Southern States are the most attractive destinations for global investors. M.A. Siraj reports after attending the South India Real Estate Conference 2013
Strong demand for housing from a growing number of people streaming into cities with professional degrees and technical skills, and mushrooming job opportunities is emerging as the most important driver of real estate sector growth in South Indian cities. While housing will remain the rosiest lure for developers as it caters to the end-users, the scenario down south is also brightened with new entrepreneurial ventures springing up on a daily basis.
While real estate is a sunrise sector in the Indian economy, South Indian States represent the most attractive destination for global investors. It is estimated that nearly 45 per cent of the country’s office space stock will be located in southern States with more than 64 per cent of the country’s IT and ITeS SEZs located in the same area.
According to J.C. Sharma, Chairman, FICCI Sub-Committee on South India Real Estate, and Managing Director, Sobha Developers, the fundamentals of real estate in the South are constantly good as demand is largely driven by an end-user market, which provides for limited volatility in prices. Millions of jobs constitute an added assurance that the sector will continue to remain rosy in the coming decades.
V.P. Baligar, Chairman and Managing Director, HUDCO, says the urbanisation trend indicates that the sector will have a sustained growth as 41 per cent of the people in the southern States live in cities and towns in comparison to 31.2 per cent in North Indian States.
While all these might give a cause for cheer, the realty sector faces issues which need to be tackled if growth has to be sustained over a long period. Foremost among them is the need to maintain social stability which faces threat in the wake of lopsided economic prosperity among various components of the population.
The Karnataka Chief Secretary, S.V. Ranganath, put some of them in perspective. According to him affordable housing remains the most crucial challenge for the real estate sector. He says developers and realtors should consider how to deliver a 600 sq. ft quality house for Rs. 6-7 lakh to an ordinary family as their foremost concern. Congestion, slums, poor transportation, pollution and scarcity of water and deficient amenities such as sewage, roads, power and retreating green spaces add to the woes of the urban dwellers and threaten social health/ harmony.
Speaking at the South India Real Estate Conference 2013 in Bangalore on September 19, Mr. Ranganath said smaller cities were growing at a faster rate than the big cities and there was need not only to assess the qualities of the migrants but even their aspirations. Responding to the developers’ worries, Mr. Ranganath admitted that red tape was the biggest constraint for the growth of real estate as 18 different clearances (NOC from Minor Irrigation dept., BSNL, Fire Force, Airport, BESCOM, establishment, and Pollution Control Board, Khata bifurcation, occupancy certificate etc)., were time consuming and hiked the cost of the construction.
He advised developers to benefit from Sakala schemes which covered several of these services. While disclosing that the State Government would be announcing the Affordable Housing Policy in October, he stressed the need for more transparency in the real estate sector. The lack of it was a major hindrance in attracting foreign direct investment.
It is pointed out that India is currently 20th in the list of world’s top real estate investment markets with investment volume of $3.4 billion in 2012 and trends available for 2013 so far indicate that it has only increased this year. While there seems to be unanimity among developers that recession did not hit the real estate sector in India (M. Murali, MD, Shriram Properties, even declaring that there will be no recession in the next 30 years) and that there was plenty of money in the market, some cautioned that the nature of capital had changed.
Says Arshdeep Sethi, MD, Development, RMZ Corp., “Capital is still available, it remains important for us to understand where capital is needed. Investors want their money to be safe and to return with dividends. They are selective and only opt for highly credible developers. Overseas investors also exist and have choices in emerging markets such as China and Brazil. Investors are now buying a real core asset and see if the cash flow is supported.”
Prakash Kalothia, CEO and MD, Sun-Area Property Partners, says developers want more risk (equity) capital, not the debt capital. He adds that overestimating profits and under-estimating the cost has been a major challenge for the sector, which is unrealistic. There is also near general agreement that the cost of capital will come down with more trust and transparency in the sector and improvement on this count has begun showing results since 2009.
Some of them even hinge their hopes on recently initiated legislative reforms pertaining to Real Estate Regulatory Bill, Land Acquisition Bill and game changers such as FDI in multi-brand retail, and SEBI’s plans to launch Real Estate Investment Trust (REIT) on the Alternative Investment Fund (AIF).
HUDCO Chairman V. P. Baligar summarises the financing challenges as 1: Non-availability of cheaper and long-tenure finance; 2: High cost of capital for builder; 3: High NPA (non-performing assets) and credit risk; 4: Rising inventories (average tenure of unsold flats: Mumbai - 48 months, Bangalore - 25 months, and Delhi - 23 months); and 5: Non-availability of home loans for EWS (economically weaker sections) and LIG (low-income groups).
Varied trends could be noticed in matters of land acquisition, the major stumbling block for the real estate sector. According to Ravindra Sannareddy, MD, Sri City Pvt. Ltd. (Sri City is spread over a 100 sq. km area, 55 km from Chennai on the Golden Quadrilateral developed on the work-live-learn-play concept), innovative methods would ease hindrances in acquisition of land.
Citing the Sri City example, he says the developers promised (and provided) jobs to those who lost their land as well as trained them for various vocations necessary in the developing township. He, however, agrees it is easier to get the land from the government rather than from farmers.
For Anita Arjun Das, MD & CEO, Mahendra Lifespace Developers, which acquired land both in Chennai and Jaipur, the approach involved giving a developed portion of land back to original landowners.
Several developers find the Joint Development Arrangement (JDA) as the preferred model after the 2008 global financial crisis as a way to overcome cash flow and diminishing profitability. Under the JDA, the land owner is responsible for all land related matters and the developer assumes the responsibility. However, nagging tax issues have cropped up and one does not know whether the land owner should be taxed on mere execution of JDA or should be taxed only when the revenue share is received. Clarity over the issues is yet to emerge.
While Cherag Ramakrishnan, CEO, Equinox Realty and Infrastructure finds JDA conducive, Shrawan Kumar, CEO, NSL Infratech prefers the Joint Venture (JV) model as it allows sharing of capital and the risk. Ram T. Chandani, MD, South India, CBRE South Asia, says the biggest challenge for developers is to get into locations which have not been ‘zoned’ and the only way is to acquire land from individual owners and farmers. “One ends up acquiring land only in bits and pieces,” he adds.
Anup Shah, Partner, Anup Shah & Co., feels that a host of personal laws regulate the inheritance aspects among various communities and acquisition is often a highly painful process. He stresses the need for title insurance as is found in other countries.