Download Housing – Engine of Economic Growth

Housing – Engine of Economic Growth
By Suvir Ahuja, Managing Director, Gesco Corporation Ltd.
Real Potential in Housing Sector
The housing industry is important because it directly addresses one of the basic
needs of society – shelter. Improvements in productivity and output in the
housing sector, i.e., lower prices and wider availability of affordable housing will
therefore have a direct impact on the economy of the country.
 For every one crore of investment in the housing sector, we can generate 750 man years
of employment.
 A unit increase in the fiscal expenditure on construction can generate five times the
additional income and eight times direct employment than the income and employment
generated in the construction sector alone.
 The construction sector provides significant stimulus for other sectors to grow and is
intimately linked to the country's economy. There are approx. 250 industries directly or
indirectly allied to this one sector alone.
 Construction is the fourth most important sector amongst 14 others (electricity, gas, water
supply, forestry, transport etc.) in terms of 'backward linkages' and third in terms of the
'total linkage coefficient'.
 The stimulus for the economy will come from higher off-take of inputs for construction,
particularly cement and steel, as part of the backward linkage. The forward linkage is
with the things that people need to put in their new homes, such as furniture, consumer
durables, furnishings, and so on, demand for which also gets a fillip.
 A 10 percent increase in this sector can generate Rs 62,000 crores in national output,
besides employment for 29,57,000 workers in various sectors i.e., a 2.5 per cent increase
in total employment.
 Shortage in Housing - The demand-supply gap in housing stands at 33 million units,
calling for an investment of Rs. 1,50,000 crore. There is an urgent need for 15 million
homes in urban centers, and the rest is in rural India. Another Rs. 2,50,000 crore is
needed to provide the infrastructure. If the money is available, it could become a strong
driving force for the Indian Economy.
The above facts clearly reflect the potential in the housing sector, and also on the country's
GDP and employment.
The property market in India….
…. A transformation in recent years.
The Real Estate Scenario
 The boom in the market in the early nineties led to mushrooming fly-by-night
developers who were driven by the motive 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 has since bottomed out
and the present trends are encouraging.
 Property Exhibitions have assumed importance in real estate selling.
Today, Property exhibitions are without doubt the best place to buy. All the best
properties are available under one roof to compare, the best deals on them to consider
and the best home loan option to finance it. Plus, advice on any legal and technical
matters that need consideration is available at the spot.
Today’s Developer
 The builder community has become more professional, ensuring better quality and
timely delivery.

There is an increased emphasis on quality and cost control. Documentation methods
of project details are more rigorous and more meaningful.
 Today, builders are offering a range of value added services and sops to lure the enduser.
Shift in Focus
TRANSACTION FOCUS
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Short-term market share mindset
Lower emphasis on customer service
Lower commitment to meeting
customer expectations (fixed product)
Product quality is the concern of
production staff
CUSTOMER RELATION FOCUS
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Long-term market creation mindset
Higher emphasis on customer service
Higher commitment to meeting customer
expectations (customized product)
Product quality is the concern across the
Change in the Customer Profile
YESTERDAY’s Customer
TODAY’ s Customer
Average age of those buying flats was in
the late forties.
The average age is in the twenties
due to the easy availability of loans.
Either ‘naïve’ or ‘King’
‘Well Informed’ and decisive Protective of his/her rights
Role of women confined to household
Chores
Young women have begun making
individual decisions about purchasing
properties on their own.
Cautious or even a negative outlook
Open and a positive outlook on taking a
loan – feels it enforces a sense of
financial discipline.
Question normally asked – ‘Bhav kya hai’
Pre-prepared Questionnaires with queries
ranging from location to amenities, legal
clearances to approved plans and
knowledge about similar other projects.
Would buy what the developer wants
To sell
Wants ‘Money’s worth’ or ‘Right Value
for Money’.
Demand during specific months.
Steady demand across the year.
From the above, it is evident that all the segments of the housing industry have undergone a
transformation over the years – the market, the developer and the consumer.
These changes will definitely improve the overall growth and health of the market.
Government Initiatives
The Government is taking a lot of steps to boost the Housing Sector
 Registration of Leave & License Agreements
The Government has made registration of all documents mandatory, including leave and
license agreements. However, there is some respite to both, the Licensor and the Licensee
with the Government finally reducing the Stamp Duty for the Leave & License
Agreements. This will encourage longer lease agreements.
