An Evaluation Of Realty Sector; Leading Players, Experts Examine Issues And Prospects

Kochi: Destination Kerala organised its second edition of the CEO Roundtable presented by RADO Switzerland and powered by INKEL Limited at the Le Meridien Kochi in May to discuss how the recent Real Estate (Regulation and Development) Act 2016 will help usher in a new era of transparency and growth in the real estate industry in Kerala.

The panelists were K V Abdul Azeez, Chairman and Managing Director, Skyline Builders; S Adikesavan, CGM – Commercial Banking, State Bank of Travancore; Elizabeth Philip, Chief Town Planner (Retd.), Greater Cochin Development Authority (GCDA); Ramakrishnan P, Deputy Managing Director, Sobha Limited; G Shankar, Founder Chairman, Habitat Technology Group and V Sunil Kumar, Managing Director, Asset Homes.

The deliberations were moderated by Destination Kerala Chief Editor Jose Kunnappally.

What is your reaction to the new Real Estate Act?

Shankar: The new Act calls for a regulatory authority in every state which is being set up. But though the original Bill envisages stakeholder community representatives in the regulatory body, it is not being followed in many states. Lot of unwelcome things are happening and a government body regulating that is good. Customer needs regulation so that promises are kept and justice served.

Elizabeth: It is a good step for customers as it is reassuring. Certain clauses like 70 per cent funds to be set aside will affect builders. Builders will hike cost and this will impact buyers. Real Estate Regulatory Authority (RERA) could become another department leading to more delays in project approvals.

Adikesavan: It is the best thing that could have happened to the real estate industry. This is also the best time for Confederation of Real Estate Developers Association of India (CREDAI) to ask the RBI to relook at easing financing norms for Commercial Real Estate-Residential Housing (CRE-RH).

Sunil: CREDAI has been demanding this Act for the longest time. It is good to curtail bad practices. Serious builders are delighted and welcoming the Act. The initial phase will be painful as there are many unclear areas in the Act. Projects are to be certified as per the new Act but services are not. Also the new Act has not set any entry barriers and is not mandating builders to register or get certified. Locking in 70 per cent of project fund is a big error. For projects in high land cost areas if 70 per cent is set aside, you cannot do the project. The lock in percentage should be differential based on location of project.

Ramakrishnan: The measures of the new Act are good for end users and contractors; not for developers. It is a one-sided Act.

Sunil: A glaring miss in the new Act is that monopoly stakeholders (State-run electricity, water, sewage and other departments) are not within the purview of the Act. Also definite time frame for granting approvals is not mandated by the Act.

Azeez: This Act is the need of the hour. I know many who have been working for so many years to pay back the bank for a house which will never be delivered. Avenues for corruption have been increased by the new Act. To release 70 per cent fund, builder will need an Occupancy Certificate (OC). To get an OC, bribe will be sought. For the past 10 months, builders have been waiting to deliver completed projects due to pending fire clearance.

Sunil: Fire is an interesting area where ambiguity looms large. As per our existing norms, every bedroom needs two fire escapes. And our Fire Department says developers can show the toilet door as the second escape door! Such senseless rules and interpretations!

Azeez: Working capital requirements will increase heavily due to the new Act, especially for zero-debt companies. This means we will have to borrow huge amounts which will lead to increase in cost of unit by 20 to 30 per cent thanks to interest cost. This 70 per cent provision will impact good builders and their customers.

Another issue is that I cannot lean on Fixed Deposit (FD) and take loans as FD is not allowed on 70 per cent project funds. Also I want to know how will you give me project funding? What should be my security for project loan?

In the last five years what are the new trends you have witnessed?

Azeez: The recession of 2008-09 was nothing short of a blood bath. Year 2010 onwards the serious players have been rebuilding confidence in the market. For the next few years it was business as usual. In the last couple of years, we have done quite well and witnessed growth of 5 to 10 per cent year-on-year. Customers have also come to realise that if developers are offering throw away prices, their projects are less likely to be delivered. You cannot offer a price below certain cost and still sustain the business.

Sunil: In 2007 there were many second and third home buyers in the market but today there may be some second home buyers but third and fourth home buyers are negligible. Earlier, the product (an apartment) with its specifications was the focus. Now it is the brand, its values, services offered by the developer and their credibility in the market. All of this has led to remarkable improvement in quality of products and related services.

Oil crisis and its impact on NRKs is a big worry for industries like real estate. How do you see this panning out?

Ramakrishnan: The Gulf oil crisis is a temporary phenomenon, though NRK investments have come down heavily due to job insecurity. Most of us do not target first home buyers. For second and third home buyers they can always delay the decision and that impacts us a lot. This is true for the last few years especially.

