Who makes affordable houses unaffordable?

Why should homes not be affordable? Who is to blame for the rise in home prices? Some would like us to believe that cement producers are the ones to be blamed because this commodity has seen a spurt in prices. But cement accounts for just around 10% of construction costs (excluding the cost of land).  Steel accounts for a higher 15%. Yet nobody looks at the speculative profits steel traders make. Moreover, unlike steel, cement companies have proved that they can compete very effectively against imports. This is possible only when the quality is good, and the prices competitive. True, cement prices went up by 10% last year, but steel prices went up by 20% while sand and brick by a whopping 300%. Cement industry spokespersons claim price increases to be much lower.

 

To understand what drives up the cost of housing, we called in a panel of experts comprising (in alphabetical order) PS Jayakumar, managing director, Value and Budget Housing Corporation Pvt Ltd; Reza Kabul, architect; VK Sharma, director & chief executive, LIC Housing Finance Ltd; Pranay Vakil, chairman, Knight Frank (India) Pvt Ltd; and Sandip Vimadalal, advocate & solicitor.

 

During the discussions, moderated by DNA’s RN Bhaskar, the main culprit turned out to be the government, not the suppliers to the construction industry.

 

Given below are edited excerpts from the proceedings:

 

DNA: We wanted to have this conversation for two reasons; first, because lately for the last one year the government has been talking about affordable housing a lot more stridently than ever before. 

The second reason was that in spite of these promises nothing seems to happen on the affordable housing front. So we thought that we could identify the reason why affordable housing has not taken off? We also wanted to know the impediments faced in making homes affordable. And, finally, we would like to know from you what you think should be done to ameliorate the situation.

Vimadalal: Housing is very expensive mainly for three reasons. The land cost in India and particularly in Mumbai, is very high. We need to go through the reasons why the land cost is very high.

Secondly, construction cost is also high. It’s not as high as compared to other parts in the world, but thzt is also because the quality of construction overseas is a lot better. Quality in Indi has been improving lately, but not to the level where the costs can be justified.

 

Third, is the cost and time involved in getting sanctions from the government, and the amount which the developer and the architect have to spend for speeding up the work.

Why land cost is very high? In Mumbai, the land cost is high, because the return on FSI [floor space index, a ratio which determines how much floor space you can have as a proportion of the land area] is low. If you look at Dubai, Hong Kong and other countries, FSI starts from 2 and goes up to 20 – in some countries it remains unrestricted. So FSI should be increased, so the cost of the flat or commercial areas can come down.

Then there are many restricted areas, land which is in possession of MHADA [Maharashtra Housing & Area Development Authority] or the BPT [Bombay Port Trust], that should be opened up in a proper way. SRA [Slum Rehabilitation Authority] schemes should be developed in a proper way whereby the benefit goes to the occupants, the government , to the land owners,  to the flat purchasers, and also to developers or builders.

Then there is the need for infrastructure connecting smaller cities like Pune and Nashik to Mumbai. This helps reduce travelling time allowing people to stay elsewhere and travel easily to Mumbai for work. That will cause demand to reduce in Mumbai, forcing the cost of housing to come down.

To further decongest Mumbai, there is a need to develop rural areas. This will allow some people to opt for staying in rural areas. 

Thus, while you can’t stop people coming from outside to Mumbai, if you develop other cities, some people may majke Mumbai a second choice for work, not their primary choice.

Infrastructure within cities also needs to be developed. So someone would prefer to stay in Borivali, and come to Fountain in South Mumbai to work. Today. The time and effort taken to travel between South Bombay and Suburbs is too much.

Then there is the construction cost factor. The government can reduce taxes and the restrictions on cement and steel. That will reduce construction costs.

And lastly, there is an interest cost for the time taken in getting all of the sanctions of the projects, which ultimately is passed on to flat or office purchasers. If that the procedures are shortened, then the cost will reduce, and ultimately it will bring the prices down.

 

DNA: Pranay, can we have your opening remarks?

Vakil:  Let’s first understand what we are talking about when we’re seeing affordable houses. I think what we’re referring to is low cost housing.

We’re not really referring to affordable housing because that’s a relative concept.

It could be very different for one person or the other. Somebody buying a Rs.5 crore flat, his income being Rs.1 crore, is still affordable, right. So, let’s talk about the low cost housing; and why it has not succeeded. And why is it that some of the developers in the recent past have sold just two, 5 or 10 flats in a project comprising 1,500 flats?

 

DNA Okay.