 Budget 2002-03
 Infrastructure Equity Fund is being set up with a Corpus of Rs. 1000 Crs – IDFC to
manage the fund – Contributions to the fund to be made by public sector insurance
companies, financial institutions, banks etc
 The requirement of obtaining 37 I clearance from the Income tax Dept for purchase /
sale of properties has been dispensed with for all such transactions undertaken on or
after 1st July 2002.
 Deduction for Interest on housing loans for self occupied houses will be allowed in
respect of houses acquired / constructed after 31st March 2003 if such acquisition /
construction is competed within 3 years from the end of the financial year in which
the housing loan is taken.
 Credit Policy
 The credit policy announced by the Reserve Bank of India (RBI) is expected to restore
confidence in an otherwise dull marketplace. The inclusion of features like the reduction of
risk weightage on housing loans against residential property, the liberalization of prudential
requirements for housing finance by banks and the encouragement of investment by banks in
the securitised debt instruments of HFCs (Housing Finance Companies) will all pave the way
for better credit flows to the housing sector.
 The limit for individual loans by HFCs has been raised from Rs 3 lakhs to Rs 5 lakhs. Loans
given by HFCs will qualify for refinance from banks at a lower interest rate. The removal of
the discount (of 1.5 per cent) on the Prime Lending Rate (PLR) to the housing sector will
ensure a market-driven rate structure. By spreading the risk, banks/HFCs will be able to
increase their home loan customer base, all leading to boosting the market. People, who
would have otherwise postponed their decision to purchase a property, would now do so.
 Home Shopping made easier
 The interest on Housing Finance has been lowered and there is a possibility of them sliding
further down in the near future. A rate war is triggered off between the Banks/Financial
Institutions.
 Falling interest rates have led to a marginal pick up in the property investments market. Also,
the Housing Finance Companies are witnessing healthy growth as the low interest rates have
attracted many of the salaried class to invest in residential property.
 According to the information furnished by National Housing Bank, the total housing finance
disbursed by commercial banks and housing finance companies has increased from Rs.
19,723 Crore in ’99-’00 to Rs. 29,600 crore in ’01-’02, and is expected to touch Rs. 37,000
Cr. In ’02-’03.
Areas of Concern and the Reforms needed in the Housing Sector
There are a few key reasons for the poor productivity performance of the sector. At
the same time, there are some legislative and administrative reforms needed, and
policies required to give real estate the much needed boost.
 Land Holdings - Issues
 There is a great paucity of land available for construction. There is a lack of clarity
over who holds the titles for the vast majority of the landholdings.
 Moreover, the lack of clear titles makes collateral-based financing very difficult, thus
reducing liquidity both in the primary and the secondary markets and further reducing
activity and competition in the market.
 The real estate developers also confront numerous hurdles in land acquisition,
registration, development and construction.
 At every stage, the state and municipal laws are very cumbersome and complicated,
making it difficult for transaction to happen.
 Land Holdings - Solutions
The following steps are highlighted to achieve this.
 First, the state government needs to set up specialised courts to handle all land title
disputes.
 Second, it must simplify and modernise the current registration system for land titles.
 Third, it should rescind the Urban Land Ceiling Act and,
 Finally, it should lower the stamp duty. In order to solve the unclear ownership rights
on land titles, the government must expedite all the existing land dispute cases
 Lack of Building Standards - Issues
 There is also a distinct lack of standards as far as building materials are concerned
coupled with ineffective enforcement of the few standards that do exists.
 Maintaining and enforcing material standards would facilitate the dissemination of
best practices and create greater transparency in the housing market thereby allowing
consumers to compare prices.
 It would also make it more difficult for contractors to profit by sourcing cheap and
sub-standard materials and compel them to focus on earning their profits by lowering
labour costs.
 Lack of Building Standards – Solutions
 The Central Government should lead the initiative to introduce modern standards for
construction materials and ensure the enforcement of these standards.
 To facilitate widespread disbursement, the government, via the National Housing
Bank, should link public funding for housing to the adoption of these new standards.
 Finally, it should introduce consumer protection laws and establish special courts to
safeguard buyers against the use of sub-standard materials.
