Real estate companies

Ek akela is shehar main: This song tells us all that is wrong with Indian real estate

ek akela is shehar mainVivek Kaul

Very few songs survive the test of time. One such song is ek akela is shehar main from the 1977 movie Gharaonda, written by Gulzar, set to tune by Jaidev and sung by Bhupinder Singh. As the lines from the song go:

ek akela is shehar main
raat main aur dopahar main
aabodana dhoondta hai
aashiyana dhoondta hai

(aabodana = food and water. aashiyana = a home)

This iconic song has an iconic scene which most people miss. Some 3 minutes and 26-27 seconds into the song there is a shot of what looks like Marine Drive. The road is full of Premier Padminis (or Fiats as they were better known as) and Ambassadors. If you look carefully enough there is even a white Mercedes somewhere.
The movie Gharaonda was released in 1977 and those were the days when Indians had the option of buying either the Ambassador produced by the Birlas at Uttarpara near Kolkata or the Premier Padmini produced by the Doshis at Kurla in Mumbai. The situation was akin to the early days of the American automobile. Henry Ford, the pioneer of the assembly line system of manufacturing remarked in 1909 that: “any customer can have a car painted any colour that he wants so long as it is black.”
In short the customer did not have any choice. The same was true about India in 1977. If one were to paraphrase Ford, “ any customer could buy any car that he wants so long as it is a Padmini or an Ambassador.”
But things have changed since then. Some 37 years later in 2014, a similar shot of the Marine Drive would show so many models of cars that it would be difficult to count the number quickly. This is the impact of competition and a largely free market which operates in the Indian automobile sector with very little interference from the government and in turn politicians. The companies compete with each other in order to offer the best possible features to consumers at the best possible price. This wasn’t the case in 1977 and the Indian consumer had a choice of two models of cars. The free market has clearly changed that.
Now let’s go back to the 1977 song that we started with—ek akela is shehar main. The song is about the inability of a man to buy a home in Mumbai in 1977. Thirty seven years later nothing has changed on that front. In fact, things have only gotten worse.
And the reason for this is very simple. Most homes across Mumbai and large parts of this country remain unaffordable for the same reason as the Indian consumer had a choice of only two cars in 1977. There is no free market in real estate.
Most real estate companies are fronts for politicians. What makes this very clear is the fact that even though there are thousands of real estate companies operating across India, there is not a single pan India real estate company. Forget pan India, there are very few companies that operate across large states. Most of the big real estate companies have an expertise in a particular part of the country. Why is that the case?
The answer lies in the fact that for any real estate company to operate in any part of the country it needs the cooperation of local politicians. And politicians in every area have their favourite real estate companies. This effectively ensures that even though there are many real estate companies there is very little genuine competition among them to offer the best possible home at the best possible price to consumers. Also, it limits the ability of a real estate company to grow in different parts of the country. It is not possible for the same real estate company to manage politicians everywhere. In short, the free market is not allowed to operate.
There is huge government interference in the sector to ensure that the favoured real estate companies continue to benefit. 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 spiraling prices resulting from scarcities than you could out of the hard work that goes into more construction.”
Over the years, the major infrastructure projects in Mumbai like the Bandra-Worli Sea Link or the Versova-Ghatkopar metro link, have addressed areas that have already been built up. The Sewri-Nhava Sheva link, which will open up a lot of land for housing is yet to see the light of day.
One excuse that is constantly offered by the real estate companies to justify spiralling prices is the lack of land. While this may be true about a city like Mumbai it is not true about most other Indian cities.
The Indian Institute for Human Settlements in a report titled Urban India 2011: Evidence esimates that “the top 10 cities are estimated to produce about 15% of the GDP, with 8% of the population and just 0.1% of the land area.” So clearly scarcity of land is not an issue.
This 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.”
Over and above this the end consumer has almost no access to price and volume trends. He has to go by what brokers and real estate companies tell him. And for these insiders the real estate prices are always on their way up. In this scenario the real estate market is completely rigged in favour of brokers, real estate companies and politicians. This is what the Nobel prize winning economist George Akerlof called a scenario of “asymmetric information”.
As Guy Sorman writes in An Optimist’s Diary “Economic actors don’t all have the same information at their disposal. Without institutions to improve transparency, insiders can easily manipulate markets.” This is precisely what is happening in India—politicians and real estate companies acting as their fronts, have been able to manipulate the entire system in their favour.
And unless this changes, the dream of owning a house will continue to be just a dream. Until then we can thank Gulzar, Jaidev and Bhupinder Singh for this beautiful song and hum it…ek akela is shehar main…

The article originally appeared on www.Firstbiz.com on August 4, 2014

(Vivek Kaul is a writer. He tweets @kaul_vivek)

