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Sep 06, 2013, 03.52 PM IST | Source: CNBC-TV18

Land Bill: Real estate developers upset over key clauses

The passing of the Land Acquisition Bill in the Lok Sabha last week, real estate developers are unhappy about key clauses over compensation and rehabilitation.

With the passage of the crucial Land Acquisition Bill, property prices are all set to escalate. Replacing a 120 year old archaic Land Acquisition Act, the new Land Bill, a pet project of Rahul Gandhi, is seen as anti-industry. Industry body, Confederation of Indian Industries (CII) feels that the cost of land acquisition could rise by 3-3.5 times.

JP Morgan pegs a price hike of 25-30 percent for new housing projects and predicts long-term property prices to settle at a higher base of Rs 3,500-4,000 per square feet. Real estate developers’ body, Confederation of Real Estate Developers Association of India (CREDAI) says developers’ margins may take a hit of 10percent.

Also read: How Land Bill will change India's real estate scenario

Here are some of the clauses in the Land Bill that will spike the prices of property going forward:

1. The compensation package; the payment against land will be four times the prevailing market rate, while urban areas will receive payment double that of the market rate.  

2. Private entity seeking to buy land will have to get an approval of 80 percent of the affected families. The process may be cumbersome and lead to delays.

3. If the acquired land is sold to a third party with a profit, then 40 percent of the appreciated value will have to be shared with the original owner. This would be exempt from stamp duty.

Niranjan Hiranandani, chairman of Hiranandani Group says, “I don’t think that we have a cure. Let us take the example of Navi Mumbai Airport. We have acquired 90 percent of the land. For acquiring 10 percent of the land, we will have to compensate the farmers or the people, villagers or whoever owns the land equal to 90 percent of the land which is already acquired."

"So, you will actually increase the cost of acquisition for 10 percent of the land by 9 times. This is going to push project costs up.”

Sanjay Ubale, MD and CEO of Tata Realty also echoed Hiranandani’s thoughts on similar lines. “The cost of acquisition of land in case of Navi Mumbai Airport itself is likely to go up to almost about Rs 2,000-4,000 crore, depending on the kind of compensation. It is going to be impossible for the government or private companies to pay for that land. Land owners are probably not expecting that kind of compensation."

"A situation of a paralysis where nobody wants this outcome is formed, but we are all going to be forced into an outcome because of the law.”

Amarchand Mangaldas reacts on the compensation clause.

“If there is a notified stamp rate, why should you have four or two times the value as when you calculate the stamp rate you are assuming that, that is the true rate of the transfer prices there. The aspect that compensation should be excessive four times, is beyond rationale. What is the equity in it? Four times is excessive, by any count four times is really excessive.”, says Shardul Shroff, managing partner of Amarchand Mangaldas. 

The Reserve Bank (RBI) does not allow developers to raise debt to buy land. Since the land cost will be higher and will also have to be frontloaded, cash-tight developers are in for a rough ride.

They are hoping states will liberalise floor space index (FSI) and floor area ratio (FAR) norms to ease the pain. Builders say the Rehabilitation and Resettlement or R&R package in the Land Bill will be the most troublesome and the cost of which will be difficult to ascertain.

Here are the details of the R&R rules:

The definition of affected family includes farm labourers, tenants, share croppers and workers in the area for three years prior to the land acquisition.

Land buyers will have to provide

1. Houses for all affected families.

2. Either a sum of Rs 5,0,000 or a job if available.

3. Subsistence allowance of Rs 3,000 a month, for one year.

4. Miscellaneous allowances of up to Rs 1,25,000 for each family.

“They are talking about how many labourers were working in the sites during the previous five years, who are to be rehabilitated and taken care of in future years. There is no accounting data which would be able to give some idea and how they have to be compensated"

"Most of those cases, the compensation is done through the payment of land price. That is going to cause a lot of confusion on the compensation for private acquisition, when we are not using the land acquisition route”, Hiranandani adds.

“The land acquisition compensation in the urban areas is not going to be twice, but is actually going to be four times. If the market price of a land is Rs 1 crore, the compensation of Rs 4 crore. Most of the cities are reeling under heavy shortage of infrastructure and are congested."

"If at all you have to shift a house, for developmental purposes, the compensation will have to be four times the market price. It is going to be impossible for the government or the local bodies. They are not even in a position to pay today’s compensation. They essentially give an alternative mechanism for example higher FSI in the benefited zone. It is impossible to compensate for urban areas for private companies”, says Ubale. 

“In pith and substance if this is a law for agricultural land and the R&R activities are in relation to owners of agricultural land, the state can argue that the centre couldn’t have made such a law. This issue incidentally was raised before the Standing Committee in Parliament. The house is aware of the risk", asserts Shroff. 

CII feels the R&R cost is also likely to go up by about three times compared to the prevailing practice.

Real estate firm Cushman &Wakefield says "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. 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."

Experts are unanimous in their belief that the Land Bill will hit affordable housing quite hard.

“A huge increase in costs especially in the case of affordable housing where the land component and other things are a large percentage of total costs will be seen”, says Hiranandani.

Affordable housing will also go up by 20-25 percent with increase in total costs. If they are outside the urban limits then it would be about 30-35 percent.

Meanwhile, brokerage firm Karvy explains the impact by giving the example of Bangalore-based listed firm Puravankara. Karvy says “ Puravankara Projects currently undertakes affordable housing projects at average land acquisition cost of Rs 200 per square feet and sells these apartments at Rs 2000 per square feet.

A 100 percent increase in land cost would constitute about 10 percent of sales or a 1000 basis points drop in EBIDTA margins or 10 percent impact on project valuation of affordable housing subsidiary. Hence, this will have a larger negative impact on real estate company's valuation in case it is not able to pass on price increase to customers.

This may result in Puravankara Projects increasing its sales price by 18 percent to maintain current margins or increase prices by 10 percent to maintain current EBIDTA per square feet at the cost of margin contraction."

The Bill also applies retrospectively to cases where no land acquisition award has been made. And in cases where the land was acquired five years ago, but no compensation has been paid or no possession has taken place, then the process will be started afresh in accordance with the provisions of this act.

Developers say this will lead to plenty of confusion, as land aggregation is a long process and thus the fate of many projects pre-launched hangs in balance.

“The whole concept of retrospectivity, the question of the whole compensation issue being reopened will all unsettle settled transactions or executed transactions and it will create its own nightmare”, adds Shroff.

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