 Lack of Private Sector Participation - Issues
 There is a lack of infrastructural development in city suburbs (such as water and
sewerage systems). As a result, housing and real estate projects lack the much needed
infrastructure like water supply, drainage, roads, and transport connectivity.
 User charges in India are mostly subsidized and not related to the real cost of
providing infrastructure services.
 Water and sewerage services are typically government owned and pricing decisions
are often taken on political rather than economic grounds.
 There is a great need of development of utility, social and economic or commercial
infrastructure in urban areas across the country.
 One cannot expect a foreign investor to invest in India when we do not have proper
roads, power and water supply.
 Encourage Private Sector Participation - Solution
 Privatise water, sewerage and the electricity services that are still under the
Government’s control.
 User charges ought to be levied on the basis of the economic cost of providing these
services, as the users are willing to pay for good and timely services. There needs to
be an established framework on fixing water charges.
 Equally important is the 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.
 Stamp Duty - Issues
 Stamp duty is exorbitantly high and need to be drastically brought down and
rationalised. Stamp duty in most Indian cities ranges between 10-15%, States such as
West Bengal, Kerala and Bihar levied as high as 20%. Some states even have a
double stamp incidence, first on land and then on its development.
 Markets across Singapore and Europe levy a maximum of 1-2% as compared to the
above. Even the National Housing and Habitat Policy 1998, recommends a stamp
duty of 2-3%.
 Stamp duty - Solutions
 State governments should follow uniform rates of stamp duty of 2% in order not only
to encourage housing construction but also increase their revenue by maximum
recovery. This move would also minimise tax evasion and reducing the costs
associated with registering titles.
 The revenue loss that the Government may incur due to the reduction of 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.
 Besides, it will also bring down the practice of undervaluation of property. It will
encourage people to buy properrtyt in their own names instead of via the general
power of attorney.
 FDI in Real estate - Issues
Present Conditions for FDI
 The minimum area to be developed by a Company will have to be 100 acres.
 The minimum capitalisation norm will be $ 10 million for a wholly owned subsidiary
and a $ 5 million for joint ventures with Indian partners.
 A minimum lock-in period of 3 years from completion shall apply before repatriation
of original investment is permitted.
 A minimum of the 50% of the integrated project development must be completed
within a period of 5 years from the date of possession of the land.
 The Company must be registered as an Indian Company under the Companies Act,
1956 and will be allowed to take up land aggregation and development.
 FIPB under the Ministry or Urban Development & Poverty Alleviation will process
all FDI cases and set guidelines for the Companies.
 FDI in Real Estate - Solution
 FDI in housing and urban development should be allowed in order to meet the huge
shortage.
 Norms of 49% or 51% for ceiling can be set with automatic clearance facility by RBI
registration and no other bars.
 The existing limit of 100 acres for 100% FDI investment into integrated townships
projects is on the higher side and needs to be brought down considerably. The need
for allowing 100% FDI into other real estate projects like multiplex theatres, shopping
malls, etc. should also be considered.
 FDI policy should be transparent.
Allowing FDI has twin benefits :
One, it would bring in huge investment.
Two, it would also bring in much needed expertise.
 Rating of Developers
 Rating of developers would be a definite improvement in the highly unorganised real
estate Indian market. Barring a few large developers who adhere to building safety
norms and standards, majority of the small time real estate developers flout these
norms with impunity.
A step taken in this direction would definitely be welcomed.
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.
Conclusion
 All these areas of concern have inhibited the GDP growth by 2-4 per cent a year.
Removing them would free India’s economy to grow as fast as China’s, at 8-10 per cent.
 In fact, if all these issues were to be addressed and the economy were to grow at 10 per
cent a year, the sector would grow at 14 per cent a year and create over 3.2 million jobs
over the next 10 years.
 Housing Construction in India accounts for just 1 per cent of GDP and 1 per cent of
employment – yet the housing industry can really become a big growth driver for the
Indian economy. It can also be the second largest source of employment and revenuegeneration.
 Also, the country’s 38 per cent gross investment is in the areas of real estate and housing
construction.
 No doubt, several steps to create a facilitating environment have been put in place. And
yet, we are miles away from the target of `housing-for-all' mentioned in the National
Housing and Habitat Policy, 1998.