 69.60
1997-98 23.37 76.23
1998-99 23.82 81.18
1999-00 26.71 94.21
2000-01 29.26 93.52
2001-02 31.06 102.40
The real estate development sector encompassing the housing and construction activity has a substantial potential to kick-start the economy on account of the significant backward and forward linkages with crucial and critical sectors of the economy including over 280 associated industries. Construction is one of the largest employment generators and accounts for a significant proportion of the GDP. The study by IIM Ahmedabad based on empirical evidence has established that unit increase in experience in expenditure in construction sector creates in the economy income of nearly 5 times as much as that generated in the construction sector alone on account of the direct, indirect and indeed impacts. The employment generated on account of unit increase in expenditure is 8 times that of the employment generated in the construction sector alone.
A series of fiscal incentives made available in terms of income tax exemption on interest payment up to a specified limit, providing 5 year tax holiday under Section 80-IA for specified housing and infrastructure activities, permitting a larger depreciation of 20 to 40 per cent in respect of corporate sector contributions in housing, increasing the banking sector contribution from 1.5% per cent to 3% per cent have also helped to bring about a thrust on the housing and real estate sector. Housing and Real Estate had been emerging as one of the potential investment avenues consequent to the increased tax benefits and fall in interest rates of borrowing as against the diminishing returns and tax benefits from conventional savings instruments. However, the report by Shri Vijay Kelkar for rationalization of tax structure has sought to withdraw or curtail many of the tax benefits to individuals for availing housing finance. This may in turn increase the cost of finance and may be detrimental to the interests of investors in housing and real estate sector. It is felt that the off-take of housing and real estate development should be given a further boost, as witnessed in the last four years, rather than take retrograde steps that would hamper the pace of growth.
The Urban Reform Incentive Fund proposed in the Budget-2002 aims at providing incentives to the States to facilitate the reform agenda covering rationalization of legislative framework and increased commercialization, encompassing easing of land availability, rationalization of stamp duties, revision of municipal bye-laws, simplification of procedural frameworks for conversion of agricultural land, levy of realistic user charges and resource mobilization by municipal bodies as well as for public private partnerships in civic infrastructure. Many legislative measures like repeal of the Urban Land Ceiling and Regulation Act and also the formulation of the Model Rent Control Act have met with partial success, as each of the States need to ratify/amend the provisions for creating a favorable environment for increased housing and construction activity. It is necessary for all the States to follow up the repeal of the Urban Land Ceiling and Regulation Act. Further the reduction in the high stamp duty from the prevalent 13 to 26 per cent to 3 to 5 per cent in line with the growing demand from the industry, will bring more vibrancy in the housing activity. West Bengal Government has shown the way in the rationalization of stamp duties, which is also essential for the development of secondary mortgage market based on securitization of assets. The apparent loss that the Government may incur due to reduction in the stamp duty would well be recouped through the increased revenues from Excise duty, Sales tax, construction tax, property tax accrual and other related revenue flows.
Equally important has been the initiative taken by the Government of India to bring out a legislation for registering and regulating the activities of the builders, real estate developers and promoters. This would help to weed out fly-by-night operators in real estate sector and help to associate only the well established and good developers in the field. The proposed Engineers Bill on the anvil is bound to insist upon the association of qualified and certified professionals in planning, designing and construction of the buildings, thus improving the level of accountability, quality control and safety.
The absence of a regulator to put real estate development on a healthy track had been haunting the sector for long. National Real Estate Development Council (NAREDCO) was set up to improve the confidence level of investors and consumers in the real estate sector by bringing forth practices through self regulation, catalyzing the growth of the sector. NAREDCO has initiated a chain of measures to improve transparency in the real estate transactions and dealings. The code of Ethics of NAREDCO gives a comprehensive list of clauses, every member is bound to adhere to, ensuring transparency of operations. NAREDCO is in the process of setting up a network of State level REDCOs for increasing its coverage and efficiency of operations. It also aims at a National Institute for Real Estate Development (NIRED) for training and human resource development in the sector. The most important step in enhancing the comfort level of consumers is the development of a rating system in association with ICRA/CRISIL for making prudent investment decisions in real estate ventures.
