Sep 05, 2013 05:38 PM IST | Source: CNBC-TV18

Why Land Bill is giving sleepless nights to developers

The cost of land would shoot up to that extent it would add to the project cost both for the industry and for the developers, says Ajit Mittal, ED of Indiabulls Group.

The Land Bill brings along with itself three major challenges for developers - high cost delay in meeting project deadline and resettlement and rehabilitation package, says Ajit Mittal, ED of Indiabulls Group.

The cost of land would shoot up to that extent it would add to the project cost both for the industry and for the developers. Clauses like consent of 80 percent people will pose a huge challenge on how to go about identifying families who are going to be affected. Any person later on also can go to the court and stall the process. All the cost associated with  resettlement and rehabilitationis going to be front loaded, he elaborated.

Rajeev Talwar, ED, DLF added that the cost of land which is already available is likely to seek higher value because new land supply may take a long time to come into the system. Therefore, it will have an impact not only on landed projects, but also on flats and other products of urban development, he told CNBC-TV18 in an interview.

The Land Acquisition Bill, which seeks to provide just and fair compensation to farmers while ensuring that no land can be acquired forcibly, was passed by the Lok Sabha. The government says the bill, which will replace a muddled law dating back to the 19th century, will help speed up industrial investment by making the rules clearer.

Below is the edited transcript of the interview

Q: What is your take on Land Bill? What it could mean for property prices?

Talwar: Post this bill, we will come out facing a new situation where there will be cost of new land and its implication on cost of land available either with the state government or private owners whether they belong to industry or urban development. Then the cost of land which is already available with them may seek a higher value because new land supply may take a long time in coming into the system. Therefore it will have an impact not only on landed projects, but also on flats and other products of urban development.

Q: From what you are saying property prices of existing projects will go up that even developers like DLF will think of maybe revisiting business plans to raise prices of up coming projects on tracks of land that have already been acquired?

Talwar: Wherever there is a historical land, the cost of future purchases may kick into this. Therefore one may see a better return to the existing land holders. The ones who are coming in the future may really have to agree to pay a higher price.

Q: What according to you will be the key challenges that developers like you will have to overcome post the enactment of the Land Bill?

Mittal: One implication is on the cost side. Cost of land would shoot up to that extent it would add to the project cost both for the industry and for the developers. While the impact on industry would be largely muted as the land per se is a very small component of the overall project cost, so to that extent this can easily be absorbed.

The major worry is the delay part because on one side it is going to fast track the process because it is going to largely favour farmers or those who possess land. On the other side, clauses like consent of 80 percent people will pose a huge challenge on how to go about identifying families who are going to be affected. Any person later on also can go to the court and stall the process.

Third challenge is resettlement and rehabilitation. All the cost associated with that is going to be front loaded whereas cash flows in any project, in any business typically take time – as long as five years, three years.

Q: Land acquisition is going to get more costly and with the compensation packet and the R&R activities cost will also have to be front loaded – developers are facing cash crunch as it is and on top of that RBI does not allow debt to be raised for buying land – do you anticipate RBI perhaps taking softer position?

Mittal: That is a separate issue. RBI has been conservative. There are issues which developers are going to face in the segment of affordable housing particularly those where land cost is going to be quite sizeable relative to overall cost of the project. But most developers today if one sees have got historical land banks. Developers like us for instance we don’t have much land which we have purchased or which we are going to purchase for the farmers.

Most of the land is acquired through the auction route particularly from the government agencies. We don’t see much of a problem there. But, yes, obviously for developers who are going to depend sizably on land acquisition route for their projects, this is definitely going to be a big add on into their cost structure.

Q: If land acquisition is going to become so much more expensive I cannot imagine developers absorbing that cost, they are going to pass it on to the consumer?

Mittal: I imagine major part of cost escalation would eventually happen to be borne by end user, the customer. But margins are also going to be squeezed a bit particularly those developers who are going to or who have been reliant primarily on acquiring land in tier II, tier III pockets from the farmers agriculture land which is converted.

That segment is definitely going to be in for some hard time initially because they will also have to bear the burden. It is not the cost of land per se which is going to really impact so much, it is the rehabilitation and resettlement component which even private bilateral deals where the sale and purchase is through voluntary process even there this R&R package has to be offered.

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Q: You just heard Indiabulls talking about affordable housing taking a hit. We had Niranjan Hiranandani say the same thing to CNBC-TV18 that we would see a 25 to 35 percent cost escalation for these affordable housing projects. Is that also DLF's view?

Talwar: If land prices go up and land availability goes down then affordable housing would not be as affordable as it is now. That is very correct. Mr. Hiranandani or Indiabulls or anyone for that matter who is going on economic principles would agree with it.

Q: What also happens to all of those projects who have been planned and for which land acquisition may not have been completed till the enactment of the land bill, many of these projects are even being pre-launched while the developers are simultaneously trying to aggregate land nearby. What is the fate of these projects?

Talwar: We only make projects on land which is already owned by us and we plan it for a long time before we get our clearances. But a large number of places in the country where perhaps with government institutions or without them projects have been started. They have been held up due to some agitations or due to some processes not being followed, maybe clearances were not there. We are wondering what will be the impact on various players across the industry.

Q: The fact is investors and developers stand to lose if land acquisition has to abe started afresh. Are there any grey areas to when that actually has to take place?

Talwar: Is it a totally blue sky situation. What about projects, what about master plans being implemented in various states, various cities of India? What about the projects which are already underway? What about townships which are already being constructed where hundreds of thousands of people have invested their savings?

If the government was to meet certain obligations which it has for either laying of roads or sewage systems or water pipelines or electricity lines or substations or small buildings required for sewage disposal, what about those? Will they start off from square one or will the external development charges, internal development charges paid for already, will they account for it? Those may get accounted which would be very sad, because already large number of people running into perhaps millions have invested their savings into such projects.

Q: Going forward will companies like DLF, will other developers still be interested in acquiring large land parcels? I am talking about those hundreds and thousands of acres for large integrated townships. Are we going to perhaps see a demise of these kind of townships?

Talwar: That would be true. How do you acquire land for a large township if private sector transactions of willing buyers and willing sellers have to come under this provision of the act.

Q: You heard DLF talking about charging a premium on historical land. Do you agree with that? Is that also Indiabulls position?

Mittal: Certainly, that is like family silver. Somebody who is sitting on historical land bank anyway has a competitive advantage compared to others who are buying land today. Even if they buy the land outside of the ambit of the current Land Acquisition Act historical land bank has its value. Definitely it is the source of big comfort to the builders who possess historical land bank.

Q: High Networth Individuals (HNI) also own very large tracts of land and these HNIs, industrialists do not need an Resettlement and Rehabilitation (R&R) package. How exactly is all of this going to pan out?

Mittal: There is another key element of this Land Acquisition Bill which people at the moment are omitting; I have been watching on most TV debates, there is a very critical element of the bill which is focused on the leasing part. It is not mandatory that you have to necessarily buy outright. This bill also encourages people to explore the leasing options. Particularly, the leasing rentals in India are fairly moderate compared to the land prices as such, so it is going to be a win-win for both.

Some of their large industrial projects which have life cycles of 20-25 years, like for instance power, cement, steel, those large projects the project developers could explore the option of leasing from such HNIs. In that case, the ownership remains with the original landholder and also the developer or the industrialist does not have to incur that kind of upfront cost. At the end of the lease period the land either reverts to the original owner or the lease can be renewed or at that point in time they can even buy the land outright. That is another option which gives hope to me and which I believe should become a practice going forward. People should seriously explore that.

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