Young minds speak up
To the backdrop of a challenging year gone by when real estate sector has had a tough time operating in a difficult fund-raising environment amid the negative effects of ever-escalating interest rates, the new financial year looks daunting. The much-awaited Budget failed to excite the real estate industry, with many players calling it “disappointing” through its lack of incentives designed to revive growth. And of course, the long-dragging problems concerning land acquisition, slow government clearances and the liquidity crunch — each still unaddressed — will continue to hurt the sector.
However, the real estate industry has evolved a great deal over the last decade and will continue to do so through the emergence of young second- and third-generation entrepreneurs who see things very differently from their forebears. Traditionally a family-run business, real estate is today witnessing a sea-change. The young entrepreneurs are bringing in more professionalism into the system; they are critical and vocal about issues that are hurting the sector. To address these issues, we bring together some of brightest young minds from across the country that represent a broad spectrum of companies. Here, they debate such important issues as the proposed Real Estate Regulatory Bill, the biggest hurdles for growth and how they expect the industry to perform in new financial year.
IN THIS ROUND-TABLE
Ashish Puravankara, joint managing director, Puravankara Group
A 28-year-old on the board of the Puravankara Group, Ashish holds an MBA from Willamette University in Salem, Oregon. He has been responsible for the identification of opportunities for the company in Bangalore, where the company has recently launched several projects. Ashish has also been instrumental in implementing best construction practices through the acquisition of new material and focusing on technology to achieve quality construction.
Kruti Jain, director, Kumar Urban Development
Currently pursuing her BBA and Bachelor of Laws from Symbiosis College, Pune, Kruti has been involved in the real estate business since the age of 15. She is the youngest member of the managing committee of CREDAI, and is convener of the Real Estate Academy of Developers and City Greening Committee in Pune. She has been the director of KUL since 2007.
Mukesh Bhagtani, CEO, Jaycee Homes
At the age of 31, Mukesh shoulders the responsibility of managing the finance and marketing aspects of the group. He holds an MBA and has over 10 years’ work experience. Taking the baton from their father, Mukesh and his brother Diipesh continue to carry on the work begun by their grandfather 45 years ago.
Pankaj Bajaj, MD, Eldeco Infrastructure & Property
An IIM-Ahmedabad alumnus, Pankaj joined the Eldeco group in 1996 to spearhead their growth initiatives, and founded his ambitious realty project, Eldeco Infrastructure and Properties, in 2000 with an aim of nationalising his company’s presence. From being the president of CREDAI NCR to fulfilling the role as managing director of his company or his credible associations with industry bodies like ASSOCHEM, CII, NAREDCO, Pankaj has wheeled off his actions with a generic rationale at every career growth stage.
Rohit Gera, MD, Gera Developments
Rohit has a BSc degree with a double major in project management and economics from the University of Massachusetts at Amherst. He is currently a vice-president of CREDAI, Pune. He is also a member of the executive committee of Mahratta Chamber Of Commerce, Industries and Agriculture.
Shailesh Puranik, MD, Puranik Builders
Shailesh has been instrumental in promoting a cleaner, pollution-free city with his green construction practices. He is also testing and implementing a range of business models, such as PE-funded ventures through special purpose vehicles, affordable housing projects, and the redevelopment of slums. He completed his Bachelor’s in Architecture from Sir JJ College of Architecture. He is also the vice-president of Maharashtra Chamber of Housing Industry —Thane.
Q. Do you think the real estate industry needs another regulator?
KJ: We don’t need another regulator in place because we already have a consumer court. There is absolutely no logic in adding another layer of regulation when all other dispute forums are more than available. The consumer is very well protected. I would welcome the idea of a regulator that covered the entire industry and all its stakeholders. Indian bureaucracy needs to learn that election pressures shouldn’t result in new levels of rule. It has spoilt the business environment. I just hope that the regulator does not cause a fiasco.
PB: Yes, the industry needs a regulator to control not only fly-by-night operators but also to regulate the unorganised side of the trade, like property brokers and land dealers. However, in its current form, the draft Real Estate Regulatory Bill is quite draconian in many of its provisions. Also there seems to be a great deal of duplication of the provisions of other acts like the Consumer Protection Act and State Apartment Act. For example, the bill talks of the compulsory registration of all projects with a regulator. This is nothing but an avoidable duplication of the existing norms in all the states where a licence is required before you start inviting bookings from the market. In short, a regulator is needed but in a simplified form.
RG: The government of Maharashtra has proposed a new housing act. I think the way they have approached the concept of a regulator is very positive for the industry and the customer. I think it’s an extremely viable, workable model. In comparison, the proposed national bill has many draconian policies and fails to answer and resolve a number of issues faced by the industry. If you have a regulator, it needs to be able to improve the plight of the industry, but the way the central bill is drafted, I think it has potential to lead to more chaos than sanity. The state of Maharashtra, on the other hand, has a far more balanced bill. And interestingly, they both come from a Congress government.