Vakil: I would like to divide the land into two parts. The physical land and the land which is represented by FSI and stuff like that. Because physically the land is there, you can’t increase it. You’re talking of Mumbai, your Peninsula, two kilometers either way, you hit the sea there is no more room for growth.

So, can we increase the FSI? Is it desirable? Will the infrastructure take it? All of those questions come up. And how much of chori [literally ‘theft’] should be allowed. How much of chori should not be allowed to the developers. That’s the FSI concept. 

 

But looking at the construction cost, I would again like to divide into two parts, the tangibles and the intangibles.

 

The tangible everybody knows — cement, steel, by how much it has gone up, 23% in one year. It has gone up and slightly come down also, but even then compared to last year, it’s higher. What has happened to sand? That has gone up.  I think there are some items which have gone up by as much as 300%, okay.

 

Now there are some people here on the panel who would like to focus on the tangible part, but I’d like to talk about the intangible cost.

Whether it’s the BMC [Bombay/Mumbai Municipal Corporation], or getting approvals, or whether the developer does it directly, or does it through architects or whatever it is, but there is that cost involved.

 

And that cost can be significant, which is pushing up your cost, the total cost.

The fact is that the developer is not running a charitable organization. When he sees a very uncertain future, he would try and build all kinds of factors into the price to counter that uncertainty, which he is facing because and has seen that happening to someone else right next to him. Maybe the land was declared as the forest land, you know, and you know, you end up paying Rs.7 a square feet extra. There are so many of these uncertainties. Uncertainties, which put question mark on whether the approval can come through or not. Uncertainties that result in delays.

Now if you are putting something under construction, and if something gets delayed by two years, do you know what is the cost implication of that? For the buyer, he is paying 25% more compared to what he had agreed to. Because by the time the delay kicks in, he has paid 80% of the price. Now with that 80% sitting in the developer’s bank account, for two years, even if you take simple interest, it comes to almost 25% increase in his cost. Now, when he came outto buy, he had a choice of buying a ready product or under construction product. But because he didn’t have the money, he went for under construction and then he found that the implicit cost went up by 25%.

Now these are the factors, which are very important to control, which are within the government ambit and control. And if handled correctly, you can without touching cement, steel or anything else, bring down the sale price by as much as 22 to 25%.

 

DNA: Brilliant. The core issue.

Vakil: The core issue of A) corruption; B) delays; C) lack of approvals, uncertainties involved, the new DC [development control] rules have ushered in many more uncertainties. There are around 3,000 proposals, which have gone for re-approvals, you know.

When you’re talking about some of these things, obviously, the developer is going to factor everything into his pricing and therefore the cost goes up by 20%, 25%. Okay. Now that’s costing. 

 

DNA: Jayakumar, you are into affordable homes. Your views.

Jayakumar: Let me tell you a bit about our background.

Well, we breathe and do only mass housing; we have stopped using the world ‘affordable’.

And our goal is to sell houses less than Rs.15 lakh. In fact, 80%, 90% of what we sell is less than Rs.15 lakh.

 

DNA: For how many square feet of premises?

Jayakumar: It would be typically, between 600- 700 square feet. Now having worked in this space, I would say that the problem has two components to it. One component is the business model itself. Historically, our business models have been based on the principle that land is a capital asset. And the slower you sell, the longer you hold, the higher is the valuation for the land.

 

And so inherently that model is contradictory to holding prices down. So, we have to think of land as a current asset, like steel or cement that is quickly disposed off. And that model brings you to the manufacturing models where you make 18-20% net margin and you make 25- 30% return on equity.

The second element, in our challenge, looking from a developer’s perspective, is that we have to go in for a fair amount of industrialization of construction to reduce cost. We have got to think in terms of standardization. We’ve got to think in terms vendor  development. And, more importantly, in terms of labor productivity which are very, very low in this country.

 

If you look at standardization, if you have — if you look at any model, there is a certain amount of standardization. Then with repetitiveness you have materials, various things coming down, lower;  labor productivity increases. 

 

But supposing you had tell me, design a house of 2 BHK, the smallest you can, but this house must comply with the regulation of eight or nine states. If I were to do such a house it would come to 950 to 1,000 square feet. In one place a window must be of some size, in one place the door must be of some size, in one place the kitchen must be of some size. And one, who tend to argue what is good for the people of Chennai, should be good for the people of Bombay and good for the people of Delhi.

 

But we have extremely complicated norms — even between Baroda and Halol you have different regimes of regulation. So that is fundamentally against the principle of standardization. It makes things difficult. It makes a repetitive model very difficult.

