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Sep 05, 2013, 12.48 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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