Azeez: Gulf crisis hits Kerala the most. I don’t think it affects any other Indian state as much. 50-60 per cent of our sales involve NRKs. If the situation worsens, Kerala economy per se will be in trouble. Oil prices are climbing back and this is indeed good news.

Of late, there has been increased awareness about planned, inclusive and responsible development. Is enough being done?

Shankar: Ninety per cent of Indian usable land lies with 10 per cent of the population. It is a grossly unequal situation leading to mafia and speculative market and other unhealthy practices. Land banks are being created even in Kerala.

We are majorly responsible for deterioration of our environment. ‘Maidan architecture’, as I call it, through which land is flattened and structures are built on top of it is the primary reason for extreme weather. Environment is being violated for indiscriminate development.

Another area that needs attention is the possible impact in the event of a disaster. Kochi is a very vulnerable city in terms of disaster. It is floating on sewage. It is frightening when you think how big buildings are going to stand. We are not focused on disaster alleviation. Buildings built on stilts with basement parking are another major concern. Cantilever balconies are also risky. They can create wow but also wreak havoc.

Ramakrishnan: It is high time mapping is done in the State. In two to three years you can complete it if we are determined. Our large engineering student community can be leveraged for this.

Elizabeth: Mapping can also ensure that land use data is updated in the records which can make life a lot easier for the builders as plans can be approved faster and town planning schemes can be launched easily.

Affordable housing seems to be a big growth opportunity with the government’s focus on ‘Housing for All by 2022’. How do you see this shaping up?

Shankar: Today, nationally we have a consensus around ensuring housing for all. But in the last 50 years we have failed to look at housing seriously. It took 40 years since the Five Year planning kickstarted in the 1950s to look at construction sector, especially its employment potential and social impact. By then, homelessness had grown to unimaginable scale. Presently 60 million families (30 crore people) live devoid of a decent shelter with safety, security, sanitation and clean cooking space. Affordable housing is the crying need of the hour.

Adikesavan: There is tremendous scope for houses in the range of Rs. 35-40 lakh as they come almost within the RBI norms of priority sector lending. Rs. 28 lakh is the maximum amount that can be sanctioned as loan for priority sector classification. This is also an opportunity as an apartment costing Rs. 40-50 lakh will become eligible for priority sector loan of Rs. 28 lakh if the cost is shown excluding MEP fittings and furniture and fixtures at around Rs. 35 lakh.

Ramakrishnan: Many of our customers who are staying in rented apartments find it difficult to set aside funds to pay EMI towards a home loan for a Rs. 35-45-lakh home, even pre-EMI.

Adikesavan: In Japan they allow 50-year repayment tenure for home loan. In India the maximum tenure is 20. When buildings can last for 50 years, why should we ask customers to pay in 20? If you extend the tenure to 45-50 years, EMI will come down drastically and many more people can afford a home. For home loans, I would recommend we give a moratorium for three to five years.

Would you do affordable housing?

Sunil: If we follow all the rules and regulations and complete a purchase, almost 27-28 per cent is paid to government as service tax and registration, VAT, utility connection charge, welfare board fund, building tax, fire charges, panchayat levy etc. Caution deposit for electricity connection to a 5000-sq.ft. super luxury apartment and a1000-sq.ft. affordable housing is the same! Government does not reduce any levy anywhere and expects housing to become affordable.

Now a portion of ST has been waived off by the Central Government. But many more waivers are required. Indeed, a separate slab system should come in for affordable housing. Land at affordable prices, tax waivers, skilled labour supply, technology innovation, material innovation, scale etc. also contribute to affordability and not just builders reducing their price per square feet.

Banks tend to look at real estate with extreme caution. Something they do not reserve for other sectors like Steel or Cement. Why cannot we have a level playing field?

Adikesavan: The crisis of 2008 led to regulatory oversight on financing of commercial and residential real estate as many loans came under stress. It was felt that in order to cope with stress in the future it was needed to increase risk weightage for loans to this sector.

The loan given to a sector like steel or textiles has 20 per cent risk weightage whereas for real estate, if it is CRE, its 100 per cent and for CRE-RH the weightage is 75 per cent irrespective of whether builder is rated AAA or financially sound.

It is 1 per cent provision for standard loans for CRE and 0.75 per cent for loans to CRE-RH while it is just 0.4 per cent for other sectors. This invariably increases the cost of loan.

Azeez: We are creating social assets worth Rs. 150-200 cr. The value is many more times than what you lend. Then why such stepmotherly treatment?