 

But coming down to costs, I think the biggest challenge we have faced is not sales.  Buying land, you know, is an emotional decision. Why would then somebody give away the land cheap, it will invoice negotiation, so its not something we can resolve in any manner. But , what we find most difficult as Mr.

Vakil was pointing out is approvals.

 

How does approval affect cost? It affects in a multiplicity of way. First and foremost, the expectation on return on capital itself has zoomed up. If I were to give money to you and you were to return it after 15 days, you would expect a certain return, but if I give money to you and say, you can give it whenever you want, I would expect a different return.

 

So the cost of capital has gone up. The cost of capital in terms of time has gone up. The various costs that we described in the approval process have gone up. Net-net my sense is that around 40% to 50% cost reduction is possible, if the approval processes are cheaper. 

 

DNA: 40% to 50%?

Jayakumar: Yes. I am talking about cost of building coming down by 35% to 40%. It’s much more.

And then when we look at the issues behind this approval, there are two areas where we face challenges. One is the NA conversion, the agricultural to non-agricultural. When something is zoned for planning development, why should there be a conversion between agriculture and non-agriculture?

In many states they are putting so many NOCs that must be obtained before getting the NA approval, that the timeline and the number of interaction sets keep increasing. So if anybody in the government feels outside the system of approval, they will immediately say, you should take one NOC from me. And then you stand in front of that guy and then you’re going to get the NOC.

 

The second challenge is the MoEF [ministry of environment and forests] approval process. I think it is a subject by itself. And the point is that it’s not very clear, how mass housing can be a polluting industry, that it should require MoEF approval.

 

And then prior to giving MoEF approval, most of the items, or almost all items in the MoEF are in any case approved or reviewed by various authorities — some by the Pollution Board, some by the Water Board, etc.  And yet at the MoEF meeting, it can come up with any question. No, I don’t like this green space. I want more. I don’t like this. I don’t trust you.

 

Now, you cannot work with a regime, where the rules will be laid across the table.

 

DNA: Yes.

Jayakumar: Often, the person who is making the rule has no authority to lay the rule as well. If you go to income tax, you go to SEBI, you go to any of these authorities, you can have a bad day and a bad treatment, but you have an appellate authority to whom you can appeal. What appellate authority do we have to appeal to?

 

So the clerk at the lowest level can hold anything you want. And I have seen instances where people have told me, “yeh road ko aise change kar dijiye” [change the road route like this]. He is not even a qualified architect to make such a comment. But if I don’t comply, I can wait. So there is a fair amount of arbitrariness and there are a number of administrative issues. I think some of the MoEFs do not even have a proper secretariat to send out the minutes in time.

 

So I think it has become an unnecessarily complicated process that building houses should be considered in the same way as coal mines or polluting industries and set to same standards and possibly the same questionnaire to fill up. I think that this has completely upset the whole process.

Today, I think the approval time for MoEF in Mumbai could be anything between 15 months to 24 months. How do you work in a regime like that? So I think the fundamental issue is there are two challenges we face.

 

One challenge is we as developers must do a lot of things that you were alluding do. In this I would put industrialization, supply site management, labor productivity as key drivers. I think we can do all of these things, but if the approvals don’t come, the work is going to get delayed. And the cost of approvals, both real and hidden, is going to be expensive. Somebody has to pay for it. 

 

DNA: Thank you. Reza, can we have your views?

Kabul: Affordable housing, like I’ve always said, is not the right term we should use. We should use essential housing. It’s basically what a person needs.

Today, I think to promote essential housing, the best way is to come up with satellite cities. The other thing is to -- when you have satellite cities -- have mass rapid transport like they have done overseas. If you go to Seoul and you want to go to Busan, the cities are far apart. But people travel for work up and down because of the train system that they put in place.  So I think the government should come up with something like a mass rapid transport which allow people to stay in satellite cities and work in the bigger cities.

 

DNA: Virtually creating dormitory cities.

Kabul: Absolutely. The other thing is to come up with a good rental housing scheme. It has ben talked about by the MMRDA [Mumbai Metropolitan Region Development Authority] , or  MHADA, but nothing has happened. So it is the government that is to be put to challenge or we have to take them to task. The people -- my developers -- have bought the land, and they have gone in for this rental scheme, but no approvals have come. They are waiting for two years and nothing has happened. So you can imagine how costs will shoot up. So without putting your proper guidelines in place you are going in, you are telling them to do something. It does not happen this way.

 

But rental housing is the right thing for Mumbai, whereby a person who has got no money can just pay a couple of months’ deposit and he can get an apartment on lease or rental, for a period of 10 years, 15 years, 20 years and he pays in installments every month. But that is no possible today, because if you want to buy an apartment in Mumbai, in Borivali or Dahisar — which is the furthermost point — nothing comes for less than Rs.10,000 a sq ft.

