Affordable Housing

Modi’s Rs 2.5 lakh cr Asset Sale Plan Needs a Transparent Approach

The Prime Minister Narendra Modi has set a target of monetising 100 government-owned assets across sectors. As he said: “We have a target of 100 assets from oil, gas, airport, power, which we plan to monetise. This has the potential for investment opportunities of Rs 2.5 lakh crore.”

This is in continuation of the idea that the finance minister Nirmala Sitharaman had presented in her budget speech on February 1, 2021. As she had said:

“Idle assets will not contribute to Atmanirbhar Bharat. The non-core assets largely consist of surplus land with government Ministries/Departments and Public Sector Enterprises. Monetising of land can either be by way of direct sale or concession or by similar means.”

Hence, a lot of this idle assets are government owned land or will involve land in some form or other. This is a good and an innovative idea which some of the previous budgets lacked.

Many large Indian cities have a lot of government land lying idle while the cities on the whole are stretched for land. Hence, freeing up some of this land and earning some money in the process is a good idea.

Let’s look at this greater detail pointwise.

1) If you are the kind who likes walking around India’s big cities, you would definitely see a lot of government land lying unused bang in the middle of cities. Close to where I live in central Mumbai is the Bicycle Corporation of India, in one of the by lanes of Worli. In the one and half decades I have walked past the company, I haven’t seen any economic activity happening. Peepul trees now grow from the walls.

This is land bang in the middle of Mumbai, some of the most expensive real estate in the world, lying unused. This is criminal to say the least. Another great example of unused real estate are all the MTNL offices, all across Mumbai and Delhi.

The Heavy Engineering Corporation (HEC) in the city of Ranchi where I was born and raised, has acres and acres of land lying unused, while the city itself hardly has any land going around. This is land that has been lying unused for decades and needs to be put to some use.

2) It’s not just the big cities that have all this excess land lying unused. Even a place like Ooty, has acres and acres of land lying unused thanks to the Hindustan Photo Films Manufacturing Company Ltd., which is largely not functional. There are quite a few such public sector enterprises which are no longer relevant, all across the country.

Given this, one of the first things that the government needs to do is to make an inventory of all this land and put it up in the public domain on a website. It needs to do so with all the other assets that it plans to monetise as well.

Of course, this inventory is not going to be made overnight and will take time. But it is important that this is done in the most transparent way, given that corruption/crony capitalism and land/asset sales, almost go hand in hand.

This is even more important because the government considers this route as an important source of revenue in the years to come. As the finance minister said in the budget that over the years the government hopes to earn more money “by increased receipts from monetisation of assets, including Public Sector Enterprises and land”. Hence, getting the process right is very important.

This becomes even more important given that there will be great opposition to the process from those who benefit from the status quo and even otherwise. The government selling its assets to raise money to do other things is not seen as a good thing. Hence, even a hint of corruption or any other controversy can threaten to derail the entire process, something the government cannot afford at this point of time.

3) In cases where the land was taken from state governments to start a public sector enterprise, it is important that the land be returned to the state government and let the state government decide what it wants to do with it. In the years to come, state governments will also be running short of money to meet their expenditure.

Also, this is the right thing to do. The state government can also use the land to attract more investment into their state. In some cities where there aren’t enough public parks, some land can even go to develop such infrastructure. The aim shouldn’t be to maximise the money earned all the time, but maximise the general well-being.

Again, this is something that will need some amount of thinking and the government’s thinking on this should be clear and out in the public domain.

4) There is another factor that needs to be kept in mind here. Real estate prices in most big Indian cities have remained and continue to remain high. One of the major reasons for this lies in the fact that the land prices remain expensive across Indian cities. Hence, it is important that some of this land be sold to build affordable housing. Only if land prices come down, will home prices come down.

And by affordable housing I mean homes which can be sold profitably in the range of Rs 10-20 lakh per unit and not affordable housing as the way the RBI defines it, which isn’t really affordable housing at all, but just a fancy moniker to help banks meet their priority lending targets.