MB: It is definitely going to help the real estate industry in terms of transparency and protecting customers, and we don’t see anything bad with it. But approvals are something else that must be taken care of. We have several departments and they are not in sync with each other. You talk about building proposals or infrastructure, or even small approvals such as storm water drains, and these people are not on the same page. If these departments can find a way to work with the regulator, things will definitely be better.
As of now, the draft like one-sided. But I think gradually it can be worked on and it could come out as a good proposal. Otherwise, it would dampen the industry and that wouldn’t be a good sign.
SP: We already have to deal with so many authorities, so having a central regulator will create one more roadblock. We already have many laws in place, and this is causing real estate to suffer from a multiplicity of legislation and a multiplicity of government involvement that is dragging the industry from pillar to post. If you bring in a regulator you should then delete everything else so that it is all done by that single regulator. The current laws are providing more than enough — you have regular courts and consumer courts, both of which are dealing with consumer cases, so how can you say that there is nobody to protect the consumer?
AP: I think that being a state subject, land is already governed by respective state rules and regulations with regard to a number of aspects of development. However, having a regulator is welcome if all the stakeholders, including customers, government and local authorities, are involved to make it all-inclusive and effective.
Q. What is the biggest hurdle in the growth of real estate sector?
RG: Having access to capital for land acquisition is the biggest hurdle. The RBI has throttled land acquisition funding from banks, which are in turn not allowed to fund developers for buying land. So if you want to open up supply, developers need capital for land acquisition. The problem that comes out of this is an overheating of the real estate sector. Ways to prevent this need to be looked at but the money to buy land for developers through the normal banking channels also needs to come in place.
KJ: For a start, the government has stopped publishing development plans for cities. In Pune, there hasn’t been a DP since the ‘Eighties or ‘Nineties. It’s a joke. And then I don’t understand why the government, which lacks the resources and the wherewithal, wants to take simple tasks and then add more bureaucracy to them. Moreover, it’s commonly known that the goalposts change overnight, and projects that are already under construction can find that they have to make allowances for new regulations even when they are half-way to completion. They want to give more protection to the consumer but what about protecting the developer? These issues are huge. Say a developer has been doing everything by the book, he could still see himself on the wrong side of the law. Why should developers find they are the ones who are being looked down on they are often the victims of the system. Sooner or later consumers will understand.
MB: For a start, there is infrastructure. Today everyone wants low-cost housing but how do we build it when we cannot promise customers that they can from their homes into the city. Nobody is going to travel for four hours in order to work for another eight. We are really suffering from poor infrastructure.
The second biggest hurdle is an inconsistency in government rules, which keep on changing every time a new officer comes in. Such things dampen the industry. Approvals have to be granted faster.
PB: Almost all developers are starved of funds today because the RBI frowns on bank lending to this sector. Also, interest rates are quite high, and developers have no choice but to raise mezzanine funding at 20 per cent-plus rates. This is clearly unsustainable. Also, the supply of developable land is critical. The issue has become so sensitive that one can foresee a sharp decline in the supply of fresh land on the outskirts of cities. The dual issues of land and financing will herald higher prices and a growth in unauthorised activities in this sector.
SP: You have multiple government departments monitoring you, you have multiple government departments you have to go to for approvals, you have agencies who don’t interact with each other and there is little consistency. Say I’m in the process of building a project and I get a call from some authority saying I can’t build that project… How is that possible? There is so much red tape involved.
AP: Inflation and interest rates have slowed down the sector to a large extent in the last few quarters. I am expecting growth momentum to pick-up in the 2012-13 fiscal year. I think that interest rates and inflation, which have peaked, will only go down over the coming quarters.
Q. How do would you rate this year’s Budget?
SP: It was the worst budget that we have ever seen. It did absolutely nothing for real estate. It brought in more hurdles, it brought in more taxes — service tax went up, which ultimately affects the consumers. Although they talk about reducing prices, the Budget ultimately increased prices by two or three per cent immediately. It was a spineless budget. Real estate accounts for 10 per cent of India’s GDP and this was completely ignored.
KJ: I would give it minus one out of 10. A Budget is done first to give a perception of growth, and second to act as a stimulus for growth. The problem with our Budgets over the years is that they might have great ideas but these just don’t get implemented. In this Budget, as well as in past ones, I only see ideas and no route to implementation. And when it comes to real estate, by putting TDS and it is not clear if the consumer or the developer has to file the returns you only add more taxation, and when you add more taxation everything becomes more expensive because the developer isn’t going to cover that cost. We are already taxed between 26 and 30 per cent, and if you add 10 per cent from TDS, we reach 40 per cent in total. The consumer is going to suffer and we are already facing inflation. There was a time when the government used real estate as a way to boost the economy.