 

DNA: Yes.

Kabul: So an apartment of, nobody makes a one-bedroom flat because the cost for a one-bedroom, for a developer, is more than that for a two-bedroom place [on a per sq ft basis]. So everybody opts for a two-bedroom flat. So a two-bedroom which is 800, 900 or 1000 square feet, comes to about Rs. 1 crore. How does a common man pay for that?

 

So we need to have these rental housing schemes to bring down the cost. This is for Mumbai. The other thing that has come up is the fungible [FSI]  cost and the premiums that have been introduced by the new municipal commissioner. I don’t disagree that it’s a bad thing; it’s a very good thing because everything is getting streamlined. But the cost of premiums and the cost of fungible is going to again hike up the prices for the flats.

 

Then the other thing is that today if we try and do any kind of mechanical construction, that too is not possible, because the approvals don’t come in that quickly. I mean, today we do a plinth; we have to wait, till we get an approval to go further.

 

Again we go to 10 floors, we have to get another approval. So there is an approval required stage-wise. They should come up with something better, more efficient. If they do not have the infrastructure to keep a check on the developers, it’s not the developers’ fault.  There are so many good developers who are abiding by the laws and follow the rules. Why should they be penalized on account of some [errant] builders? The BMC or the Corporation or the Government Authority should have their own infrastructure to keep an eye on the developer; they are required to be policemen, controlling crime, without stopping routine life.

 

DNA: Yes.

Kabul: The other thing we should have is a single window clearance to the whole thing. Today, from 9 to 6, whenever we are working, there are days we don’t go to our office. Why? Because we are sitting outside the BMC. For what? Because we have to get clearances.

When you go to an MoEF meeting, they are busy. The whole day passes by. You don’t get an appointment. They have called you on that particular day, but you don’t get to go inside.

 

So why should we have all these things. Put down rules with distinct guidelines. Why should there be committees?

This 70 meter high-rise committee that is there, why should it be there for 70 metres. Where did they get the figure from?  Why 70 metres? Why not 100 metres? Why not 50 metres?

 

DNA: Sharma, you are at the Apex of one of the major financers for this sector. What are your observation?

Sharma: The advantage of talking last is that most of the things have already been talked about. I agree with them. I think that this term “affordable housing” has become a political phrase – it  has no meaning or it has a meaning which is different for everybody.

It should be properly defined. For instance, if you say that you are targeting lower middle class, first decide how many years’ income should he invest in a home.

 

A person 35 years or 40 years, he is serving somewhere. He is wage earner. How many years of his income he should invest in a house? And that will be perhaps the parameter to determine whether the home is affordable or unaffordable. If a person decides to invest 30 years of his income in house with only 10 years, or 5 years of his service left, then something is wrong.

 

Because again the low income, middle income, or high income it is relative to time. Today I am buying a house 1 BHK or 2 BHK. Tomorrow it becomes a part of low income tenement. It gets classified as a low cost house. So as far as a finance person, I see that there is no clarity on this area. We are only we are talking. There should be more serious effort.

 

The last integrated city developed in this country was Chandigarh. Thereafter nobody has talked about integrated city development. Another attempt was perhaps Lavasa — maybe for a different segment — but it went into its set of problems. Otherwise there is no integrated city development. Unless this is done in a proper manner it is not going to solve India’s housing problem. 

 

DNA: I see.

Sharma: Town planning was done by Lokhandwala. You can consider it as a low cost house. At that point of time, when the surroundings were not developed, each flat costing Rs.10 lakh was given to a weak group of people, because they were sold at a subsidized price of Rs.6 lakh. Other [non-subsidised] houses were priced at Rs. 10 lakh. So that kind of clarity is not there today.

I am a finance company if anything happens or if anybody asks me question, I tell that my regulator is NHB [National Housing Bank], you go and talk to NHB. A banker says I don’t know anything, you go and talk to the RBI [Reserve Bank of India], I am guided by the RBI. A mutual fund says that you go and talk to SEBI. But where does a real estate man can go and complain?

 

DNA: Now there is a new regulator coming in. The bill is lying with the President.

Sharma: Hopefully. Hopefully. Hopefully. Provided the real estate person is provided all the options.

The second major aspect to sector is the cost of capital. Cost of capital is high in this country. Housing finance companies are not allowed to go in for ECB [External Commercial Borrowings]. So they cannot have  acces to such funds. The government has forgotten that one of the biggest housing finance companies in India was set up with the support of ECB. But thereafter? This is on the developer side. Even on the retail side, a person who wants to buy a flat and he has to pay 12% or 15%. The rate of interest is very high, and affects the affordability of houses.

