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With RERA, many fence sitters will become home buyers: Niranjan Hiranandani

The Hiranandani Group co-founder & chairman says the realty sector is getting a 'system reboot' with demonetisation, GST and the setting up of a regulator

Published: Jul 4, 2017

The financial markets generate a lot of number on a per second basis. There are people who have made it a profession to convert this information into trends, buy-sell signals, charts and pivot tables. Over the last 18 years of financial journalism, I have realised that every number has a story to tell. And these numbers as a trend normally never lie. I am forever looking for these trends.

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Image: Joshua Navalkar

Niranjan Hiranandani, co-founder & chairman, Hiranandani Group, is also the founder and first president of the National Real Estate Development Council (NAREDCO) that works under the aegis of the ministry of housing & urban poverty alleviation. His role is to work closely with the government to simplify processes in the real estate and construction industry which is a cause of major delay in the completion of projects. He spearheads the initiative for providing affordable and low cost houses. He spoke to Forbes India about the challenges of the real estate industry and how things are moving in the right direction. Edited excerpts from the interview:

Q. Give us a sense of how you look at the housing sector
Every industry and every business goes through a cycle of transition. In the early nineties, the Fiat and Ambassador cars became less conspicuous on our roads. Later on, the fixed telephone line started to disappear. The mobile phone and the internet killed other technologies. I think a similar process is taking place in the housing sector.

The prime minister has made it clear that he wants to achieve housing for all by 2022. He wants to build 2 crore houses in urban areas and 4 crore houses in rural areas. He further states that he also needs to take care of the poor. He also wants to create smart cities. The government has realised that it cannot make housing the way it makes highways. Irrespective of what happens, land [acquisition] is a big problem. Our country is too large for the government to look into each and every aspect of development. They have to partner with the private sector to make progress in the housing segment. The government wants to focus on affordable housing in the country and is taking the right steps.

Affordable housing in Mumbai, Delhi, Chennai and Bengaluru is 30 square metres in terms of carpet area. For the rest of the country, especially in the periphery of cities like Mumbai (in Thane or Navi Mumbai) it is 60 sq metres. An affordable area of 60 square meters carpet area is reasonable. The government is now creating conditions so that people can get low cost loans to buy these houses.

New projects beginning from June 2017 will get a tax free position for five years. A lot of people will get lower interest rates on their housing loans depending upon the quantum of loan. If adjusted for inflation, the cost of this loan will be close to zero.

The government has insisted that all the states should also take up the issue of affordable housing seriously. Maharashtra is doing serious infrastructure development. The pace of building highways has accelerated to 30 km per day and a metro project is underway. This investment in infrastructure as well as housing will generate a lot of job opportunity.  How many people do you require to put up an atomic power plant? It is around 500 people.  My one site has 5,000 people. Today I can employ a lot of people because of the growth in the industry.

The secondary benefit of this activity—housing and infrastructure is unbelievable. Around 260 industries (downstream) get benefited by these sectors. This includes cement, steel, paints and tiles, plumbing, glass, aluminium and steel.

So yes, we will build a lot of houses across all segments of the society but housing for all will drive the GDP of the country for sure.

Q. So what about RERA? How do you look at a regulator for the housing sector?
Governments have misused and abused this segment in the past. They overtaxed it and corrupted it. In general, when all the corruption disappeared because of competition, the politicians needed a whipping boy. Real estate industry was perfectly placed because unlike other industries we had to deal with the state government for every piece of approval. For a long time the industry dealt in cash. Later on developers started to take their consumers for a ride. Something was bound to give in.

As far RERA is concerned, it was needed. The consumer was unhappy with the industry. Noida created a lot of problems for the real estate buyers. Some developers were not able to deliver the houses on time and were not available to answer basic queries from buyers. People out there had put in their hard earned money to buy a house. Eventually the authorities stepped in and RERA was created. The big plus of RERA is transparency. For the first time in India, you can buy a house and you can know everything about it. The carpet area and the timeline for construction which are the two basic pieces of information will now be easily available to the buyers. Anybody who doesn’t abide by these rules of transparency will be penalised. Right now there is no provision to take on the babus who are a critical part of this chain who control the approval process.

However the chief minister of Maharashtra has said that he is getting the Right To Services Act which will keep a check on bureaucrats who do not work. Developers who are already stressed before RERA will now have to escrow money. They will require more money. Some of them are worried as they do not have adequate funding.  The government will now have to assist these developers to complete their existing projects.

Q. But RERA cannot be uniform in all the states.

Yes. Real estate is a state subject and has to be implemented by the state governments. Obviously some people will be tough and some will be more lenient to developers. But what matters is that there is a system in place which will follow best practices.

Q. Can RERA be as powerful as the capital markets regulator Sebi?
Yes it can. But it depends on the people who are heading it. The law is one. RERA will pick up the best practices in the country and implement the same and make it applicable to everyone. RERA is going to bring in transparency to the entire system.