PB: The sector was not addressed at all. No tax breaks were announced; on the other hand, the increase in service tax and excise is going to increase the cost of construction. We are awaiting the fine print on the provision of TDS on transactions above Rs50 lakh.
RG: From the real estate point of view, I would rate this Budget as zero. You know excise and service tax are going up, which means our input costs will go up and therefore the customer’s purchase prices will go up. So in that sense, it makes it more difficult for people to buy a home. There were so many opportunities to use real estate as one of the engines to revive the economy. They have done nothing really in terms of the boost as far as real estate is concerned.
There hasn’t been much song and dance about TDS. Now every single customer who buys an apartment has to deduct 1 per cent tax at source and hand that money over to the government; only then can he register the purchase. Though it becomes very cumbersome for the flat buyers, this measure will help the government to potentially keep track of each and every property transaction.
MB: We don’t see anything to help the industry in any way. The service tax has gone up by 20 per cent and we will pass on this cost to the customer. These things are actually very disturbing because they are not serving the purpose of affordable housing. We don’t know yet how people will react to TDS on lease and capital gain but we suspect that people will be uncomfortable with that too since TDS has to be deducted when you sell the flat. At least today they can hold onto the money and also start looking at other properties. It’s neither a great nor a very bad budget. I would rate it as five out of 10.
AP: Long-pending expectations like granting industry status, increasing interest deductions for individuals from the existing Rs1.5 lakh and extending tax holidays under Section 80IB of the Income Tax Act, 1961, have not been addressed, which is a little disappointing.
Measures taken up on affordable housing like investment-linked deductions for developers, a reduction of 1 per cent in interest rates for consumers for loans within Rs15 lakh, the and reduction of withholding tax for ECBs will benefit only a small portion of the sector as many players are still not in the affordable housing segment.
Q. How the sector is expected to perform in 2012-13?
SP: With the country’s shortage of housing, it won’t be long until people start buying again, and the trend has already started to reverse. Real estate is showing signs of bouncing back and we are expecting more buoyancy in the market to make it a much better year than we have seen in 2011-12. It is a long-term game and so many different things are going to happen within this field over a longer period — say 10 to 20 years. I see a very bright future for real estate.
KJ: It’s a good market, but is it a great market? Are we in a market that will help the consumer or the developer contribute to the bottom line of the nation? No. Absolutely not. Interest rates are very high, but I’m sure they will come down in the next quarter. The market is good and will continue to be. Will there be a boom with consumers seeing big rises in their investments and great appreciations overnight? No. It’s not a go-go bonanza market, but it’s a good market, and will continue to be so.
PB: While there is undisputedly demand for quality real estate across sectors and geographies within the country, a lot will depend on factors beyond the control of developers and buyers. Interest rates are a key issue. Another one is the state of the overall economy and rate of GDP growth. These in turn depend on complex issues like global economics, inflation and crude prices. Hopefully, things will start looking up in the second-half of this year.
RG: On a national level, 2012-13 will continue to be a year where we will not see any break-out for the real estate sector, and we will continue to see plodding growth. The only silver lining is that if the RBI reduces interest rates, this might give home buyers the ability to go out and buy larger homes. It may also help in terms of the sentiment but that’s really the only hope from the sector’s perspective. Otherwise, it will continue to be a year of slow growth alongside challenges. I don’t think it’s going to be a rocking year.
MB: Over the past two years, prices have become stagnant. This is a good thing because when prices start escalating, we fear it’s turning into a bubble and will crash. But when it is stagnant, people have digested the prices, and neither land nor the property prices are going up. So we are looking at 2012-13 as a good year; we have put up more properties this year than last, over the last three months. We are very positive about it. We are also catering to luxury as well as affordable.
AP: The demand for housing in this country is still very strong and the current macro-economic factors will definitely help in the sector coming back to growth trajectory in 2012-13.
We ask two of infrastructure’s bright lights to share their views on their industry’s burning topics
Rishabh Sethi, executive director, SPML Infra
Rishabh spearheads business development and project management in the company’s water and environment verticals. He is credited with establishing a robust IT infrastructure for the organisation, including the implementation of an enterprise resource planning system through SAP. New technologies have helped SPML optimise costs, enhance design and maintain consistent quality conformance. He is also leading the company towards a strong water and environment business in the areas of O&M of municipal water systems, sewage and effluent treatment plants and municipal solid waste management. Rishabh is a graduate in industrial engineering and economics from Northwestern University, USA.