 

DNA:  Yes.

Sharma: Add to this another two years which are taken for approvals – the cost will shoot up further. Take what we call “rough calculation”. If a builder is prudent, and if his total cost is Rs.25, then he has to start with Rs.100. I will tell you why. This Rs.25 he has to borrow. Nowadays, builders have also become smart, they don’t invest their money, they will try to get as much capital from the market as possible.

His total project is of five years. If this project takes five years then for five years he will have to pay interest. If he has taken 25 crore, then by the time he has to pay, he has to pay Rs.50. Now you visualize that the project gets delayed and it goes beyond five years. He has to keep another Rs.25, and he has to keep another Rs.25 for himself. That is why the total cost comes to Rs.100.   It is a very simple calculation, if he does not adhere to it, he is doomed.

 

DNA: I see.

Sharma: If he does it, then the cost burden has already been passed on to the customer.

 

DNA: Interesting.

Sharma: This is the financial part of it.

But it does not mean that government is doing nothing. Something is being done here and there. Like there is a kind of a subsidy or support by NHB for low cost housing. We are distributors of those subsidies. We know, it’s a great help in its own way. It is small, but it’s a great help. There -- there are a four, five schemes.

Another facility provided by the government which has been great help is the income tax rebate. It has been one of the drivers of growth for middle-class housing. 

 

DNA: Yes.

Sharma: The fact is that land cost has gone up very, very high. Whether it is artificial, whether it is natural, I do not know. But even in Tier 2, Tier 3 cities during the last five years, the cost has gone four times. Go to small, small places and you don’t have land. If a builder is purchasing and then build it, the government is not doing anything to help him. Some key development has to take place. Rural Development has to be done. And so must infrastructure relating to transportation work begin.

But there has to be some method to identify and provide land -- it need not be agricultural land. A city can be developed in a place which is barren today.

This must be the government’s job.

 

DNA: There are two questions that I would like to put to you:

Does it make sense for a government to go after cement companies — through the competiton commission — and not remedy its own house, or rein in other players like sand or steel suppliers?The second query is: how does one remedy these issues you have raised?

Vakil: Let’s assume that you’re running a hotel and you want to buy a tourist taxi. Are you aware that you get a huge excise duty rebate when you’re buying even a Mercedes Benz or BMW to ferry people to the airport as a tourist taxi?  You get about 20, 25% off.

But if you are building a house for the poor, do you get any discount at all, in anything, whether it’s cement, steel, anything at all, not even the interest. Excepting a subvention facility which is very, very minor, there is nothing else that’s available to you for the basics of roti, kapda or makaan [food, clothing and shelter]. It’s available for a five star hotel, but it’s not available for affordable housing. Why? Because we developers don’t have a lobby. We are not able to put across our case effectively.

 

DNA: Excellent.

Vakil: We don’t have an industry or infrastructure status to do this. That is hurting us. Moreover, it looks like we are not hurt enough for the government to sit up and take notice and make those concessions, the way they are doing for fertilizers.

 

Sharma: If housing is treated as infrastructure, it will make a lot of change.

 

Jayakumar: There are many people in the government want to do something and the Ministry of Housing and Urban Poverty Alleviation for example is leading that effort. But there is no alignment in the government. So one department may want to do something, but does everybody in the government consider this in that way? The answer is no. There is zero alignment.

For example, take financing. The Finance Minister did announce that he will provide the ECB benefit for the housing. But where is the follow-up policy on that?

 

Sharma: The RBI withdraws the circular after a week or two weeks.

 

Jayakumar: Take another example – FDI [foreign direct investment]. Everyone knows that if you reduce the cost of financing, you reduce the cost of housing. But in the FDI policy there is a minimum requirement of 500,000 square foot for construction. But in many areas where we do affordable housing -- because in the city it’s not possible at all given the land cost – we would like to develop less square feet, but at several different points, so that customers can live there. So, we need to reduce the absolute amount of money available for FDI. At the moment, 500,000 square feet, 18 months’ waiting time with MoEF, doesn’t make any sense.

 

Then take the case of the NA conversion. You know the number of NOCs that one has to get is quite unbelievable and the guy who introduces the NOC introduces it for many reasons, other than necessarily for public good.

So there is a absence of alignment. 

 

So the MoEF has its own agenda and has its own committee, its own interest. Somebody else has his own interest as well. It is the alignment of interests that is missing. You can have single agency, but if the single agency means you got 23 NOCs before and then submit it to the single NOC agency as they have in some place a single window. It effectively means multiple windows.

