‘Concessions to rental housing critical’

With the Union Budget just a few days away, DNA Money invited some realty sector stalwarts to understand what they wanted from the Union finance minister. Abhisheck Lodha, managing director of Lodha Developers, Pujit Aggarwal, managing director of Orbit Corporation, Mayur R Shah, managing director of Marathon Realty, and Pranay Vakil, chairman of Knight Frank India, participated in the interaction on Wednesday: Excerpts:

What would be the best budget for realtors this year?
Pranay Vakil: First up, the limit of Rs 1.5 lakh (tax waiver) on interest paid on home loans, and Rs 1 lakh for certain other expenses need to be reviewed. Essentially these need to be taken up to spur demand. There are two other very important things which we are pushing for. First is industry status for realtors. The government will not lose out by giving us industry status, but the access to funding that this gives will do a lot of good for developers and everybody in the game.

Second is concession on rental housing. Today yields in rental housing are so low (at about 5% or 6%) that nobody wants to invest in it. Moreover, the legal system is such that getting a flat back (from a tenant) can be a problem. Both these have to be addressed.

Would better rental norms help develop a Reit market in India?
Vakil: I think the two are inter-related. You either have Reit or Reit-like products — both will serve the purpose of organised rental housing. There is not a single developer creating rental housing in an organised fashion in India. See, every city has a 20-30% floating population, which doesn’t necessarily want to buy a flat. They are subjected to brokers who just give something, they don’t even know if the titles are clear; then they worry if they’ll get their deposits back. If you have rental housing backed by the government, it will make repossession possible. That is the need of the hour.

Pujit Aggarwal: A Reit-like structure will bring down rentals and there is also an automatic passthrough as far as taxes are concerned. We are asking that Reits be given mutual fund status so that they become more attractive and developers would create more for-rent properties. This structure has proved to be one of the biggest drivers of housing in Europe and America.

Mayur Shah: The Reit debate has been on for the last 5 years. There is a committee under (former HDFC honcho) Deepak Satvalekar that looked into the problems with Reits. The legal frameworks of both the state and the Centre needs to be streamlined. There are a lot of suggestions, but somebody has to take a call and come up with something, and then may be we can refine it.

Vakil: We had Reit guidelines ready two years back and we were asked to give our inputs. And, while in the process was on, mutual funds came and got approval without any discussion. So today you can have a real estate mutual fund but not a mutual fund Reit.
Shah: The problem is that we can push the issue but the decision has to be taken by the finance minister. If I do a rental business today, how do I exit from the market? The typical exit is a Reit, which buys flats from a developer. If the developer is given a tax break, he would be inclined to do rental housing. Reits also prove to be an excellent investment opportunity for commercial purposes.

Aggarwal: Today there is a mismatch between sales and demand. In the last one-and-a- half years, sales have stopped and so everyone stopped constructing. If a Reit system was created, a developer could have tied up with a Reit and completed his project so there would be more supply coming in and therefore there would be price stability. There is a lot of demand.

Vakil: Another confusion is on whether service tax is applicable on rental housing. The high court says it is not, but I can show you internal instructions of the tax department which say it is, and the department is actually telling its people to go and recover service tax despite the HC order. What we want is clarity and consistency. Every time you have uncertainty, prices go up. If evelopers can finish a project from start without hindrances you can even expect a reduction in prices.

But wouldn’t it be in your interest to keep the supply tight?
Shah: It is a myth that every developer would like to choke supply. We want to build more, may be at a lesser margin, but greater volumes. That’s the game every developer wants to play; so there is no truth in developers actually trying to choke supply.
Vakil: I think developers are more interested in churning their money. They want to invest, get out, re-invest, get out, and the faster they are able to do it, the better. Today you are paying a premium because because of uncertainties.

Shah: That should not be the case. Price increases because there is some stoppage in work because of some issue or uncertainty. Developers need to price that risk. We have been pushing very strongly for rental housing because in any city in the world, you can rent a home within 15 days. Can you do that in Mumbai? No, because nobody is creating stock. I think we must create ample stock if we want to double Mumbai’s population from 1.8 million to 3.3 million.