What Modi can do to bring acche din for home buyers

India-Real-Estate-Market
Vivek Kaul


People have taken the Bhartiya Janata Party’s election slogan “acche din aane waale hain”a little too literally. I have often been asked on the social media over the past few weeks whether real estate prices will fall, now that Narendra Modi government is in power. I wish I had a definitive answer for that.
Nevertheless, there are many things that the Modi government can do so that home prices start to mirror the actual demand from people looking to buy homes to live in. Right now, a major part of home demand comes from investors and speculators looking to park their money. How can this be taken care of?
There are a number of steps that can be taken.
a) The Modi government wants to get back the black money Indians have stashed away internationally. As per data from Global Financial Integrity, this amounted to a whopping $644 billion as of 2011. While the intention to get back all this black money is certainly noble, how practical is it? Also, if the idea is to recover black money then why discriminate between those who have managed to transfer the money abroad and those who haven’t.
It will be certainly easier to recover black money that is still there in the country. Also, the amount of black money that has remained in the country is likely to be significantly more than what has left the shores. A lot of this money has been diverted into buying real estate. This link between black money and real estate needs to be broken.
Former finance minister in the budget speechhe made on February 28, 2013, said “There are 42,800 persons – let me repeat, only 42,800 persons – who admitted to a taxable income exceeding Rs 1 crore per year.” This number is totally unbelievable given that nearly 27,000 luxury cars are sold in India each year. Over and above this estimates made KPMG suggest that there around 1.25 lakh high networth individuals in India who have an investible wealth of at least a million dollars(around Rs 6 crore), and also own a house and other durables.
What this clearly tells us is that as a nation we barely pay taxes. This means we are generating a lot of black money. A large amount of this money goes into real estate, and ensures that real estate prices remain firm. This wouldn’t have been possible without the cooperation of the highly corrupt Income Tax department.
In fact, the Modi government could do some out of the box thinking like the Greek government, to recover this 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 need to be come up with. The property dealers of the National Capital Region and the amount of taxes they pay, will be a good target to start with.
If real estate prices need to fall, more and more people need to be forced to report their income properly and made to be paid a tax on it.
b)One of the most well kept secrets of the Income Tax Act is that it actually encourages people to speculate in real estate. There is no restriction on the number of homes against which you can claim a tax deduction on the interest paid on the home loan to fund the property. Only one of these properties needs to categorized as a self-occupied property. On this self-occupied property, an interest of up to Rs 1.5 lakh can be claimed as a tax deduction.
But this limit does not apply to the remaining homes that an individual may choose to buy. Any amount of interest paid on home loans can be claimed as a deduction as long as a “notional rent” is added to the income. We all know that these days “rents” are relatively low in comparison to the EMIs that need to be paid in order to repay the home loan. Hence, the interest component tends to be massive during the initial years and helps people with two or more homes, claim huge tax deductions.
This “loophole” has been used effectively by well paid corporate employees to bring down their taxable income over the years. People who use this deduction are more interested in claiming the deduction than actually making money from an increase in price. Hence, they are likely not to sell, even in a scenario where prices may be falling.
While offering a tax deduction on a self occupied property makes some sense, there is no logic to offering a tax deduction on a home, one is not living in. This “loophole” needs to be plugged immediately.
c) The Modi government needs to work towards building a credible real estate index. Currently, there is no way of figuring out which way the real estate market is heading. Are prices rising? Are they flat? Or are they falling? These are important questions for anyone looking to buy a home to live in. Brokers will always tell you that prices are going up. Real estate consultants bring out reports on home prices, now and then. But given that they make their money from real estate companies, these reports needed to treated with a pinch of salt.
The National Housing Bank does have a real estate index. But not many people know about it. Also, it is a quarterly index, and by the time the data actually comes out, it is not of much use. As of now the datafor up to December 2013 is available. But we are already in June 2014. The government needs to look at building an index along the lines of the Case-Shiller real estate indices in the United States. This will not lead to results immediately but will really help over a long term.
d) In the short term the government needs to look at the real estate lending of banks closely. Most recent data released by the Reserve Bank of India shows that between April 19, 2013 and April 18, 2014, the overall bank lending grew by 13.9%. During the same period the lending to commercial real estate grew by a significantly higher 19.8%.
This, in an environment where real estate companies have huge inventories. So, why are banks lending money to real estate companies? And what are real estate companies doing with that money? One possible explanation is that banks have been giving fresh loans to real estate companies so that the companies can repay their old loans. This has allowed real estate companies to not cut prices on their unsold inventory and ensure that prices do not fall.
This is something that needs to be looked into closely.
e) These days more and more real estate companies seem to be interested in launching new projects, rather than delivering the homes that they have already sold to the consumer. Companies use the money they raise for new projects to pay off interest on debt as well as repay debt that they have taken on over the years. Hence, there is no money left to build homes.
In this situation, the only way left for the company to raise more money to build homes is by launching newer projects. The money raised for one project is used to pay off interest on outstanding debt as well repay debt that is maturing. In order to build homes promised under the project, another project needs to be launched. This leads to the first project being delayed. To build homes promised under the second project a third project needs to be launched.
And so the cycle continues. In order break this cycle, the idea of a real estate regulator had been proposed a while back. That does not seem to have gone anywhere. It needs to be re-considered, even though it may not lead to immediate results.
If these steps are taken in the days to come, there might be some relief for people looking to buy homes to live in.
The article originally appeared on www.FirstBiz.com on June 13, 2014 

(Vivek Kaul is a writer. He can be reached at [email protected])