• APRIL 17, 2006

Real estate: Challenges ahead

The real estate sector in India has assumed growing importance in the past few years, especially with rising demand and consequently buoyant property rates. Real estate, in fact, has emerged as one of the most appealing investment options for domestic as well as foreign investors. Developments in the sector are being influenced by faster growth of the retail, hospitality and entertainment, economic services and information technology industries. However, despite such strong growth, the Indian real estate market is still in its infancy, largely unorganized and dominated by a large number of small players with very few corporates or large players having national presence. The sector is also having a large number of legislative barriers, which are hindering a much rapid growth. In this write-up, we highlight the major factors that are acting as hindrances to a faster growth of the sector.

Legislation: Restrictive legislations are one of the major impediments to growth of the sector. Legislative norms, wit respect to the Tenancy Law, Urban Land Ceiling Act and Rent Control Act are very rigid. The Rent Control Act, in fact, is the single most important reason for the proliferation of slums in India by creating a serious shortage of affordable housing for the low-income families. People find it very difficult to deal with these rigid laws. Moreover, a lot of time is being consumed in completing the legal formalities, thereby leading to delays in project completion.

Transaction Cost: Transaction cost is another major challenge for the real estate sector. There is direct relationship between Registration Act and Stamp Duty. Stamp duty needs to be paid on all documents that are registered and the rate varies from state to state. With stamp duty rates of 13% in Delhi, 14.5% in Uttar Pradesh and 12.5% in Haryana (Source: www.indiabudget.nic.in), India has perhaps one of the highest levels of stamp duty in the world. Some states even have double stamp incidence, first on land and then on its development.

Titles: Another important issue in real estate development is that of title to property. High percent of land holdings do not have clear titles, thereby leading to a lot of problem because ownership is unclear and hence the land is off market.

Urban Land Monopoly: Many cities have created development agencies (like the DDA in Delhi) and handed over control of all urban land within the municipal jurisdiction to them in the belief that they would act in the interests of the public. However, it is in the interests of the monopolist to restrict the development and sale of new land and keep the prices high, so as to maximize its own returns. Introduction of a competitive construction boom requires abolishing the monopoly of such agencies over urban land by completely separating control of land from its development and thereby leading to growth of the real estate.

Apart from the abovementioned factors that have been restricting growth of the real estate sector in India, the rigidity of financing norms laid down by the government is also an issue. To attract investments into this sector, it is imperative that the government increases the comfort level of the existing fund providers through appropriate legal measures and corporatisation of real estate, besides maintaining industry discipline.

Apart from this, improved laws for the sector shall form the basis for the government to permit the setting up of a Real Estate Investment Trust (REIT), which shall consequently open up the investment floodgate for the real estate sector, especially from the retail investors' front. REIT would operate like a mutual fund, where investments of individual investors will be consolidated to invest in real estate, rather than stocks of companies. It would provide a higher level of liquidity.

Now, while the challenges are abound, we believe that the opening up of the sector to greater private and foreign participation is a positive move. This shall not only reduce the existent demand supply gap in the housing market, but will also lead to growth of dependent industries like steel, aluminium, cement and engineering services.

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA, Canada or the European Union countries, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited (Research Analyst)
103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407