Aggarwal: What I would really like is a reclassification of FDI norms. They should be different for cities and metros. Whe the recession hit us, projects got stuck everywhere. If we reclassify FDI norms, a lot of these projects, especially in the metros, would achieve financial closure and there would be more capital coming in —- in the form of actual equity infusion, and not external commercial borrowings.

Vakil: The rule is that you must get a minimum of $10 million and keep it for 3 years. What happens if you get $50 million instead of 10? The government is saying whatever you bring you have to keep it for 3 years compulsorily. Now that’s an interpretation which none of us anticipated. So I think when Aggarwal talks about FDI it’s a major interpretational thing that if you get $10 million you keep it for 3 years, but if you get $20 million you keep $10 million for 3 years and the other $10 million you can take away.

Abhisheck Lodha: The government is very clear that it does not want hot money in any sector. So if we are to take the argument forward that only $10 million should be kept, you will have a situation where 3- and 6-month money comes in - that is something the authorities are apprehensive about.

What about affordable housing?
Shah: I think we really need to look at that. The government has been talking about it for some time now. We have some reports that say there is a shortage of 28 million houses. McKinsey & Co estimates India will need Rs 6 lakh crore to finance affordable housing. If we are looking at that kind of numbers, we really need huge funding to come into real estate. Where is it going to come from? Every time there is a little increase in credit offtake by realty, there is a big hue and cry; the RBI says realty exposure has risen by 30% or more. But what base levels are we talking about? When we really need this kind of money, debt funding will definitely rise. In any case, I don’t think banks can provide Rs 6 lakh crore  - their total outstanding loans is around Rs 28 lakh crore. So where is the money going to come from? FDI, ECB?

Does affordable housing give a good enough return for you to be interested big time?
Shah: Definitely, even after considering all costs.

What about foreign financiers? What are they waiting for?
Aggarwal: They are waiting for easier ECB norms. The existing norms prevent us from borrowing money from overseas.
If the gate is half-opened, will they rush in?

Aggarwal: Even if the gate is opened just for a toe to get in, there will be a gush of money. They are willing to finance provided the investments meet statutory norms.

What about Section 801B?
Lodha: A lot of us have abused the section. We have done 4,000 sq ft flats and showed it as 4 flats. We hit ourselves by doing such things. But where the cases were genuine, where you are really providing affordable housing, it has to be there because otherwise the IRRs aren’t there. Moreover, that is where the bulk of the population wants housing. When you look at Mumbai’s demographics, we have a shortfall of 200,000 units every year. And last year 18,000 homes were delivered. Out of the 2 lakh units, 130,000 is in the Rs 10-40 lakh segment and here there are not even 10,000 homes under construction. So you just see the supply-demand gap. The cement per sq feet that goes into construction of a Rs 20 lakh home is no different from that which goes into a Rs 10 crore home. But the multiplier effect is much more in the affordable segment because you are spending a much higher amount as construction cost compared with the sale value. So confidence about the continuation of Section 801B — and not making it a year-after-year extension thing —- is necessary. Clarity is very important.

Vakil: One of the major objectives of Section 80 IB is to give a tax holiday for affordable housing. That would take out the black money from the system.

How is that?
Vakil: Why does a developer take partly in cash and partly in cheque? If he takes cash, it is not disclosed to the government and therefore there is no tax on it. But when what you disclose is not subject to tax, why would you take cash?

Lodha: I would like to add that the implementation of 801B has been most shoddy.

Aggarwal: Pathetic.

Everything here seems to be boiling down to supply. What are three steps the Budget needs to take to increase supply of housing? To engender supply…

Lodha: One is greater clarity on regulations. Second is using the JNNURM funds in a productive fashion — don’t build the same road six times, please! Use the funds more productively to create supply and not just whitewash. In terms of infrastructure, it would mean identifying the growth nodes of cities — like in Mumbai, the ones in central, western and Navi Mumbai and then create mass infrastructure. That is the starting point of how Shanghai evolved or how global financial hubs have evolved. They create growth nodes and then they do everything for the nodes to be connected to the main city.

Shah: I think infrastructure development is critical: we need water, electricity, drainage systems and connectivity in the growth nodes across cities.

