Different Truth serialises the issues and concerns of the realty sector in India in two parts. Here is the second and final part of the series; an analysis by Anirban.
In the first part we covered GPPP, and reverse auction, including forward contracts, and land pooling. Here we discuss proper legislation and land laws, affordable financing, and alternative concerns and issues.
Proper Legislation & Land Laws
Over 100 laws date back to the 19th century. Some of the archaic laws, including recent ones, are:
- Indian Contract Act, 1972: This Act specifies when a party can have the capacity to contract, among others, by an individual, partners of a firm, a corporate body, a trust a sole corporation, the manager of an undivided family and a foreigner.
- Transfer of Property Act, 1882: This Act has provisions for dealing with property through sale, exchange, mortgage, lease, lien and gift.
- Registration Act, 1908: This Act is the conservation of evidence, assurances, title, publication of documents, and prevention of frauds.
- Special Relief Act, 1963: This Act is to enforce individual civil rights. A persondisposed of individual property without its consent can recover possession through suit, within six months of the date of disposition.
- Urban Land Act, 1976: This Act fixes the ceiling of the vacant land that a person in urban areas can acquire and hold. This ceiling ranges from 500-2000 square meters.
- Land Acquisition Act, 1894: This Act authorises government to acquire land for specific purposes, such as, planned development, provision for town or rural planning, provision for residential purpose to the poor, or carrying out any education, housing or health scheme of the government.
- The Indian Evidence Act, 1872: This Act enables the status of any person, as the owner of immovable property of which he has shown the possession.
- State Law: Rent Control Act: This Act applicable at the state level has come as a temporary measure to save the tenants from the landlords.
The path ahead has to address the archaic rules and regulations. These are:
- Revise the number of Acts and merge into one comprehensive law.
- The repeal of Urban Land (Ceiling and Regulation Act) by various states would release 2.2 lakhs hectares of urban land.
- The amendment of the Rent Control Act to remove the absolute authority of the rent controller over the disposition of the rented property.
- The amendment of the Indian Stamp Act or the Indian Registration Act, to delink the process of registration for removal of stamp-duty and removal of various NOCs.
- Rationalise the tax rates and duties from the present range of 13-26 per cent to the level of 3-5 per cent. Stamp duties must be the same across the states. Property tax can be linked to the capital value of the property than the rental value of the property. Entertainment tax may be reduced.
- The principles of law should apply to the sale of property that can potentially create cross-linkages between municipal authorities, electricity boards, taxation departments, land registries and collectors.
- A formal system for enabling private participation in the provision of municipal services for improving efficiency, and make them self-sustaining in the long run. Some of the land related reforms are:
- Simplify and modernise the current land reform system for land or property tiles.
- A time-bound program for auction of all the vacant land should be drawn up and implemented.
- Provide the GPPP mode of partnership based on the HUDA model.
- A controlled freedom to convert rural land for urban use.
- A regulatory commission for continuously viewing zoning regulations.
- A system of deemed approval for plans of development by authorised architects to speed up the process of securing approvals.
- Existing ceiling on agricultural land-holdings, especially for the lands on the periphery of the towns.
- Amendment to the Land Acquisition Act, and at the same time not challenging the needs of the various stakeholders.
Sometimes affordable financing becomes a major challenge for the infrastructure stakeholders. The credit flow is severely controlled or flows easily through the alternative channels. To allow funding in proper means, these steps may be taken:
- Allow the pension funds, provident funds, and insurance sector to invest in the real estate through bonds.
- Encourage the creation of real estate mutual funds.
- Promote trading in mortgage backed securities. The introduction of norms for closure, and administration of recovery tribunals is necessary.
- The stipulation that the FDI will only be allowed for a minimum township of 100 acres can be relaxed to 50 acres.
- The development of a grading system among real estate developers to keep a tight check on the control default rates among the developers.
- Linking interest rates to the buyer’s choice, rather than on the bank’s interest rates.
- Laws on closing deals for infrastructure projects.
- Reduction in taxes for the infrastructure projects.
- Threshold mark-up for the projects that are for sale.
- Inducing range and capacity co-relation for taking a macro-view of infrastructure.
- Reduction of stalled and improbable projects by alternative finance.
Here are some more details on the infrastructure finance:
Financing options are skewed in favor of personal loans against infrastructure financing. Only 5-7 per cent of the loans disbursed by these housing finance companies go to builders and institutional developers. The high default rates among the developers, dissuades housing finance companies from investing in the sector. Lack of code of conduct keeps the investors away. All the developers and builders approaching private source of finance at higher interest rates leads to higher real estate prices. To garner investment in this sector, the GoI may appropriate legal and legislative measures, and corporatisation of the real estate, besides maintaining the industry discipline. Developing a grading system will help the developers. It would facilitate the overall growth, by providing the developers with incentives, to conform to fair trade practices and legal requirements. A scientifically graded project, would lend itself to a more accurate and reliable estimation of the risks associated with the real estate project promoter. The developers can borrow from financial institutions on priority basis.
