CREDAI Study on - Magicbricksproperty.magicbricks.com/newproperty/img/credai18june.pdfFor organizing participation of members in the survey A special thanks is due to the city authorities

CONFEDERATION OF REAL ESTATE DEVELOPERS ASSOCIATION OF INDIA

CREDAIStudy on

SECTION 80-1B (10) THE INCOME TAX ACTImpact on Real Estate Development in India

ACKNOWLEDGEMENTS

The Research team wishes to thank CREDAI for having entrusted us with

the responsibilty of undertaking this research on its behalf.

Thanks is due to the senior functionaries of CREDAI, Mr Kumar Gera ,

Chairman, Mr Ramani Sastri, President, Mr Raj Menda, Secetary and Mr

Ranjit Naiknavare, Treasurer, for their active guidance throughout the

entire length of this project.

We also would like to thank the CREDAI associations across the cities of

Kolkata Mr Santosh Rungta and Mr Pradip Sureka

Jaipur Mr Gopal Gupta

NCR Mr Surendra Gupta

Pune Mr Rohit Gera, Mr Rajesh Chuadhari ,

Ms Aroona Nafday

Ahmedabad Mr Arun Chaturvedi

Mumbai Mr Nainesh Shah, Mr Ravi Nambair

Bangalore Mr Balakrishna Hedge, Mr Ramani Sastri,

Mr Srinivasan Desikachari

Kochi Mr Abdul Azeez

Chennai Mr Ramesh Reddy

For organizing participation of members in the survey

A special thanks is due to the city authorities of Pune, Pimpri-Chichwad,

Jaipur, Mumbai, Ahmedabad, Bangalore, Chennai and Kochi. We wish to

thank the officals of AUDA for their help.

Thanks is also due to the senior officals of PNB Housing Finance, ICICI

Bank, LIC Housing Finance and State Bank of India for their valuable

inputs. We also wish to thank the National Housing Bank for their help

A special thanks also due to Mr TS Venkatesan, Advisor, S Jalan & Co and

Mr Subhash Lakhotia for their special insight.

We wish to thank all the developers who responded to the question-

naire within a very limited time frame. Thanks is also due to all the

developers who met with the project teams and gave their valuable

inputs.

A special mention needs to be made of Mr V Suresh, Director Aerens

Gold Souk and former Chairman and Managing Director, HUDCO, for

guiding the research team through its analysis

The team wishes to thank Mr R Sunder, President, Time Business

Solutions for his valuable suggestions and guidance to the entire team.

Last but not the least, we wish to extend our heartfelt gratitude to Mr G

P Savlani, Resident Director, CREDAI for coordinating the exercise on

behalf of CREDAI and smoothing all the rough patches.

We would also like to thank all the support staff at every location as well

as our own administrative and design teams for handling the back-end

operations to ensure that the exercise went smoothly

MagicBricks Research Team

Section 80-1B (10)

TABLE OF CONTENTS

INTRODUCTION 1

BACKDROP 2

EXECUTIVE SUMMARY 4

MAGICBRICKS CREDAI STUDY 7

1.1 Objectives

1.2 Terms of the Study

1.3 Methodology

1.4 Deliverables

1.5 Scope of the Study

CHAPTER 1: SECTION 80-IB (10) 8

1.1 Details of Section 80-IB (10)

1.2 Aims & Objectives

CHAPTER 2: SECTION 80-IB (10): The Survey 9-20

2.1 Introduction 9

2.2 City Survey 9-14

2.2.1 Mumbai

2.2.2 Delhi NCR

2.2.3 Kolkata

2.2.4 Chennai

2.2.5 Bangalore

2.2.6 Pune

2.2.7 Ahmedabad

2.2.8 Jaipur

2.2.9 Kochi

2.3 Developer Response 15-17

2.3.1 Developers Availing Incentive

2.3.2 Case Study: Jaipur & Pune

2.3.3 Increase in no. of developers

2.3.4 Uniform interest across cities

2.4 Key Findings 17-20

2.4.1 Sec 80 IB (10) & Market Dynamics

2.4.2 Deterrents: Section 80-IB (10)

2.4.2.1 Specific Cases

2.4.3 Unmet Demand

Section 80-1B (10)