Other than helping people buy affordable homes to live in, the real estate sector has the ability to create a large number of jobs very quickly. It also has the capability to have a multiplier effect across many other sectors. Building real estate requires cement, sand, steel, bricks, pipes, etc., and so on. Once real estate has been built in, moving into a home requires its own set of purchases. Buying homes also gives a fillip to the home loan business. And of course, people living in homes they own, enhances general well-being.

5) Finally, it is important that the money earned through this route be used for a specific purpose and not just for bringing down the fiscal deficit, which has ballooned to Rs 18.49 lakh crore or 9.5% of the gross domestic product (GDP) this year. Even in 2021-22, the fiscal deficit target has been set at a high Rs 15.07 lakh crore or 6.8% of the GDP. Fiscal deficit is the difference between what a government earns and what it spends and is expressed as a percentage of the GDP.

It is important that money coming from land sales be allocated towards specific infrastructure projects, preferably in the very state where land is being sold. This will make it easier to sell this idea to the state governments, whose cooperation is very necessary to make this idea a reality.

To conclude, the monetisation of excess government land in particular and other assets in general, is a good idea. Having said that, it needs to be executed in a proper process driven and transparent way.

This is an updated version of an article that first appeared on Firstpost on February 2, 2021.

Why are more than 10 million homes vacant in India?


India-Real-Estate-Market

Dear Reader,

If you ever go to New Delhi, try taking a drive through the sub-city of Dwarka and you will see miles and miles of built homes with nobody living in them. You can see a similar sight in large parts of the National Capital Region (NCR) around New Delhi.
In fact, Anshuman Magazine, chairman and managing director of CBRE South Asia Pvt. Ltd., in a recent article pointed out that “around 12 million completed houses” are “lying vacant across urban India”.
A similar point is made by Akhilesh Tilotia in his book The Making of India—Gamechanging Transitions, where he states that India has more homes than households. As he writes: “India’s households increased by 60 million to 247 million from 187 million between 2001-2011. Reflecting India’s higher ‘physical’ savings, the number of houses went up by 81 million to 331 million from 250 million. The urban increases is telling: 38 million new houses for 24 million new households.”
And despite this, there is a huge shortage of housing in urban India. As the latest Economic Survey, a document which is released every year a day before the annual budget of the government of India, points out: “At present urban housing shortage is 18.8 million units [i.e. homes].”
So what is happening here? Many of these homes have been bought as investments by people who have “extra” money to invest. A substantial portion (no one knows how much) of this is black money on which taxes haven’t been paid. Hence, homes have been bought but nobody is living in them.
Further, the dynamics of real estate sector in India have so evolved that builders like catering only to the richer segment of the population. Also, the price levels have now gone even beyond this section of the population.
But the shortage in housing is at the lower income levels. “95.6 per cent [of housing shortage] is in economically weaker sections (EWS) / low income group (LIG) segments,” the Economic Survey points out. Tilotia points out that: “70% of the urban housing shortage arises from the bottom four deciles of households whose ability to pay is severely constrained.” He estimates that unmet needs in India are at price points of Rs 0.5-Rs 1 million. The real estate companies due to various reasons are not interested in satisfying this unmet demand.
A recent research report by real estate rating and research firm Liases Foras points out that the average price of a home in the Mumbai Metropolitan Region, as of March 31, 2015, was Rs 1.3 crore. The numbers for Bangalore and Delhi are Rs 86 lakh and Rs 74 lakh respectively. Given these high prices, it is not surprising that the housing demands of a large segment of population are going largely unmet.
Hence, it is not surprising that as per the 2011 Census, 13.7 million households in cities live in slums. The number of people living in these slums is around 65 million and forms around 17.4% of the urban population. As per the Census, Visakhapatnam with 44.1% of its population living in slums comes right at the top. Mumbai, with 41.3% of the population living in slums comes in third. Kolkata with 31.9% of its population living in slums is eight on the list.
Further, the number of people living in urban slums may be understated. This is primarily because the 2011 Census was carried out only in what are known as statutory towns. These are towns which have some sort of an elected local body.
A Times of India newsreport points out that India has a total of 7935 towns. Of this 4041 are statutory towns. The remaining do not have an elected local body. Nevertheless, they fulfil the criteria of being urban, and the Census classifies them as census towns. The census towns were not considered for counting slums. These towns have a total population of more than 5 crore and substantial part of that population is living in slums.
Further, other estimates put the slum population living in Indian cities at a much higher level. A 2012 newsreport quotes S. Parasuraman, director of the Tata Institute of Social Sciences in Mumbai as saying: “Nearly 60 percent of Mumbai’s slum population lives in 8 percent of land.” The Census number as mentioned earlier is at 41.3%. These differences apart, what this clearly tells us is that with so many people living in slums, India has a huge urban housing shortage.
So what is the way out of this? The government needs to start doing something about it sooner rather than later. Maybe it can learn a thing or two from the South Korean government, which in the late 1980s built around 2 million homes of which around 0.9 million were built around the capital city of Seoul, as Tilotia points out.
In order to do this, the government will have to first and foremost sort out the mess that currently surrounds the process of land acquisition. Further, these homes will have to be built on the periphery of cities, backed up by a good transportation system, so that people can travel to work. The outdated floor space index laws controlled by real estate lobbies (which are often fronts for politicians) will need a thorough re-look. These laws essentially deal with how much area can be built-up, given the size of the plot on which a building is being built. So, if the FSI allowed is 2, then on a plot of 1000 square metres, the building being built can’t have a built-up area of more than 2000 square metres.
If all this is not done there will be more trouble ahead, as more and more of Indian population moves to Indian cities, in the years to come. As the Economic Survey points out: “Nearly 30 per cent of the country’s population lives in cities and urban areas and this figure is projected to reach 50 per cent in 2030.”
What this means is that if affordable housing doesn’t become the order of the day, the slumification of India will continue. And that is not a happy thought.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column was originally published on BBC.com on May 21, 2015 