Adikesavan: South East Asian crisis started with a real estate crash in 1997 where capacity built up was more than two to three times the demand. In 2008, the then RBI Governor strongly felt that it is a sector where asset bubbles can be created easily. Hence, a cautionary approach was followed. After agriculture, the largest employer in the country is real estate industry. Creating social infrastructure is important. CRE-RH should be exempted from higher credit weightage requirement.

Azeez: 90 per cent of the commercial loan bucket goes to 2 per cent of builders who create havoc in the market. Kerala does not even get Rs. 5 cr worth of loans. Rs. 25,000 cr is the exposure to one big real estate player which is under stress!

Adikesavan: I agree with you completely, concentration of risk is a big problem. This is true for other sectors like steel also. Processing effort required for sanctioning a loan of Rs. 5 cr and Rs. 500 cr is the same and hence, the preference is to release Rs. 500 cr and meet target. But that approach is wrong. When I lend I should look at what is the social impact.

We have heard pending approvals from government departments have been delaying projects. Are things better now?

Elizabeth: I cannot say things are better today. In my view, it was better earlier. At that time, we had master plans prepared for all major cities. Now all approvals are granted by only local bodies but they don’t have the expertise to go through plans, interpret them and give sanction. Earlier, there were development authorities like GCDA who checked each plan and granted first approval based on land use. And then the proposal went to the local bodies. At that time all stakeholders were complaining that we have an extra agency now to deal with but I think it was a good thing to have. Local bodies do not have sufficient staff and they have engineers who are made town planners overnight. But town planning is a specialised role. In other countries, there are registered practicing architects and town planners, and they scrutinize the plans and approve each plan. They are held responsible.

Ramakrishnan: In India there is no indemnity for structural engineers. They should be held accountable, like CAs. Until there is a regulation for holding architects and structural engineers responsible for their actions, instead of only pulling up the builders, things will not change for the better.

Sunil: Rules and regulations need to be much more simple and clear.The fact that a precedent is also not honoured is a big issue when it comes to approvals. Sometimes sanctions granted are also withdrawn citing rules. The newly-constituted Real Estate Regulatory Authority (RERA) is expected to iron out these issues. 

We are in the midst of yet another extreme summer. Green housing is being suggested as a long-term solution to counter this.

Shankar: Time has come for seriously rethinking our approaches. We are struggling to live on earth. Unsustainable activities have been going on in the construction sector for years. We are using five billion litres of water in Indian toilets every day. 32 per cent of energy produced in India is going towards construction; 30 per cent for building infrastructure. It is alarming. Promoting organic architecture that responds to geographical, cultural and topographical sensitivities is the need of the hour.

We have been fighting with government over determinants of LEEDS rating. It is a big scam; parameters judged for granting the rating are non-consequential. Many builders are using such ratings to mislead customers. Builders talk about green glazing and green air-conditioning and secure huge credit. Orientation of the building, its natural ventilation etc. are overlooked.

Today most buildings are erected with no concern for natural ventilation or natural energy sources. Builders have to do proper Energy audit and even Nature audit if they manipulate the land. There are enough design solutions to create responsible infrastructure today.

Developers very often manipulate to get maximum Floor Space Index (FSI). FSI is important for viability. And architects have to somehow comply as builders put enormous pressure on them. So indemnity should come to builders also as we share the responsibility.

Azeez: Nowadays lot of importance is being given to greening in projects by responsible builders. Customers are also expecting developer to do proper landscaping and plant trees and earmark gardens and so on. I agree only a minority of builders do this. The rest are building concrete jungles.

Shankar: There is a wave of green awareness for quite some time now in the sector which is heartening but sustainability while creating infrastructure is still a major concern. If you study urban mobility in Kerala you will find that 65 per cent is pedestrian and still new roads are being built without considering this. Pedestrian pathways that are safe and secure are urgently required but very little is being done.

What is the industry doing in the area of skill development? Already the entire labour force in the construction space is non-Malayali.

Shankar: Having worked on projects around the world, I can vouch with conviction that we have world class carpenters and masons in terms of their traditional skills. But where are they today? Our legacy is broken. Skilling is a major concern for real estate industry that needs concerted efforts to address. Many migrant workers are coming to our State but they do not have real skills. It may be the reason why real estate companies like Sobha are running skills training academies.

Sunil: ASAP (Additional Skill Acquisition Programme) of Kerala Government is a good initiative on paper but the outcome in terms of number of good plumbers or carpenters it has released into the market,  is questionable. Construction Industry Development Council (CIDC) is doing a good job in the rural sector and focuses on micro specialty.