CHAPTER 3: HOUSING FINANCE 21-23

3.1 Home Loan Disbursals

3.1.1 SBI

3.1.2 LIC

3.1.3 PNB Housing Finance

3.1.4 ICICI

CHAPTER 4: DEMAND 24-29

4.1 Middle Budget Housing

4.2 Housing for all

4.3 Real Estate: Engine of Economic Growth

4.4 Indian Economy: Next to China

CHAPTER 5: RECOMMENDATIONS 30

CHAPTER 6: CONCLUSION 32

DISCLAIMER 33

Section 80-1B (10)

INTRODUCTION

Confederation of Real Estate Developers' Associations of India(CREDAI), India's apex body of promoters and builders withabout 18 state/city level associations of builders and developerscomprising of about 3,500 individual members across seventeenstates covering more than 60per cent of organized private realestate development activities in India, has retained the servicesof MagicBricks, India's No. 1 property website, promoted by TheTimes of India group, for the study on Section 80-IB (10).MagicBricks.com provides content pertaining to every aspect ofthe real estate industry and helps users make informed decisionspertaining to all their property requirements.The following document is a report on Impact of Section 80-IB(10) under the Income Tax Act on Real Estate Development inIndia.The study is in six parts. The introduction deals with the overallbackground to the incentive, the Executive Summary encapsu-lates the study and its findings in brief, Chapter 1 deals with theincentive, Chapter 2 deals with the survey and its findings,Chapter 3 tackles the issue of housing finance, Chapter 4 dealswith middle budget housing. Chapter 5 gives the recommenda-tions on the basis of the study and Chapter 6 summaries the con-clusion.Section 80-IB (10) tax incentive was announced in 1998 (validupto 2005, later extended to 2007) for real estate developers inIndia to construct upto 1,000 sq ft apartments in Delhi andMumbai (and a ring of 25 km around it) and upto 1,500 sq ftapartments in other cities on a minimum plot size of 1 acre. Thetax break is equivalent to 100per cent of the profits earned fromthis project in the previous financial year. (Annexure I) This tax incentive came into force in year 1998 after RakeshMohan committee's `India Infrastructure Report 1995', predicteda housing shortfall of 1 million housing units annually and the10th Five-Year Plan document released in 2002 predicted a hous-ing shortage of 22.4 million dwelling units.The government was of the view that such a requirement couldonly be met if the private sector was encouraged to participatein a very big way. The Section 80-IB (10) Income Tax Act was oneof the incentives used to provide the private sector with tangiblebenefits to construct smaller housing units which would thenremain affordable to the masses.

1Section 80-1B (10)

BACKDROPRakesh Mohan India Infrastructure Report 1995, predicted a housingshortfall of 1 million housing units annually, and the10th Five-Year Plan,estimated a housing shortage of 22.4 million dwelling units. Of the Rs150,000 Crore funds required by the housing sector in the Ninth FiveYear Plan, the formal sector accounted for only Rs 50,000 crore, accord-ing to Reserve Bank of India (RBI) data. (Annexure II) After the release ofthis data, it was clear that the private sector intervention in housing pro-vision became necessary.The Finance Minister announced in his 1998 budget speech: TheNational Agenda, identifies housing as a priority area.We will move pur-posefully to tackle the country's enormous housing shortage problemthrough partnership between government, housing finance institu-tions and the private sector. (Annexure III) To provide 'Housing for All',

Government of India (GoI) initiated several steps to expedite theprocess. These included:Offering tax incentives to retail consumers to avail of housing loans Offering tax incentives to developers to construct housing units of upto1000 sq ft in Delhi and Mumbai and upto 1500 sq ft in the rest of thecountry Allowing Foreign Direct Investment in real estate through joint ven-tures with Indian partners The Eleventh Plan begins in March 2007 with a housing deficit of 9 mil-lion units carried forward from the 10th Plan and a current estimatedPlan shortfall of 15 million units. (Annexure IV) The housing finance offtake jumped from Rs 5,000 Cr in 1998 and isexpected to close at Rs 90,000 Cr in 2006-2007.The average age of the buyer registered a significant drop from the 50+segment to an average of 31 years currently.