 

It’s like this, you know. If you take a look at a Toyota company, you try and find out how many hours the factory is working. If you look at us as a Toyota company, it’s a factory where for the first 12 – first 18 months we’re waiting for approvals. The next six months we construct and build, and the next six months we’re waiting for occupation certificate. Thus, the factory is working for just 20% of the total time duration.

 

Water, electricity meter, you name it; you wait for three months. So when you take all of these things together, you’re running a Toyota plant and you realize - hey, by the way, you know what, in an hour you can only work for 10 minutes. Then where is the ability to produce cars at a lower cost. There is no justification for this. Unless you have an alignment of interests and unless policies are made with the alignment of interest, nothing will happen.

 

Vimadalal: In short there is no consistency, or alignment, in any or all the government departments. Every policy changes with the change of the government or with the change of the Chief Minister in the same government, or change of the Municipal Commissioner in the same government.

Today, you will start a project keeping this policy in mind. A new Chief Minister assumes charge;  he appoints a new Municipal Commissioner. Both change policies in their own way. So where do we go? 

 

There are two costs. One is on the flat purchaser, who has already paid his money. So he is losing interest on the amount invested. And on the other side is the developer, who has sold his product for a fixed price, but his cost is going up day-by-day because of delays. So both the parties are suffering losses because there is no consistency and alignment in government policies.

 

Vakil: Well, I am going to stop criticizing government. And try to see how do we find solutions?

And I have a four point agenda.

 

One is connectivity. With the focus shifting to infrastructure instead of real estate, you will provide that connectivity which is badly needed. Talking of Mumbai, you develop the Trans Harbour bridge and you will open up an area three times the size of Mumbai. Mumbai is 438 square kilometers. The new hinterland [around Panvel] is 1,200 square kilometers, mostly unoccupied. So you are not affecting many people. In 20 minutes, you can get there – much faster than you can get to Bhuleshwar from here [Parel].

 

The second, like Reza said, is rental housing, which is very important. Not everybody who is staying in the city wants to buy a place. There is at least a third of the population that only wants to rent. And you go anywhere else in the world. Now that kind of a model has to come and that will come if the funding and the mutual funds are allowed to kind of raise money for this particular purpose, which are called REITs. And if REITs are allowed, you will get the funding for rental housing.  Have a different kind of FSI. 

 

The third is technology. It is now possible to import technology by which we’re able to reduce cost. There is a shuttering technology, for example, for repetitive design, which you can use, right? And that can bring down your cost by at least Rs.200 per square foot.

There are number of technological changes by which when the curing of cement which take a month can now be done in seven days.

 

Jayakumar: We do it two days.

 

Vakil: Fourthly interest. Did you know that we have seen highest volumes of transaction when the interest rate had gone down to 7.5% and 8%. We have not seen such volumes. Why? Because the interest rate was affordable. Interest costs should not exceed 50% of your take-home pay, to make it affordable. 

 

DNA: In contruction of houses, what percentage of cost would each of the components account for?

Vakil: Excluding land?

 

DNA: Yes.

Jayakumar: Cement and steel might go up to a third of the total value, about 35% of construction cost. .

Labor is about 30%. This is without including the cost of delays, because for that we would have to include the cost of land. We have to pay for the land, and any delay causes our interest to go up. On an average, delays cause costs to go up by 65% of the cost of land, or 35-40% of the project cost. 

 

DNA: To conclude: What is your wishlist?

Kabul: The answer is single window.

 

Jayakumar: In the short-term, we should be very focused, and would say that the need is to keep a time limit to getting approvals.

It will allow for increase in supply, lower cost and economies.

 

Sharma: Once a decision is taken that in principle this building is approved then thereafter there should be minimum disruption in work.

You know that a developer is constructing a building having 50 floors. After 25 floors, his building is stopped for two months. Only two months. His cost has gone up by 15% straight away. In a Rs100 crore project, this delay can kill you.

There should be an automatic system — that within 15 days decisions must be taken.

 

Vakil: Deemed approval.

 

Sharma:  Deemed approval. That will reduce the total time taken and it will bring down costs considerably – by as much as 30%.

 

Kabul: Just take the example of Debai. There was no construction in Dubai. It started only about eight years ago. The authorities started work, did all the infrastructure. They built, over-built actually, and that brought the cost down today. Today you can buy an apartment in Dubai --- or a villa -- cheaper than in Borivali in Mumbai.

 

DNA: Have a swankier, better connected, villa.

