New Delhi: Unorganised, unrecognised, and where half the transactions go unreported. The Indian real estate industry has more negative adjectives attached to it than any other industry. This high order of anarchy was the insignia of the real estate sector till a few years ago.
Not any more.
For the past few years, especially since the Urban Land (Ceiling and Regulation) Act was repealed, there has been a systematic focus on the industry. While the ULCRA Repeal Act cleared the air, structural changes in legislations ushered in a new spirit of reforms to the industry.
One such promulgation was the decision to allow 100-per cent foreign direct investment (FDI) in real estate. This addressed one of the fundamental reasons that kept the Indian realty bogged down all these years - paucity of fund flow into the sector. One would be prompted to think that the FDI guidelines would have sent global players scrambling for space in Indian real estate. But this is not really happening.
What has happened is just hype. As the initial euphoria wore off, so did the interest of potential investors. Cent per cent FDI for developing integrated township was announced in 2001 and revised guidelines were issued in January 2002. But, so far, just one project has been cleared - a joint venture between Feedback Ventures Pvt Ltd and OCL India Ltd in collaboration with Kontur Bintang Sdn Bhd, incorporated in Malaysia, and Tan Sir G Gangalingam, a Malaysian citizen. With an estimated cost of Rs 748 crore, this project will develop a residential township in Gurgaon.
FDI is expected to effect increased competition among the local developers, in terms of price, quality and timing. But industry experts feel that the FDI norms are far too stringent and the very idea has come a cropper.
"There is not much rush for FDI as expected," confirms Brig (Retd) R R Singh, executive director, National Real Estate Development Council (NAREDCO). This is because of the many 'restrictions' such as a minimum area of 100 acres, a minimum capitalisation of $10 million or $5 million, as the case may be, and a minimum lock-in period of three years.
But the major reason that is putting foreign players off is the condition on the minimum area to be developed. For a foreign player, finding 100 acres of land around Indian cities will be a Herculean task, as most land may have already been cornered by local developers.
Domestic players unanimously say that the minimum area to be developed should be reviewed. Kumar Gera, president, Confederation of Real Estate Developers of India (CREDAI), says this should be brought down to 20 acres. He also suggests that the number of dwelling units to be developed should be slashed from 2,000 to 500.
Cushman & Wakefield executive director Sanjay Verma is of opinion that more reforms are required for the industry to thrive. "Also, the norms have to be investor-friendly. An investor will invest only if profitable returns are foreseeable. The prevailing conditions are good enough to keep potential investors at bay because of bottlenecks such as unrealistic property taxes and stamp duty. Before soliciting foreign investment, at least these fundamental issues have to be settled. By now the government must have realised the pores in FDI norms."
Property transaction in India is extremely complicated, courtesy India's ubiquitous red-tapism. "The norms should be rationalised by introducing a single-window clearance policy," says Anshuman Magazine, managing director, South Asia, CB Richard Ellis. He also says that unless and until the transaction procedure is simplified, foreign investors will not be interested. "Reforms are the need of the hour."
Growth and stabilisation
The year 2002 was largely a mixed bag for the industry. While the first half of the year was affected because of fear of war, which resulted in many multinational corporations delaying their entry into India, things improved in the second half. Also, after the continuous recession since 1996, the industry started looking up.
"Till recently housing was seen as a luxury in India; it is only for the last four-to-five years that realisation has dawned upon the government that this sector needs serious attention," says Gera.
"The government at the centre and states have started talking to the industry players as they have realised that without public-private partnership, the growing demand of housing and infrastructure cannot be met," agrees Brig Singh.
Real estate is the only industry that records a growth of 30-35 per cent every year in terms of investment. This is evident from the fact that despite the worldwide recession, production of cement and steel, two most important core-sector industries, has actually increased. The income tax sops on housing loans have been one of the major contributing factors to boost the growth of the housing sector.
Boom times ahead
The action is in the housing sector. Year 2002 witnessed a steep increase in demand as a result of dwindling housing loan rate and increased purchasing power of the middle class. There was also an upsurge of housing financing companies (HFCs). As the government liberally doled out income-tax sops, more and more banks jumped on to the home-loan bandwagon.
The scene got hotter as the competition metamorphosed into a bitter war on interest rates. As HFCs tried to outdo each other, home loan rates hit rock bottom. In the melee, it was the consumer who emerged victorious. Interest rates that were as high as 17.5 per cent in 1995-96 plummeted to 8.75 per cent in 2002-03.
According to industry experts, home loan rates will come down even further. With more and more money at their disposal, banks and HFCs are under constant pressure to soften the interest rates further. An estimated Rs 40,000 crore has been released to the market for disbursement.
The drop in interest rates, stable real estate prices, and attractive tax savings provided by the government have together resulted in a high rate of growth for the housing segment. "However, the biggest reason for the rejuvenation of the housing sector is the abundant supply of cheap credit, thanks to a fall in interest rates," says Harsh Vardhan Roongta, CEO, Apnaloan.
Even as this is being written, interest rates are coming down. True, there is a slowdown in the overall market, but the housing sector presents a refreshing scenario. As demand and supply go up, there will be a lot of activity in the days to come.