The development of housing units in the country by a large number ofdevelopers old and new, big and small, domestic and international has

now reached every nook and cranny of India. From the large metros, ithas now moved into every city and town of India.The private sector interest has largely been confined to the HIG andCreamy layer of the MIG housing, which accounts to only about 18-20per cent of the demand, as estimated by the Planning Commission. The

2Section 80-1B (10)

These steps taken by GoI yielded tangible results:Five Year Plan Total Shortage Unmet demand10th Plan 22.4 million 9 million11th Plan 9 + 15 = 24 million

Housing Shortfall Estimates - 11th Plan:

Serial Category Shortfall Cost/unit No In Rs lakh1 Higher Income Group 1.14 million 12-252 Middle Income Group 1.56 million 8-12 3 Lower Income Group 5.4 million 1.5-34 Weaker Section Housing 8.1 million Below 1

36 per cent demand for LIG housing and the 46 per cent demand forweaker section housing has currently not found many takers in the pri-vate sector.According to Dr Rakesh Mohan- National Council of Applied EconomicResearch (NCAER) study in 2001, (Annexure V) with the enhanced pur-chasing power of consumers, the numbers of purchasers has alsoincreased.This study estimated the number of high income householdsto grow from 4.6 million to almost 30 million by 2010, even at a GDPgrowth rate of 6.5 per cent. Considering that the growth rates havebeen at over 8 per cent and is projected to even reach 10 per cent, thevolume of high income households will increase dramatically.This is thesegment that most of the developer community has been targettingover the last few years, especially since the boom period in 2005.However, this growth also corresponds to the rise in purchasing powerof the erstwhile low income groups to the middle income groups. Thisis the segment that the Section 80-IB (10) incentive wanted the privatesector to address. However, with the rising land values and the specula-tive investment patterns in residential real estate, this segment hasbeen relatively unaddressed. This demand is expected to grow to over6.96 million in the 11th Plan period. Any extension of the Tax incentiveshould try to spur development in this category.Of the 24 million housing units shortage, the Planning Commission esti-mates about 8 million housing units to be in the Economically WeakerSection housing. Since this segment has to be fulfilled by the govern-ment's social sector obligation, the bulk of allocated resources go intothis segment. However, to promote private sector participation in thissegment, there has to be active incentives such as tax breaks and landconsolidation and grievance redressal by the government, for the pri-vate sector to be actively involved. (Annexure VI Slum Housing)

3Section 80-1B (10)

EXECUTIVE SUMMARY

■ Introduction CREDAI has commissioned MagicBricks to study the Impact of Section80-IB (10) under the Income Tax on real estate development in India.

■ Section 80-IB (10)

Section 80-IB (10) Income Tax Act was one of the incentives used toprovide the private sector with tangible benefits to construct smallerhousing units which would then remain affordable to the masses.

■ About the StudyMagicBricks conducted the study across nine cities (4 metros, 3 Tier IIcities i.e. cities with population of over 1 million and 2 Tier III cities i.e.cities with population less than 1 million) as requested by CREDAI.

■ The Findings

Of the total respondents, 53 per cent have availed of the incentivewhile 47 per cent are yet to avail of the incentive. Of the ones who areyet to avail of the incentive about 25 per cent have already availed ofthe incentive and are also filing fresh IT returns claiming benefitsunder Section 80-IB (10) for the projects that are currently sanctionedor underway.If the incentive is withdrawn, 72 per cent say they will continue in thecategory but may reduce the number of apartments in the1,000/1,500 sq ft category or sell at increased values. About 28 percent of developers feel they will exit the category and build in the larg-er apartment category where the input costs are lower by about 15per cent and the returns are higher.

■ ConclusionThere is a clear case for incentivising the private sector into this cate-gory due to these reasons.

Limited Public Finance: It is difficult for public sector agencies toaccelerate rate of housing provision looking at its limited financialresources of Rs. 34,000 Cr in comparison to required investment of Rs.1,21,370 Cr for urban centers. (Annexure VII)

Govt not been able to deliver in the past: In the past (Annexure VIIINHB), GoI has not been able to meet its targets. In FY 1999-2000,against a target of 44,000 units in LIG, only 27,000 were constructed,while in the EWS category, against a target of 96,571 units, only 28,541were constructed.

Growing Middle class: According to Assocham's estimates(Annexure IX Assocham report), the Indian middle class, which num-bered about 59 million in 2001-02 is expected to swell to about 100million by 2006-07 and cross the 153 million mark by 2009-10. But todate, only 1 out of every 10 houses has been constructed by the gov-ernment and public sector units.

4Section 80-1B (10)

Private Sector Building Largely for Creamy Layer: Premium housinghas already taken off in a big way and the private sector's contributionto this segment has been well established. With market forces deter-mining a return on investment here, this segment of the market doesnot need a boost through incentives such as Section 80-IB (10) taxbreaks. But the lower and middle income housing sector is facing ahuge shortfall and needs appropriate incentives for private sector par-ticipation.