Kabul: And how did they achieve all this? Because of single window clearance. We used to go to the Dubai Municipality. We used to give a set of drawings which had the structural drawings, the architectural drawings, the MEP drawings, everything was there, we used to give it to them and we used to do nothing beyond that.

 

We used to get the answer on the mail. We used to get the answers on the mail.

 

DNA: You didn’t have to wait anywhere?

Kabul:  No. If there was a query, they would give us an appointment; we would go to the office and clear the query. Otherwise the approval was done. And we would not even get the drawing back even after being the architect. The developer would not get it. Only the contractor would get it. So, you had to employ the contractor if you were getting an approval to go and receive the drawings. They were so much ahead of time that you had to finalize the contractor as well before the clearances..

So, that’s how you can move ahead. Not like Bombay. Here my clients have got 33(9) projects [refers to cluster redevelopment]. Till today the 33(9) scheme is not cleared. The government itself is in a yes, no, yes, no state. The client has bought all the plots. It has to be a minimum of one acre. And they have bought it in the City of Mumbai. They’ve bought all the buildings. They’ve moved the tenants outside. 

Firstly, they have paid for the land. Then they pay for the rents of the people who have been accommodated elsewhere till the new buildings come up. Now they have gone to get the MoEF clearance. And the clients are paying crores of rupees as rent every month. And this has been going on for two years. So single window is the only answer to all these things.

 

Jayakumar: Look at what’s happened to Dharavi.

 

Vakil:  That is a sad story. 19 people have run away from the project. Why? Because the government just couldn’t decide on what do it wanted to do on that plot; 618 acres of land.

 

Jayakumar: [to Kabul, with a smile] If I may ask you two questions: given your experience on both sides, would you say that the people you’ve been with in Dubai are professional people, who know what they are doing?

And would you say that we do not have equivalent professional people on the [Indian] government side approving projects?

 

Kabul:  Take the example of MoEF. We’ve got one MoEF committee for the whole of Maharashtra. And how many projects do we have in this state, which have residential, industrial, everything. And the committee members are supposed to be experts on everything.

 

Jayakumar: So one of the things you have as we do not have a class of people who you could probably consider as experts.

 

Vakil: I would not even go to Dubai, go to Gujarat and see how approvals are done.

And the other extreme is Chennai where you don’t get approvals at all.

 

Sharma (laughing) Chennai has a different story.

 

Jayakumar: One other thing I just want to mention to you. If you look at the approval process, it’s basically a legacy system we are suffering from. The British came they set up collectors. Then we setup urban bodies and said urban bodies will approve, but we did not remove the collector.

Now it’s kept on going. Now look at the 72nd Amendment Panchayat, now Panchayat has to approve it. So after you get all the approvals you go to a group of people called Panchayat in very urban area and they approve. They have no, honestly, any technical competence to approve anything. What do you think would be the nature of the discourse with the Panchayat?

 

So we have accumulated approval authorities. In our building in Bangalore, we have to take approvals from BSNL.  NOCs. People are now in a cellular ageand don’t know what is the market share of BSNL in relation to the rest of the people. We’ve to take approvals from the Minor Irrigation Department because there is a small stretch and we have to put a little bit of bridge over it. We have to take the groundwater approval from the Central government after it has been approved by the State government for any digging of a borewell. The number of approvals is quite enormous, and when you go for an OC, you again go through the same path. We have three people approving for electricity in Karnataka; the Karnataka State Electricity Board, the Karnataka

 

Transforming Board and there is one more Board that is there.

 

So we are all making a big deal about this supreme regulator coming. If 339 people who were approving our project are not going to ensure compliance, then what is the 340th fellow going to do? So our problem is that the legacy issue of multiplicity of authorities -- one more added, one more added -- because our system of bureaucracy gives anybody a right to co-opt themselves in the approval process. So I can decide tomorrow I must approve, I must also approve, come to me for NOC. 

 

So the question is why BSNL, Airport Authority, Minor Irrigation Department?

So you have a legacy system and you have a system where anybody in the government system can co-opt himself through the approval process and therefore decide that you have to take an approval from him. And there is no certainty. You get a project. You are about to reach the finishing line when you have to get one more NOC from somebody else. You now wait for three months, four months. So I think, it’s a very serious issue.

 

Vakil: And you are building all of this into you pricing.

 

Kabul: In New Bombay the lands have been allotted on Palm Beach Road by the government through CIDCO. The buildings have been completed up to 20 storeys. Today, they have announced an airport in Panvel. So all of them have to go and take an approval from the civil aviation. Why should they go? The land has been given by CIDCO. They have to now -- suddenly they have got up and they’ve said that the creek is close-by so you have to get a CRZ and NOC. The building is of 20 floors, you gave the approval it’s your fault. You gave the land. 