Real estate may have funding from mutual funds, pension funds, and insurance companies as well. LIC may route the amount to infrastructure development fund. The developers should get an access to long term funding, and so the GoI can consider long-term loans as well. The real estate fund monitored by SEBI and administered by the GoI, may open the floodgates of the real estate sector. This infrastructure fund can operate like a mutual fund, where investments of the individual investors are consolidated to invest in the real estate sector. High level of liquidity as well as professional advice for price discovery would be an added bonus. Also, the swing in the market in the range of 5-10 per cent is better than absorbing 60-90 per cent swing on the stock market.
Corporate bonds are another way of financing the infrastructure fund. It shall have the bond money raised from the leading private players, who would park the amount in bond to lower interest rates. Once the 5-20 year bond matures, the inflation adjusted tax-free bonds may be broken to adjust the amounts. Also, banks and housing finance companies do not have remedies to foreclose an account. The foreclosure law, which allows no penalty when the bond is closed prematurely, may be implemented.
Alternative Concerns and Issues
Till now, it has been a wait and watch system or a ‘cautiously optimistic system’ on the PPP model. Frankly speaking, apart from the usual tasks on risk analysis, project management, and revenue pattern sharing, there may be a structured model on the PPP, such that lock-in period gets dissolved if shareholding pattern is taken out. Either you receive the returns or become a share-holder, depending on a case-by-case basis analysis. So, a good way is to start is to pluck the lower-hanging fruits, or things with immediate returns in the PPP models. Sincerely speaking, if the system allows a seven per cent compound annual growth rate (CAGR) for two years, many players would be interested. Always, and always we have to remember that negotiations should help both of the parties, and a win-win effort to come true. There is no place for doubts, with lots of if-and-but in the system which can raise money alternately by issuing government bonds through FIIs, DIIs, unforeseen revenues, and the public system as a whole.
We may raise fund through the commoners, where everyone is a part of the system, and is wholly responsible for it? Let us take an example of a heritage park. People in the vicinity pay for publically issued government bonds. They are responsible for a small stake and as well as well as its cleanliness? Or a development of an airport near Navi Mumbai, maintained and established by a group of private players. Similar concept might be extended to the infrastructure bonds.
The request for the capital value based system of taxation, has created some advantages:
- It results in revenue buoyancy, which essentially means that the tax revenue may keep up pace with inflation and cost of living, as the capital value can be revised based on the market value of the residential properties
- The system is more transparent and simple
- The main objective reduces the element of discretion
- It provides an equitable assessment among the different property owners
An important issue in real estate development is that of title to the property. Especially in India, state does not allow a title to housing or land property. Currently, there are three legislations that affect property transactions involving transfer of ownership of proprietary interest. Titles to the land has become a requirement for the land title documents, to provide a greater security to tenure with those in occupation of land, to allow pace with the better demand of re-sell and re-financing, for better support of mortgaging and investment, and to make steady increase in the number of private and public users, who make general inquiries about land ownership.
A database may be created for land deeds, and also to comprise such records so as to create database. According to other Registration and Other Related Laws, Act 2001, it has been proposed that the compulsory registration of documents related to the performance of contracts concerning immovable property, in order to prevent loss or revenue of the states.
Many cities have created development agencies, and the cities have awarded the administration procedure of handling the urban land, within municipal jurisdiction to them, on the premise that the development authority would act on greater benefits of the public persons. However, care should be taken so that the authority does create a monopoly at this stage; probably a GPPP partnership would be of greater value, also another parallel identity to the development authority.
There is a huge potential for leveraging the large portfolios of underutilised real estate assets of various government agencies, coupled with policy initiatives that can value the non-performing assets. A GPPP mode in housing will provide a new mantra on the infrastructure authority. The government acquires the land. It is then developed by the private players to create integrated townships. The development of such integrated township would mean development of residential, commercial, corporate, institutional complexes, besides provisions of various infrastructure facilities.
The present ceiling of 15-25 acres per person on agricultural holdings come in the way of large scale real estate developments, especially with FDI norms. Hence, procuring 100 acres of land for development would produce delays against FDI norms. With the urban ceiling removed for private investors in GPPP mode, things would take a sharper turn. Also, the conversion of a rural land should be completely decontrolled and left to the market to decide the present value under suitable norms.
About FDI: It is allowed to develop integrated township only. It shall have the following advantages, owing to the exposure to certain norms and conditions:
- It shall provide necessary funds in this sector
- It shall bring professional players for the specific sector
- Introduction of new technology
- It shall lower infrastructure costs in the long run
- It shall generate employment and revenue
- It shall improve the quality of related infrastructure
Municipal laws, Zoning Rules, Approval Procedures, Consumer Protection, all these norms has to be looked into. Owing to this growth rate, the infrastructure industry would provide a greater percentage of GDP growth and share than expected.
Hence, we see that there are some avenues for the growth and change for the realty sector in India that would improvise the current system. Concepts like GPPP, land pooling, forward auctions, change of laws and affordable financing can change the entire landscape of the realty sector.
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Anirban Kar is a technology and business consultant, who has earned his education degree in two continents, the USA and from India. His work started from 2003 in TCS, and comprised
of various clients ranging across geographies. His area of interest is business modeling,
enterprise architecture and investment analysis.