Demand Supply Gap in LIG, MIG: The 36 per cent demand for LIGhousing and the 46 per cent demand for weaker section housing havecurrently not found many takers in the private sector.

Case for extending Section 80-IB (10): It is imperative to incentivisethe private sector in mass housing, there is a case for extending thisbenefit for at least another five years, and incentivise development inthe segments where the housing shortfall still exists. This is due to thefollowing reasons:

Housing Spurt in 2004: The sudden spurt in the volumes of housingand the extent of coverage has truly picked up only since 2004 whenthe Indian economy too registered a whopping growth and the pur-chasing power of the Indian buyer has also grown.This is due to the fol-lowing reasons:❑ The economy of the country registered a steady and rapid growth ❑ Rise in income levels and disposable income ❑ Access to housing finance improved with easier borrowing normsand falling interest rates ❑ Tax breaks to individuals and developers on availing of housingloans from financial institutions ❑ A spurt in the number of developers and consequently housingproducts on sale

Deterrents to Efficient Functioning: There were several loopholes inthe law that acted as deterrents to efficient functioning. For instance,builders went through litigation to fight whether the incentive was oncarpet area or built-up area and the court clarified in year 2004 that itwas the built up area. Also, since there was lack of clarity, differentassessment officers, developers and tribunals took differing views andprecious time was lost.

Lack of Awareness of This Incentive: There has also been a singularlack of awareness building efforts on the benefits of developing for themasses. As a result, many developers have only recently started consid-ering this category seriously. A number of developers in Rajkot, Surat,Baroda, Kochi etc have recently come to know of this incentive. As aresult of all these problems, the number of developers availing of theSection 80-IB (10) tax incentive has been growing only since 2004.

Houses Affordable to Masses: It is not that developers will totally exitthe upto 1,000-1,500 sq ft category, but according to MagicBricks sur-vey, if the incentive is withdrawn, 72 per cent of the developers in oursample size say that they will continue in this category but may reducethe number of apartments in the 1000/1500 sq ft category or sell atincreased values. About 28 per cent of developers feel they will exit thecategory and build in the larger apartment category where the inputcosts are lower by about 15 per cent and the returns are higher.

5Section 80-1B (10)

Newer Developers: Developers which have commenced operationssince 1998 (Eg Ashiana, Shipra in Delhi NCR, Nitishree in Lucknow andParmar Construction Company and South India Shelters Pvt Ltd inChennai, Pride and Expert in Bangalore), have no land banks or hugefinancial muscle but with incentives in this category, it made businesssense to cater to the volumes market. Each of these groups have availedof the Section 80-IB (10) benefits in over 85-90per cent of their projects.

■ Recommendations ❑ The benefit should be extended because the momentum has onlyrecently picked up. A sudden withdrawal will either push up prices orresult in fewer for the mass housing category.❑ The benefit should also include a clause on LIG and MIG housingspecifically because the study shows that the demand is huge andgrowing in this category.❑ With housing loan interest rates going up, the affordability amongbuyers is reduced. Offering the incentive at such a time would allowdevelopers to build where the demand is and offer competitive prices.❑ The loopholes and delaying factors should be addressed so that thenumbers scale up instantly.The law may be amended for clarity and themunicipal byelaws and taxation laws be brought in harmony to avoidconfusion.❑ Awareness building exercise was not undertaken earlier. This timeround it should be done.

6Section 80-1B (10)

MAGICBRICKS CREDAI STUDY

■ ObjectiveCREDAI needs data on the impact of tax incentives offered to develop-ers by the Union Government from 1998 for developing residentialunits of 1,000 sq ft in Delhi and Mumbai and 1,500 sq ft in other cities.

■ Term of the study

The study was to be conducted over a period of one month fromOctober 26-November 25, 2006.

■ MethodologyMagicBricks teams conducted the study across nine cities (4 metros, 3Tier II cities i.e. cities with population of over 1 million and 2 Tier IIIcities i.e. cities with population less than 1 million) as requested byCREDAI. Hyderabad was replaced with Chennai in consultation withCREDAI.