What Narendra Modi can and should do for Indian real estate

narendra_modi
I am getting into a habit of writing trilogies. This is my third column this week on real estate, after writing three columns on oil sometime back. And I decided to write this column after a friend asked me to “stop ranting” and come up with something constructive instead. So here we go.
First and foremost it is important to realize why a healthy real estate sector is necessary for economic growth. Real estate has tremendous forward as well as backward linkages, which leads to what economists refer to as the “multiplier” effect.
The multiplier effect can be both direct as well as indirect. The direct effect comes from the demand in the construction sector for products from other sectors. A house that is being built needs cement, wood, glass, bricks, sand, electrical equipment etc.
As Fatih Terzi and Fulin Boren write in a research paper titled An Analysis of the Development Between Housing and Economic Development: “The multiplier effects of housing [come] through the creation of investment in other sectors generated by the demand in the construction sector for their products. The builders buy raw materials for the building and hire transport to move them.” These are essentially referred to as backward linkages.”
Then there are forward linkages as well. “The occupants of the houses buy furnishings and fittings, and pay for maintenance, all of which creates paid employment and the use of materials,” write Terzi and Boren.
The indirect effect comes because of the money being spent in the local economy by those benefiting from the direct effect of construction of homes. As Keith Wardrip, Laura Williams, and Suzanne Hague write in a research paper titled The Role of Affordable Housing in Creating Jobs and Stimulating Local Economic Development: A Review of the Literature: “During the construction of affordable housing — or any kind of housing, for that matter — the local economy benefits directly from the funds spent on materials, labor, and the like. If the builder is purchasing windows and doors from a local supplier, the supplier may have to spend money on materials and hire additional help to complete the order – examples of indirect effects. Finally, the construction workers, glass cutters, and landscapers are likely to spend a portion of their wages at the local grocery store or shopping mall, which illustrates induced effects.”
One estimate puts the number of total such linkages to 270. Given these reasons a vibrant estate sector is a necessity for a vibrant economy. In fact, a study commissoned by HUDCO found that housing came third among 14 major sectors, in terms of the linkages that it had with other sectors. This tells us how closely linked a vibrant real estate sector is to the overall economy.
The latest Economic Survey of the government makes this point as well when it states: “Housing activities have both forward and backward linkages which not only contribute to capital formation, generation of employment, and income opportunities but also to economic growth. Estimates show that every rupee invested in housing and construction adds 78 paise to the GDP.”
Nevertheless, these linkages come into play only when homes being built are also being sold. But as we saw in the column published on January 19, 2015, that doesn’t seem to be the case. Most homes being sold in cities are way beyond what most people can afford. In fact, a friend on reading the January 19 column quipped, “forget taking on a loan to buy a home, how many people even have enough money to make the 20% down payment required on the home”. Typically, most banks finance up to 80% of the home price. The remaining money needs to be made by the borrower of the loan as a downpayment.
Given this, affordable housing is something that should be a huge priority for the government. The Report of the Steering Committee on Urbanization released in November 2012 points out: “approximately 24 percent of India’s urban population resides in slums. The proportion of slum dwellers in large metropolitan areas is higher. For example, according to Census 2011, 66 percent of the population in Mumbai Metropolitan Region (MMR) lives in slums.”
