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Sep 06, 2013, 09.33 AM IST | Source: Moneycontrol.com

How Land Bill will change India's real estate scenario

Sanjay Dutt of Cushman & Wakefield discusses the impact of the Land Acquisition Bill on the overall real estate scenario in the country. He stresses on rising costs of projects and houses as a result of the passage of the Bill.

Sanjay Dutt
Cushman & Wakefield

The much debated Land Acquisition, Rehabilitation and Resettlement Bill, 2012 (LARR Bill) was cleared by the lower house of parliament in the first half of the Budget session. This crucial Bill that seeks to replace the antediluvian Land Acquisition Act, 1894 with a fresh legislation wherein the component of compensation for resettlement and rehabilitation of the project affected families is added.

The Bill covers land acquisition including for infrastructure and industrial developments bringing in government, quasi- government and other.

Also read: Here is why India Inc is miffed by Land Acquisition Bill

The LARR Bill is expected to majorly affect the development of large infrastructure development projects, industrial projects, integrated township projects and if they are brought under the ambit of this law.

While the populist objective is to ensure people losing land should be adequately compensated, the obverse that this will help the acquirers of the land to be more assured of the acquisition process and there by rule out problems of unwarranted claims and issues of inadequate compensations.

The provisions of the Bill will be applicable in cases of land acquisition of 50 acres in urban areas or 100 acres in rural areas. The compensation for land acquisition will now at least double in urban areas and will go up by 4 times in rural areas, according to the new LARR guidelines.

Thus, the cost of land acquisition will surely go up for all projects irrespective of them being government or private or public-private-partnership (PPP) projects as they will have to adhere to the new norms.

Further, the clause of mandatory consent of 80 percent of owners for private projects and consent of 70 percent landowners for PPP projects will delay the process of land acquisition and the projects in turn. As land titles are not clearly documented in our country, it will take quite some time to change the current situation.

The bill is expected to add to the cost of a project substantially as the expected time taken for acquisition of land thereby delaying the entire process. Apart from the existing requirement of going through the regular the legal and regulatory process which usually adds up to the time and cost factor of any major large scale project. 

Impact on infrastructure & urbanization

Infrastructure projects are the ones that will receive the sharpest blow. In many instances, this rise in input costs is likely to yield the projects unviable. As it is, the infrastructure projects are under pressure, especially those in the rural areas as it is difficult to monetize them; so the private sector is not interested in them.

The growth of India is largely dependent on the infrastructure development which the government cannot take up single handedly and co-operation of private sector becomes necessary. The consent clause will delay the start of the project; further making the required returns from the project difficult to achieve.

Thus if India’s growth story is to continue then a user development fee will have to be charged and the price of utilities like electricity, water etc. will have to go up to rake in the revenues.

All in all, this is a laudable reform by the government for providing equitable sharing of profits while also moving a step closer to laissez faire kind of environment.

The high rate of migration and natural growth rate of our population in urban areas highlight the need for building new cities as existing ones are overburdened. Satellite towns depend on the parent city for their work and employment requirements, while the need of the hour is to build self-sustaining urban centres.

With the LARR Bill developing cities on a large scale would be difficult due to the requirements of getting consent from 80 percent of project affected people, arranging for their rehabilitation and resettlement (R&R), as well as paying a premium price for land shooting up the overall budget to very high levels.

Higher land acquisition & overall real estate cost

For the real estate industry too, the addition of R&R component will be a big financial burden due to which the LARR Bill has received flak from them. Post the Bill, the cost of land acquisition will increase across the board and the real estate developers intend to pass on this increase in input cost to the buyers.

So certain sections of the industry feel that an increase in property prices will ensue the LARR; thus negatively affecting the ordinary buyers. Considering the present scale of projects, most of the residential, commercial and retail real estate projects occupy an area of land smaller than the stipulated parcel size.

Many big private real estate players have bought the land at market prices and with 100 percent consent of the landowners. However, their input costs will rise as a result of the increase in compensation and minimize the profit margin.

Since the developers will want to preserve their profits, we will see more joint development projects happening, wherein the profits as well as the resources and the risks will be shared.

Already in many Tier-1 cities, joint development is route followed by developers, so this practice will now spread all over. Looking at the current scenario, the Bill should exempt open market transactions from its aegis to avoid the decline in investments and undue rise in the price of land for private purposes, thereby adversely affecting economic growth.

The author is the executive managing director of South Asia at Cushman & Wakefield.

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