■ SCOPE OF THE STUDY❑ The study includes a sample impact assessment survey of theindustry to estimate:❑ The number of developers who availed of Section 80-IB (10) bene-fits under the Income Tax Act ❑ Assess the number of housing units that were created i.e. totalnumber of residential units covering 1,000 sq ft in Delhi and Mumbaiand 1,500 sq ft in other cities built during this period.❑ To assess the area developed under Section 80-IB (10) of theIncome Tax Act.❑ The scope of the survey also includes interviews with senior offi-cials in the municipal authorities, development authorities andincome tax departments as also data supplied by these authorities.(Annexure X)❑ It also includes meetings with housing finance institutions and thisdata has been included in the report. (Annexure XI)❑ Data collection from developers across the cities has been on for-mats pre-approved by Credai before the commencement of thereport.While most developers have adhered to the format, some havenot done so. The forms filled by the concerned developers or officialsfrom their offices, is being submitted as annexure to the report.(Annexure XII)

7Section 80-1B (10)

The cities surveyed are:Metros Tier I Tier IIDelhi Bangalore JaipurMumbai Pune CochinChennai AhmedabadKolkata

SECTION 80 1B (10)

■ 1.1 Details of Section 80-IB (10)

The amount of profits in case of an undertaking developing and build-ing housing projects approved before the 31st day of March, 2007 (thishas been extended by two years from March 2005) by a local authori-ty, shall be 100 per cent of the profits derived in any previous year rel-evant to any assessment year from such housing project if, (AnnexureI Section 80-IB (10)).Such undertaking has commenced or commences development andconstruction of the housing project on or after the 1st day of October,1998;The project is on the size of a plot of land which has a minimum areaof one acre; and The residential unit has a maximum build-up area of one thousandsquare feet where such residential unit is situated within the cities ofDelhi or Mumbai or within twenty-five kilometres from the municipallimits of these cities and one thousand and five hundred square feet atany other place.Therefore the theme of Section 80-IB (10) is as under:❑ The housing project should be approved latest before 31.3.2007(extended from 31.3.2005) by a local authority.❑ The commencement of the development or construction shouldstart on or after 1-10-1998.❑ The project of residential housing should be on a minimum area ofone acre land.❑ Each of the residential units must not have a built up area in excessof 1000 sq. feet for Delhi & Mumbai towns or in its neighbourhood of25 kilometers. For other towns and villages the maximum built up areais of 1500 sq. feet.❑ The built-up area of shop and other commercial establishmentsincluded in the housing project does not exceed 5per cent of theaggregate built-up area of the housing project or 2,500 sq ft, whichev-er is less.

■ 1.2 Aims & Objectives The Section 80-IB (10) tax incentive aims to:❑ To encourage housing developers to construct upto 1,000 sq ftapartments in Delhi and Mumbai and upto 1,500 sq ft apartments inall other cities. Encourage the developer to undertake construction ofsuch houses as are affordable to the middle classes ❑ Encourages larger scale of developments as the minimum size ofthe development has to be 1 acre to avail of the Section 80-IB (10)incentive.❑ Encourages suburban development as the tax incentive is valid fordevelopment in a radius of 25 km from the mother city in Delhi andMumbai.❑ Stop influx of population from the suburbs to the main town ❑ Generate employment to the local populace in the suburbs byencouraging economic activity

8Section 80-1B (10)

CHAPTER

1

THE SURVEY

■ 2.1 IntroductionThe amendments to Section 80-IB (10) incentives, moved by theFinance Minister, especially in the last three to four years, were all final-ly passed by Parliament and have clarified many burning issues. Fromthe first version introduced in 1998 there have different amendmentsto the enactment in different years aimed at providing efficiency andclarity.In the last three years, there has been a steady growth in the volumesof housing by the private sector and the number of developers availingfor Section 80-IB (10) incentives.

■ 2.2 City Survey

2.2.1 MUMBAIOver 15 developers were contacted in the Mumbai region, includingthe suburbs.Specific points of Mumbai Developers❑ Black money instance significantly reduced. With almost all buyers

in this category availing of housing finance, there is hardly any blackmoney transaction.

❑ Limit of 1,000 sq. ft should be relaxed❑ Do not include Thane, Vashi, Vasai in definition of Mumbai city❑ No 1 acre plots in Mumbai.❑ Lack of clarity gave rise to a lot of harassment❑ Townships should be given relaxation of commercial area develop

ment ceiling and allowed to claim exemptions as and when possession given and not wait till entire completion.

❑ Service tax is more than compensating for any revenue loss to government arising out of granting tax benefits of Section 80-IB (10).

❑ Environmental clearances taking too long delaying projects under 80 I B (10)

❑ Allow greater FSI under this scheme

2.2.2 Delhi NCR

Eleven developers were contacted in Delhi, including areas Gurgaon,Noida, Greater Noida, Faridabad and Ghaziabad, besides the nationalcapital territory of Delhi.