Further, “not all slum dwellers are poor but the extreme scarcity of housing for low income groups has led to them living in slums.” Living in slums also leads to inadequate access to basic sanitation facilities and potable water.
The issue of affordable housing becomes even more important when one takes into account the fact that the number of people living in cities is going up day by day. “Nearly 30 per cent of the country’s population lives in cities and urban areas and this figure is projected to reach 50 per cent in 2030. The present urban housing shortage is 18.78 million units of which 95.6 per cent is in economically weaker sections (EWS) / low income group (LIG) segments and requires huge financial investment,” the Economic Survey points out.
So, the question is what can the Narendra Modi government do to making housing more affordable? The solutions on offer are not easy to implement. Neither can they change things overnight. Nevertheless, the work needs to start someday and the sooner it starts the better it will be.
The situation can be improved significantly if some of the land that the government has been sitting on can be made available for affordable housing. KPMG in a report titled Affordable Housing – A key growth driver in the real estate sector points out “The government holds substantial amount of urban land under ownership of port trusts, the Railways, the Ministry of Defence, land acquired under the Urban Land (Ceiling and Regulation) Act, the Airports Authority of India and other government departments.”
The question is will this happen? More land in the market will lead to land prices falling. And this is something politicians will not like given that their ill-gotten wealth is held through benami land as well as real estate. As Bombay First points out in a report titled My Bombay My Dream “Government and the land mafia in fact do not want more land on the market: after all, you make more money out of the spiralling prices resulting from scarcities than you could out of the hard work that goes into more construction.”
Nevertheless the basic issue is the huge amount of black money that comes into the real estate sector. If real estate has to become affordable something needs to be done on this front. While the Narendra Modi government has been very aggressive about getting back all the black money that has gone abroad, they haven’t said much about trying to recover the black money that is there in the country.
This money would be considerably easier to recover vis a vis the black money that has already left the shores of the country. Also, in this day and age a lot of information technology can be used to figure out who are the individuals who are not paying taxes.
The government can learn from what happened in Greece. In order to recover black money, the Greek government used Google Earth to track those who have swimming pools and then cross indexed their address with the amount of tax they are paying. Ideas along similar lines which use information technology extensively in order to identify people who are not paying the correct amount of income tax, need to be come up with.
In the February 2013 budget speech, the then finance minister P Chidambaram had estimated that India pointed out that only 42,800 people in India had a taxable income of Rs 1 crore or more.
This in a country where 27,000 luxury vehicles are sold every year. Self employed professionals like property dealers, doctors, etc., need to be made to pay their fair share of income tax.
Of course, the income tax department does not have the resources to go after everybody. Hence, it is necessary that a few pilot projects may be implemented in different parts of the country and depending on results things can be taken forward.
I am no expert on real estate but I am sure that there are lots of other things that can be done to break the backs of those who are pouring their black money into real estate. The only thing required is the political will. The question is does Narendra Modi have that will? The nation wants to know.

(The column appeared on www.equitymaster.com as a part of The Daily Reckoning, as on January 22, 2015)