 

Vakil:  And when you give the land, there is a stipulation that if you don’t develop within three years, all hell will break loose on you. It’s not just recovery of the land. Now, on the one hand if you are saying that you complete construction, on the other hand you are saying you don’t proceed with the work. I mean, this is exactly the situation also in BKC [Bandra Kurla Complex].

 

Vakil:  In BKC all those plots got allotted by MMRDA and that time it was BMRDA.

Then suddenly somebody realized there is river going through it, all right. So 200 meters from the river you can’t develop. Unfortunately, so many plots were already allotted.

 

So they went back saying ‘give us our money back’ and MMRDA said it had no money. Now, so therefore some of them got some other plots in exchange for what they have actually vacated. Some of this thing – on the one hand you just signed an agreement saying you will develop in three years. Very next day you get a letter saying don’t touch this land. This is CRZ [coastal regulatory zone].

 

DNA: So effectively to sum-up the biggest cost is approvals, the delays, the absence of a single window. So instead of blaming other people – like cement manufacturers -- for escalation in prices, you focus on what can be done immediately. Would that be a fair?

Jayakumar: Absolutely, we got a backlog of MOEF files. Clear them in the next 30 days.

 

Kabul: I have been told now they have come up with the second committee for Mumbai alone, but I don’t think it’s in place yet.

 

Jayakumar: No, I think you are dealing with an issue which is real, which is that we have a serious and significant cost escalation on account of delayed approvals and the uncertainties in the approval process is driving up the cost of capital and driving capital away. These are the issues. You can not ignore that.

 

Vakil: One issue we must talk about is that of ECB that was raised in the the last budget. The government permitted ECB for affordable housing. That intent of the government is not been translated into a notification or a circular.

Jayakumar: But I think that we should also focus on rental housing, It is a very important component.

There are two things that are immediately required for rental housing to take place. One is a legal framework to allow for rental housing to be safe. In Karnataka State, for example, there is a very progressive regulation, which says, any house that will be constructed for the next 15 years will not be subject to tenancy laws. Therefore you can actually rent it out and be sure that the property will come back. Some states do not have that provision [without which rental housing becomes difficult].

 

The second challenge in the rental housing business is the absence of a financial market mechanism to support rental housing. Supposing, I as a company, decide to opt for rental housing. My cost of capital in terms of interest cost is higher than the rental income I will get.

So you need to have a method by which capital financing, whether it is REIT or housing finance company’s holding, real estate asset, or insurance companies investigating in equity -- you need to broaden the scope of investors. But currently, there isn’t a good transmission mechanism.

 

Kabul: In Mumbai, the rule that Maharashtra has come up with along with MMRDA is that it will give you an incentive FSI. So the developer takes a plot of land and opts for rental housing. He goes to the MMRDA, builds three units for himself and one for rental housing, which he hands over to MMRDA which in turn rents it out.

 

Jayakumar:  But that supply is going to be very limited.

 

Vakil: Coming back to the rental housing that we talked about and why has it not taken off, I attribute it to only two reasons. First, that our legal system is such that if somebody doesn’t get out of the flat that he is occupying, it can take you years to get him out.

 

Now for the fear of not getting the flat back has resulted in many idle flats. Even in the island city of Mumbai there are 28,000 flats, which are locked up, not given out on rent. Why? Because the owner, who might be an NRI or whatever, fears that he may not get the flat back. So legal system has to be reviewed.

Secondly, for the cost to come down, you know, and for your returns to look viable, your FSI has to be higher. Because if you are getting a 4-5% yield, you can’t justify a 14% interest cost.

 

This can be offset with a higher FSI. So these two things will bring the rental housing into vogue.

 

Vimadalal: I agree. We need to have strong legal systems to make sure that we get back our flat after the rent period is over. Like in Dubai if you are not getting the flat back in time, you don’t need to go to court of law. Just go to the police station and show him the copy of the agreement and police will come and request that person to leave their flat or police will give him 24 hours, or 48 hours to vacate, else the police will throw the occupants out. We should have a similar system in Mumbai and for all other cities.

 

Second, the rental scheme will become popular only if the cost of the flat or the office goes down. Because first, the investor will take the flat and rent it out. Today any investor as per the practice will look for return of 6% to 7% on his investment. And if you count 6% to 7% on investment, the rent becomes very high and unaffordable. So it can work out only if it is reasonable. For this real estate costs must climb down.