While there is a smaller margin of profit in constructing in this catego-ry, developers such as Mr KN Shukla, Chairman Nitishree also feel thatthere is a “our moral responsibility as builders to cater to all segmentsespecially lower income.” Most of these developers claim to be passingon the benefits of the incentive to end users. Even if the 80IB (10) incen-tive is withdrawn they will continue to build in this category but feelthat the costs will be higher to the buyer.There is a category of developers such as Nitishree, Assotech, Shipraand Ashiana have been building in this category and have 85-90 percent of development in this category. Eg Nitishree is building a town-ship currently called Alastonia in Greater Noida which has 519 units of1500 sq ft apartments and the other one is Lotus Awadh in Lucknowwith 400 units of 1500 sq ft each. According to Vishal Gupta, Joint

9Section 80-1B (10)

CHAPTER

2

Managing Director, Ashiana Housing, “In the Lower Income Category(LIG) no solutions have been found and we feel there is trouble brewingthere. In this regard, the state has to take charge and make land avail-able at reasonable rates for LIG housing projects. Then with incentivessimilar to Section 80-IB (10), even LIG housing can attract the privatesector.”While the first round was in the NCR region with rising land costs andscarcity of land in the NCR they are all now developing in other cities inthe North India region. Large developers such as Vatika and Vipul havenot availed of this incentiveand are not building in this category at all and don’t intend to enter thiscategory.Groups such as Nitishree, Assotech and Shipra, feel that the category ofbuyers who can afford an EMI repayment of 5000-7000 per month issignificant enough to be catered to. This is significant as this kind ofincentive alone will ultimately solve the problem of housing for themasses.While most developers are catering to the creamy layer that canafford a repayment of 15000 to 20,000, there is enough of a smallerbudget market to keep them building in this category.The Aerens group is constructing Aerens Palm Residency under this cat-egory. Kailash Gupta, MD Aerens Builders Pvt Ltd, says that the incentiveshould be extended as there are many instances of projects beingmade with these specifications but may be waiting for sanctions eventill March 2007. He maintains that the incentive should be extended forat least the next 5 years.

2.2.3 Kolkata

Thirteen developers were contacted in Kolkata.Kolkata is a unique case where the public private partnership model isin vogue. This ensures that the private sector caters to all segments ofdemand. However, recent developments in the Rajarhat and Salt Lakeareas have witnessed premium housing development accompanied byspiraling price rises.Explains Santosh Rungta, Chairman, Rungta group and Vice-President–East, Credai Executive Committee,“ Given the choice, the private sectorwill never go for mass housing. Incentives such as Section 80-IB (10)makes it an attractive segment to enter. The notion that developers aremaking huge profits out of this incentive is a misnomer. The basic costof the mass housing unit is about Rs 1,600/ sq ft. This sells at about Rs1,800/ sq ft. But premium categories sell at between Rs 2,500-4,000/ sqft.”This indicates that the tax incentive has been passed on to the buy-ers in the upto 1500 sq ft category.For KS Bagchi, Managing Director of Bengal Peerless HousingDevelopment Corporation, a public-private-partnership project withthe state government, the issue is not whether he will build in the cate-gory or not.“Benefit or not, we have to build in this category. The jointsector has to cater to all sections of the society. The LIG housing at Rs400-450/sq ft will have to remain at that price level with subsidies. TheMIG segment at about Rs 1,000/sq ft will be maintained at that level ona no-profit, no-loss basis. But these subsidies will be recovered from thehigh-income groups. If the subsidy is withdrawn, this segment will beimpacted severely. In that case the reasonability of pricing will go away.”As the group to avail of the highest amount of incentive under Section80-IB (10) category, Bagchi is speaking from experience.Explains Basant Parekh of the Orbit group: “The development of thesesizes of apartments is because of market demand. But the incentive

10Section 80-1B (10)

allows us to make it more affordable.” Majority of the projects of theOrbit group are in this category. He estimates that prices will go up byabout 15-20per cent is the incentive is withdrawn. Nandu Belani ofBelani Housing Development agrees.“About 50per cent of demand is inthe 1000-2000 sq ft category,” he says. He in, fact suggests an extensionof the 25 km from the mother city category to about 50 km.” This, hefeels, will allow developers to offer affordable housing further away,where the land values are lower. (Current rules allow this benefit todevelopers any distance away from the city, except in Delhi andMumbai) If the volume of incentive is greater for price sensitive seg-ments, the momentum of housing can be sustained and private sectorfunds will continue to flow into the housing sector.A clause linking infrastructural and transit link development to thesenew hubs could be another means of ensuring user benefits.

