Home » News » Real Estate

Presents

Co-Sponsored by

In Association With

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.

Set email alert for

ADS BY GOOGLE

Ask the Experts

Get your Personal Finance queries answered

  • Q

    Interest rates are going to go down. And all my fixed deposits will be maturing next year. I will have to renew my fixed deposits next year at lower rate of interest. What is the way out?

    A

    Interest rates keep fluctuating due to various micro- and macro- economic factors. There is never an ideal rate of interest. In a high inter...

  • Q

    If I put Rs 2 lakh in PPF, how much tax rebate I will get?

    A

    As per the existing guidelines and rules a person cannot deposit more than 1.5 lacs in one PPF account. However you can deposit money in the...

  • Q

    I want to buy online term life insuance plan. Which is the best one? Should I go for single premium or regular premium policy?

    A

    Single premium term insurance policies don?t make much sense. Why pay such a large amount at one go when you have the option of paying in sm...

  • Q

    I want to invest some money with at least ten years view. I dont want share market risk. Can I invest in NSC? Is there any other investment option?

    A

    NSC or National Savings Certificate is a safe investment scheme offered by the Central Government. It is an ideal option for investors with ...

  • Q

    Is it a good idea to invest in asset allocation funds? if yes, please suggest some good fund to invest money. I am 35 years old and can invest Rs 10000 per month.

    A

    Asset Allocation Funds are for those investors who want to take an exposure into different asset classes but do not wish to create their own...

  • Q

    My CA says that I have to pay tax on interest accrued on my FD of Rs 20 lakh. I have submitted form 15H in all banks. Is it necessary to pay tax in this case?

    A

    In case of interest on fixed deposits which is taxable under the head ?Income from other Sources? a taxpayer has two choices. Either you can...

  • Q

    Please suggest a good investment option of land in South India. I want to buy a land parcel of around 2 acres.

    A

    If you take a look at the South Indian real estate market, Bangalore has emerged as a clear winner. Due to the strong presence of IT/ITeS an...

  • Q

    I want to invest Rs 20000 per month. I have identified Reliance Small Cap Fund and DSPBR Micro cap fund for investment. I can hold to investments for two years. Is it a good idea to invest in these schemes? How much returns I will be getting?

    A

    If you are an aggressive investor, you can consider investing in either of the 2 funds.DSPBR Micro Cap My suggestion is that if you are inve...

  • Q

    I want to save my money for retirment Please suggest a good insurance policy

    A

    For retirement it is advisable to use multiple investment instruments and not just life insurance policies. If you have 15 years or so for r...

  • Q

    IS IT a Good time to invest in GOLD ?

    A

    Currently the outlook for gold is bearish/negative. However if you are planning for a long-term investment in gold it is ideal to invest the...

  • Q

    I have retired from my job in November. I have got Rs 48 lakh from my employers, by way of epf, gratuity and other benefits. Should i invest in senior citizen scheme of LIC? How about pension plans from LIC?

    A

    1. You can invest Post office Senior Citizen Scheme. 2. You also should invest lumpsome in MIP in post office and get monthly interest. 3. K...

  • Q

    I want to save Rs 1 crore for my retirement when i turn 60. Now I am 42 years old and have fixed deposits worth Rs 18 lakh.What should I do to reach Rs 1 cr mark?

    A

    start investing a minimum 5000 per month in mutual fund and increase 10% to 20% every year....

  • Q

    I want to save on my utility bills and fuel expenses.Please suggest a good credit card for me.

    A

    Yes, you will be able to save on Utility bills and fuel expenses through the cash back schemes offered by some of the credit card companies....

  • Q

    Suggest couple of equity mutual funds for me. I am keen to invest Rs 25000 per month for next couple of years. I can remain invested for at least five years?

    A

    Asset Allocation Funds are for those investors who want to take an exposure into different asset classes but do not wish to create their own...

  • Q

    I am a senior citizen.I received interest of Rs .1,70,000/- on FD.I have duly filled 15G form.I have NO other source of income.Have I to pay Income tax on this interest or can it be excempted?

    A

    Sir, please note if you are less than 80 years but more than 60 years of age, your total income upto Rs 3,00,000 is exempt from tax, you are...

  • Q

    Please suggest a good money back policy for me. I am 27 years old and want to accumulate Rs 10lakh over 10 years.

    A

    If you are a fan of traditional money back policies, go in for the LIC New Money Back Policy of 20 or 25 years. I would suggest you go in fo...

  • Q

    I want to buy a life insurance for my brother Please suggest a good policy. He is 19 years old. he should get Rs 5 lakh when he turns 25 years.

    A

    Best to go in for a ULIP in case he is looking to grow the money also. Go in for a ULIP like HDFC Click 2 Invest which is very low on charge...

  • Q

    In 2013, I bought an Endowment policy from LIC. Premium for that is around 35K per year. Now i understand, this was a big mistake and i want to go for a term insurance policy. I have already paid two premiums in 2013 and 2014 and I want to make this policy paid-up. Can i pay one more premium this year and make that endowment policy paid-up ? Or is there any better alternative ? Please suggest.

    A

    Yes, you can convert to a paid-up policy after 3 years premiums have been paid. I would recommend that you surrender the plan and take back ...

  • Q

    Is zero depreciation cover a good option under auto insurance? I have plans to buy honda city in January

    A

    Zero depreciation is a good option to along with the standard car insurance plan. By paying a slightly increased premium you can ensure that...

  • Q

    I am 20 years old,I am getting 17+ % or returns from share in my portfolio consistently for the last 6 months.should i think about a career in stockbroking?

    A

    Its nice to note that your portfolio has been gaining such high returns, however it might be too early to take a call and make stockbroking ...

Explore Moneycontrol

Copyright © e-Eighteen.com Ltd. All rights reserved. Reproduction of news articles, photos, videos or any other content in whole or in part in any form or medium without express written permission of moneycontrol.com is prohibited.