Q. What will be the effects of RERA?
We expect that transparency and openness will bring in a higher amount of investment in this field. People will feel confident to invest. Previously, when it came to real estate, there was this feeling that you were investing into a black hole. That part is gone. Now investors are not worried. They will be able to see what is happening. Companies with brand names or those companies that have corporatised will benefit more from RERA.

Q. What will be the use of RERA for the sector and common public?
Indian real estate is witnessing a ‘systems reboot’ which began with demonetisation, the legislation on benami properties, GST and the Real Estate Regulatory Authority (RERA). Implementation of RERA will bring in much required positivity, transparency and accountability on part of the developer, which in turn will enhance trust and confidence on part of the home buyers. I expect to see a positive impact of RERA on the sector, which will be now regulated and operated in a professional manner. From the perspective of home buyers, it will enhance confidence in real estate developers, provide a stronger legal remedy and will result in many fence sitters making a buy decision.

Q. Investors are not looking at real estate as an asset class anymore. Why?
All businesses are cyclical. That is true of equities as well. While stock markets look seductive today they may not look like that in the next one year. It may get overheated or anything can happen. Whenever there are contra indications the maturity of the market comes out. Weather the market is up or down, it will stop at a particular level. Maybe real estate as an asset class is ignored by investors now. But that is just a temporary phase. When the cycle turns or salaries rise, which surely will in a growing economy, people will turn to buy houses. Besides, the growth in affordable housing is tremendous. Here people are not buying real estate as investment. They actually want to stay in those houses.

You also need to look at areas beyond the top four metros. There is a lot of growth happening in the small cities. I feel that real estate projects in areas from Mira Road to Virar or Thane to Karjat or in Panvel areas around Navi Mumbai will be very successful.

Q. Is the real estate consumer getting matured? The consumer is getting price conscious and is questioning his decisions to own or rent a flat. He is also asking questions about the developer.
The answer is yes. The real estate consumer is getting matured especially in urban areas. But it is more circumstantial rather than through education. This has happened more out of bad experience. People got cheated in NCR and other places and then they learnt. It is similar to what happened during the global financial crisis. After the crisis they have put in many rules to make the world a safer place in terms of extreme financial products that caused the crisis. The regulators became very cautious and put the system back into place. Similar is the case with RERA. After people have burnt their fingers, RERA has been introduced to reboot or clean up the system.

Q. So who will be the successful players in the affordable housing segment?
Look at the aviation industry. Only a low cost airline like Indigo is making money. The rest of them are struggling. Indigo is making money because it has kept costs low and operates only one type of aircraft. It gets high volumes since it caters to everyone. It is the right fit for the Indian market. Similarly, companies operating in the affordable housing segment will make money. There is demand. But can a Hiranandani make money in that segment? You also need to ask the question if a Mercedes Benz can make money in a market meant for low-cost cars?  

My answer is that it won’t be easy for a lot of us to make money in the affordable segment. There will always be big profits in a segment which is expanding and the demand is unlimited. Can you as a high end housing company make profit at that price point? The answer is you may not be able to but someone else may be able to do it better. Who will be the Indigo of the real estate business? There is a huge opportunity in affordable housing but it will take a different developer to cater to that demand. Will the big companies be nimble enough to make this change? To do that they will have to reduce costs, reduce overheads and reduce debt and work hard on a lower margin and increase turnover. It is just like any other competitive business.

Q. What will be the effect of GST on real estate?
Given the GST provision of partially covering real estate under the 12 percent on works contract, the real estate industry had high expectations that GST would subsume stamp duty, registration and other additional levies. Non-inclusion of these additional heavy duties are expected to result in an inflationary impact on the housing industry. GST and RERA are part of the process that will bring in accountability and transparency to real estate. Some aspects may seem painful initially, but the over-all impact will be positive.

For real estate, the concept of Goods and Services Tax (GST) was that different taxes and levies, which are imposed on the industry across different states as also by the Centre, would be subsumed into one single tax. So, GST was to bring about uniformity and single rate of taxation all over the country, plus it was supposed to ensure no instance of double taxation took place. The roll-out has been a process where we have been getting mixed signals, especially from those who analyse and comment on what is proposed for real estate under GST.

My viewpoint is: Among the factors that comprise a paradigm shift for Indian real estate, the implementation of GST and RERA easily top the list. Given the initial reports about the GST provision of partially covering real estate under the 12 percent on works contract, the real estate industry had high expectations—that GST would subsume stamp duty, registration and other additional levies. Non -inclusion of these additional heavy duties are expected to result in an inflationary impact on real estate.

It is not quite double taxation, but a situation where GST will not result in ‘one nation, one tax rate’, with states levying their different rates for stamp duty, registration and other additional state levies, apart from the GST. The stake holders in real estate, including home buyers, had expected GST to replace all different forms of taxes, cess and levies, which is not the case. This will continue the different rates of taxation on real estate across different states in India; plus will result in inflationary pressure on real estate across different states.

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