Abhijit K Avarsekar, VC, MD and CEO, Unity Infraprojects
A second-generation entrepreneur, Abhijit joined the business in 1995 at the age of 21 immediately after completing his civil engineering qualification from the Father Agnel College, Navi Mumbai. He played a key role in the expansion of the EPC business into newer geographies and gradually gave the business a pan-India presence. Abhijit spearheaded the company’s initiative to diversify into infrastructure construction from its traditional core competence of building. He has also ensured that the company keeps abreast with the latest developments in technology.
Rishabh Sethi, executive director, SPML Infra
Infra growth: The Indian economy continues to be very strong, although some policy reforms at government level are needed to remove bottlenecks and to maintain its healthy growth rate. JNNURM has helped 65 big cities to develop infrastructure facilities, but the momentum needs to be accelerated and more cities must be added. All major infrastructure projects are lagging behind schedule due to poor planning and implementation. Clearly, there has to be a strong push from the government’s side to award and implement large infrastructure projects. Flexible concession agreements, swift land and environmental clearances will help in facilitating improved infrastructure that is critical to the economic development of the country.
Land acquisition: The Land Acquisition, Rehabilitation and Resettlement Bill, 2011 has been devised to adjust the anomalies of a 117-year-old act. The present bill aims to address rehabilitation and resettlement, providing safeguards for both land owners and livelihood losers while defining the “public purpose” for which land can be acquired by the government.
I believe in order to address land acquisition issues we need clear legislation to lay down the basic obligations of the government towards the rehabilitation of displaced persons. The use of a method for fixing monetary compensation, which accounts for price-rises, is also very important. There should be compulsory social impact assessment to ensure that the subsequent problems of loss of employment, social surroundings and emotional trauma are accounted for. Also, the use of Panchayati Raj system as a platform for the opinions and grievances of those affected is needed. We need a decentralised and less autocratic approach towards development.
Funding: The government has planned to spend Rs1 lakh crore in infrastructure development over the Twelfth Plan. A substantial amount is expected to come from the private sector. The worsening financial environment in developed Western economies has forced Indian infrastructure companies to look for investment options. The infrastructure sector is estimated to account for 25 per cent of India’s industrial output and to continue on the growth path, it requires the funding from the government to increase.
Measures for boosting demand, especially on the investment front through progressive policy action, are vital. For sustainable growth, it is imperative to have favourable investment scenarios that encourage asset creation and risk taking by financial sectors.
Union Budget: Government strategy to increase investment in infrastructure through a combination of public investment and public private partnerships indicates an increased thrust on the sector. A 14-per cent rise in budgetary allocation to the Ministry of Road Transport and Highways is expected to encourage the transportation and logistics sector in India. Additionally, a 27-per cent increase in allocation for rural drinking water and sanitation, as well as a 20-per cent increase in PMGSY, is expected to improve overall rural infrastructure and connectivity across the states.
A proposal to add certain eligible sectors for viability gap funding is expected to provide support to PPP in the infrastructure sector. Additionally, allowing for tax-free bonds to the tune of Rs600 billion would further support infrastructure financing. Overall, the government strategy of increasing investment in infrastructure through a combination of public investment and public private partnerships indicates an increased thrust on the sector.
Abhijit K Avarsekar, VC, MD and CEO, Unity Infraprojects
Infra growth: The government should be committed to keeping banks adequately capitalized as this would allay fears of capital shortage for growth. The spending on infrastructure development is to cross Rs50 trillion during the Twelfth Plan, which is just on the anvil. The government’s move to increase fund allocation from 10 to 20 per cent for schemes such as NHDP, AIBP and PMGSY will accelerate order flows for infrastructure companies. Reforms and initiatives by the government in form of announcements would help but executing or rolling these out will be the key.
Land acquisition: This is a very sensitive and politically driven subject. It would be best if government bodies and institutions were allowed to raise additional capital through options like in the case of that NHAI — through the latest Budget, NHAI is allowed to raise an additional Rs100 billon through bonds, which will surely help in funding land acquisition.
Funding: Infra projects need huge funding, both in the form of debt and equity — normally, the ratio is 70:30 for these. Foreign funds are cheap, but their availability is a big concern due to global financial crisis. I think a good project with good IRR will not face funding problems because ECB is available despite the global crisis. Western countries where returns are much less prefer India because good opportunities are available here. So I don’t think there will be dearth of funding because India needs good infra projects and targeted GDP growth is not possible without these.
Union Budget: I think this Budget has some good things for the infrastructure sector. The infra bond limit has been doubled from to Rs60,000 crore. The reduction in tax on interest payable from 20 to 5 per cent for a period of three years is also a good move. And the power, roads and low-cost housing sectors will get tax breaks; hence they will have more access to foreign funds. The award of highway project is expected to rise 20 per cent to 8,800 km, as well as the ministry’s allocation increasing up by 14 per cent to Rs25,360 crore.