Vakil: We need to have a second look at floor space index (FSI). We need to increase supply selectively for affordable housing, selectively or slum redevelopment, things which are needed by the city like hospitals, schools and stuff like that. The second thing I want to emphasis is connectivity. If you want supply to reduce prices, then places have to be approachable. For example, in Mumbai, why are we dragging our feet on the Trans-Harbour Link? It can open up an area three times the size of Mumbai - it will be just the way life exists Long Island to Manhattan, in Singapore and in Hong Kong. The third thing is give tax breaks we talked about Section 801B. If you are able to give tax breaks to the user and the developer both, and to some extent to the guys who are funding it, there will be more supply and prices will come down.

Aggarwal: I am big believer in a vision map or a roadmap so we would like to see something coming out of the Budget specifically for housing where the government shows its absolute intention that yes we are looking at formal housing for a larger group of people. The government has to say here is how we are going to put up the infrastructure, here is how we are going to do this and how we are going to integrate everything. We need clarity in laws and execution.

How important are incentives to the townships? Are you looking for them in the budget?
Lodha: I think it is clear that a planned development is a concept we miss thoroughly in the country. Townships are built keeping in mind things like who is going to live there, and similarly support facilities. So in a country where the urban population was 300 million in 2009 and going to be 700 million by 2030, I think the creation of growth nodes is extremely important and when something is that important, you incentivise it. Townships are the most important and clear ways of doing this.

What about foreign funding for townships?
Lodha: Well, FDI is allowed in any development over 50,000 square metres so townships automatically come in that bracket as most are spread over 5 lakh sq ft area. The 801B tax breaks are available to most townships as they also tend to be smaller homes. ECB facility is allowed for 100-acre plus townships. So yes, some of the things are certainly in place. May be the ECB guidelines could be relaxed to bring smaller townships into the fold.

Why isn’t ECB gushing into township projects?
Lodha: That’s because foreign lenders are wary about the Indian legal system’s ability to enforce mortgages. As a result they haven’t yet found comfort in directly lending. Secondly, there the element of interest cap of 2% over Libor.

Vakil: Not a single case of ECB funding has happened to date for any of the large township developments in the country.
Shah: Apart from the interest rate ceiling, there is also a five-year lock-in. I’d also like to point out that other than financial incentives for developers to undertake township projects, there are requirements like water, electricity and minor last-mile connectivities. These are very crucial to township developments.

Today, if I have to undertake a project in the extended outskirts of the city, uninterrupted power and water supply prove to be major hurdles. Imagine living with over 4-5 hours of load-shedding daily. What is the value and commitment that I’m offering to the buyer, then? I can very well take care of all the internal requirements of the township at my own cost but these are some of the basic needs that need to be addressed seriously.

Vakil: There is also a great opportunity for townships to take advantage of the situation and go green. These are all greenfield projects and can be pursued with sustainable designs featuring aspects like green architecture, energy saving, water harvesting and vermiculture.

Aggarwal: The reality is, we hear a lot of talk about facilitating the developer community to undertake such developments, there is nothing really happening on the ground level. There is a vast gap between what is said and what gets implemented.

Shah: Just recently, the Maharashtra chief minister announced that the state will allow extra FSI for township developments at no premium. It is understood that the CM’s office has entered into a tie-up with TERI to put together rules and regulations including other incentives for eco-housing which is expected to be made public sometime in April 2010.

Aggarwal: It’s a commendable step in the right direction but we will have to wait and see what actually comes out in black and white. That’s precisely the problem with most announcements from either the Centre or the state government.

Shah: They are talking about zero-energy consumption in townships and I’m trying to understand how practical can this be. How can you have no energy being consumed in a township?

Vakil: The other issue is weighted deduction on expenditure. Whatever you spend should get 125% of it as deductions. In fact, that’s how other countries pursue it and there is no reason why we should not.

Aggarwal: I’d say these are just the incremental steps that constitute for just 10-20% of the overall issues that need to be addressed. The infrastructure and related aspects we discussed earlier are the more crucial ones and form 80-90% of the overall hurdles faced by the Indian realty sector.

Discussion moderated by Raj Nambisan. Edit team: Pooja Sarkar, Ashish K Tiwari, Rajshree Mehta and Gaurav Dutta