2.2.4 Chennai

A group of 13 developers met the survey team.Developers across the board in Chennai maintain that there will be nomajor revenue impact because of the tax concessions because it hastriggered off a quantum jump in housing construction. The increasedexcise duty earnings for the government and the rising service tax col-lected as a result of increased building activity should make up for thebenefits given, they felt. “The government gets Rs 50,000 Cr as servicetax from the construction industry alone,” one developer maintained.The Section 80-IB (10) incentives have pushed construction activitiesinto suburbs and smaller towns. But this development is often happen-ing without adequate infrastructure. The city is now spreading with800-1,500 sq ft units on the outer periphery. With the estimated hous-ing units requirements estimated to jump to 60 million units by 2020,the 80IB (10) incentive ensures the creation of more projects.The fact that there were many clauses that were unclear led to a lot ofdoubts over whether the developers would get the incentives theyclaimed. The big issue that worried most was whether open terraceswould become part of taxable area. Different states have differentbyelaws while tax laws are uniform. This leads to confusion.Developers of Chennai maintained that the investigating officer’s sub-jective interpretation was a problem. The developer claimer incentivesfrom Year 1 onwards for the 8 blocks he had completed. The investigat-ing officer maintained that each block was a separate unit. This isbecause corporation rules state that on a 30 ft wide road the sanctionscan be given only for a block of 4 apartments.With 8 sanction plans thedeveloper was finding it difficult to avail of the benefits though the sizeof the project was over 1 acre and the unit sizes were 1,500 sq ft each.The developers want a specific time period in which the sanction isgiven by the authorities and a clear guideline on where the builder’sresponsibility ends. If there was no violation till handing over, then theincentive would be granted. After handing over if users make changesto compound wall or add a servant’s toilet, the developers do not wantto be held responsible.The 2000 sq ft commercial area clause was felt to be impractical. Eventhe definition of what constitutes commercial area is in the grey zone.The rider that the incentive can be claimed only after a completion cer-tificate has been granted was also a problem area. Sometimes comple-tion certificates can be stalled because a basement parking height wasover the sanctioned limit by 4 inches or that a washbasin was installedon a terrace.


2.2.5 Bangalore

Fourteen developers were contacted in Bangalore in addition to theKarnataka Ownership Apartments Promoters Association (KOAPA) One of the biggest fears in the city was whether availing of this incentivewould become a stick for the income tax authorities to use against devel-opers. For instance, if a developer executes a big project of about 500apartments in a particular year and then slows down in the next year,would the fact that he availed of the incentive be reason enough for a taxraid?The incentive has led groups such as Pride & Expert to concentrate on theupto 1500 sq ft category. But the issue of whether the terrace and gardenare part of the built-up area was an issue.Many developers maintained that as in the service tax issue, the authoritiesdo not take into consideration the fact the real estate development is along-gestation period project and sudden inclusions of service tax orunclear norms of tax relief in Section 80-IB (10) can disrupt the sellingprocess.The biggest problem that arose was the lack of clarity on what constitutedthe 1500 sq ft.The slow pace of clearance of projects at the local level was quoted as astumbling block for availing of the tax incentives.Developers also asked for the sanctions to be extended to mixed projectsas well.Currently over 25 acres of land is under development of Section 80IB(10)projects. Development of nine townships on the outskirts of Bangalore iscurrently being planned by the Bangalore Metropolitan regionalDevelopment Authority. Extended incentives would push the private sec-tor to developing smaller housing units for the masses here too. But someprojects have been held up for environmental clearances for over twoyears and may well miss the incentive deadline if it is not extended.

2.2.6 Pune

Fifteen developers were contacted in Pune.❑ Advantages of the Act

★ Builders can pass on benefits to customers. More than 50per centof Pune developers would have availed of this scheme.

★ Incentive to builders to build a larger amount of units under 1,500sq. ft

★ Builders can pass on benefits to customers making housing available to large number of people.

★ 4 year cap, ensures faster completion of project.★ It has brought in a lot of transparency in dealings since there is an

incentive for developers to declare their entire profit.★ This year 30,000 to 40,000 units of under 1,500 sq.ft. out of a total

of 55,000 units are likely to come into the Pune market. Most of these are actual consumers.