NAREDCO in association with CRISIL and ICRA, has recently brought out the NAREDO-CRISIL and NAREDCO-ICRA real estate ‘developer rating’ as well ‘project rating’. The major elements involved in such an assessment for rating are the project risk analysis and the developer risk analysis. These are meant to assess and rank the developers based on their track record of overall performance through out the country and specific projects to be undertaken. The institutions financing regime on the need for such report so that funds are put only in well-conceived projects and being implemented by recognized developers. It is necessary that the rating be made mandatory by the local bodies. The prospective buyers should also demand for the rating to be reflected in the advertisement to be brought out by the developers/promoters. It is heartening that the scheme is becoming popular and over 15 developers have come forward.
The needs of back-up infrastructure for housing and real estate development also require to be addressed carefully. We do find large number of examples both in private and public sector and cooperative sectors where housing and real estate projects lack the much needed amenities and infrastructure like water supply, drainage, roads, and transport connectivity etc. The opening up of Urban Infrastructure lending by institutions such as HUDCO/IDFC/LIC/ILFC/ICICI have contributed significantly in the development of utility, social and economic or commercial infrastructure in urban areas across the country.
It is essential to ensure large-scale partnership efforts through involvement of all stakeholders including public, private, community and co-operative sectors in real estate and infrastructure development. The new BOT Act of the Government of Gujarat, the Infrastructure Development Enabling Act (IDEA) in pipe-line in Andhra Pradesh and the proposed initiative of Punjab for enabling the infrastructure development through publci private partnership are positive measures in this regard.
With the major thrust on economic liberalization, large number of players are expected to enter the real estate and construction arena, not only from within the country but also from abroad. Global competitiveness along with the ‘search for excellence’ in quality of service would bring in the need for capacity building efforts in the real estate industry. Training and capacity building would be required for the various actors of the real estate sector. The premier education and management institutions, training institutes in the sector, research and development institutions, training institutes in the sector, research and development bodies, and the developers’ associations in association with professional bodies could join hands to provide the necessary inputs to the various stakeholders.
The local bodies and development authorities need to initiate steps to simplify their procedures and expedite sanctioning of new development projects. This would entail greater delegation of authority and implementation of information systems for file processing with strict time-frames and check-lists for sanction compliance. The proposed City Challenge Fund would help meet the transitional costs towards making the urban local bodies stronger and credit worthy institutional systems for municipal management and services delivery and provide resources for financial management, computerisation etc.
There is need for empowering the Chartered Licensed Architects and Engineers also fixing accountability for processing of building permissions upto a certain extent. Provisions for Transfer of Development Rights (TDR) and floating FSIs (for spaces provided as non-statutory open spaces) need to be considered by the local bodies for incorporation in the Building Byelaws and Development Control Regulations. There is also a need for a performance zoning approach by allowing a balanced mix of compatible land uses.
It is essential to increase the pace of rental housing activity in the country mainly in the urban areas. The initiative by some of the developers to enter the fray of rental housing although in view of the recession in the sector needs to be encouraged. The developers could be provided fiscal incentives and concessional credit towards construction for the purpose of leasing out. This along with the legislative backing through the Model Rent Control Act could ensure optimal utilization of vacant houses and considerably reduce housing shortage in urban areas. Further the developers could enter into joint ventures with the corporate sector for the provision of ownership or rental housing for the employees. The demand for specialized campuses through IT Habitat for the information technology professionals and housing for multinational companies also could effectively be tapped by the real estate sector. There is need for diversification into Special economic zones, convention centres, multiplexes, software or biotechnology parks, industrial estates etc. as new opportunities for real estate development.
There is a need for joint initiatives with the housing co-operatives for assessment, retrofitting and repair of existing structures. This has become imperative in view of the dilapidation of structures and the vulnerability to disasters of a large proportion of construction in urban areas. The benefit of depreciation for the investments in this sector could be shared by the developers and the owners, thus facilitating better quality and maintenance of the assets.
While India Habitat Centre in New Delhi is being lauded as a successful and self-sustainable model of creating a rare ambience by selectively mixing work with entertainment and business promotion, it is proposed to extend the concept to the State level with the establishment of Regional Habitat Centres in the capital cities. The real estate developers would have a major role in development of these Habitat centres with spaces for institutional offices, business, recreation, entertainment and hospitality along with state-of-the-art infrastructure and shared facilities for conferences, expositions, library and information dissemination.