❑ Key Drawbacks★ Lack of clarity on definition of what areas to be included (projec

tions, staircases etc). This made it open to subjective interpretation and harassment by inspectors.

★ Plans already passed before act was introduced must also be included.

★ Local municipality asks for 5per cent+ commercial to be built forplots greater than 1 acre, but if this is followed then it would exceed 2,000 sq. ft and the project would get disqualified for the exemption.


❑ Recommendations★ Overall a very welcome scheme, a great scheme if simplified.★ Should allow proportionate exemption on larger plots, at least in

suburbs.★ Allow composite plans to be made.★ Would reduce LIG housing if exemptions are withdrawn.★ Would put brakes on current optimism and growth if abruptly

withdrawn. Should at worst be withdrawn in a phased manner over 5-6 years incentivising faster completion. Give faster completion bonus linked to year of completion from start of scheme.

★ More commercial area should be allowed, it would help offset costs.

★ Should allow proportionate exemption on larger plots, at least insuburbs.

★ Would seriously rethink making LIG housing schemes if benefit iswithdrawn.

2.2.7 Ahmedabad

The eleven developers contacted in the city were extremely apprehensiveabout giving details of the projects.They have maintained anonymity evenwhile giving information.

Highlights of discussion:❑ Natural calamities have prevented developers in Gujarat to derive full

benefit of the scheme.❑ Post the earthquake the by laws pertaining to development/ design

were under the scanner and were modified.This was in a limbo for overa year. Demand thereafter was very depressed and has just about picked up. Vacancy ratios high in high rises, especially post the Bhuj earthquake.

❑ ULCRA was repealed in 1999 but the detailed guidelines were only formulated in 2001.

❑ New residential zoning laws in June’01 and the town planning schemesof AUDA were to be approved by the govt. causing further delay in starting new projects. All this prevented developers from deriving full benefit of the Act.

2.2.8 Jaipur

Ten developers were contacted in Jaipur.The new age economy sectors of Information Technology (IT) and SpecialEconomic Zones (SEZs) are making foray into Jaipur and this will meanincreased migration of workforce into the city and demand across residen-tial segments of middle to upper middle class. According to ML Gupta,Additional Director Revenue & Property Disposal, “Jaipur DevelopmentAuthority has always been expanding its physical boundaries. As on date,JDA owns 56,000 bigahs of land. We will soon have another 107 villageswithin our geographical limit.”The values have escalated by three times in the last three years. Landwhich was available for Rs 20-25 lacs two years ago is worth over Rs 1 Crnow.Two to three years ago, there was a thrust on plotted homes but nowthere us a craze for apartments. Amongst flats, there is a greater emphasison middle budget housing 2/3BHK. Nevertheless Jaipur still abounds inplotted development and is still a city with availability of land, adds Gupta.

Some of the key trends in the market are as follows:The real estate values in the market have doubled in the last one year. AT


Bani Park, land was available at Rs 15000/sq yard 2 years back and todayit is valued at Rs 50000/sq yard.All builders are going in for low margins due to the tax breaks. There isno clarity on super built up and built up. “We have been cautiousenough to build only 1250 sq ft apartments so that the tax authorityclears it without any room for ambiguity over built-up or super built-uparea,” says Ajay Goyal, MD M/s Dharti Ratna Builders P. Ltd Builders are not sure what all will be included by the Tax authority. Willthey include the clubhouse, parks, shops, other amenities in the town-ship project?About 60 per cent of the market demand is for 1500 sq ft propertywhich has a saleability in the market today. But with time, people willprefer larger and more spacious homes. 50 per cent of the apartmentscoming now into the market are premium ones so that indicates ademand for them. The preference for villas is getting lesser and peopleprefer to stay a little away from the business areas in the townshipswhich has all the amenities for a good lifestyle.A lot of developers have started constructing 2004 onwards are stillplanning projects in this category. Eg Dhirendra Madan, MD MahimaReal Estate Pvt Ltd, says that his project Mahima Iris project qualifies fortax incentive. Another project is Iris II which we will start in Jan 2007 andwill get it sanctioned before March 2007 to avail of this incentive. Thiswill comprise 160 units. Another example is Pearl Gardens which will belaunched on 1st Jan, 2007. This project will have 500 flats targeting themiddle and lower income group. It will comprise 2 BHK of size 900 sq ftand 3BHK of size 1250-1300 sq ft.The commercial area is highly inadequate. Says Surja Ram Meel, M/sSatya Prakash Builders (P) Ltd- “Under Section 80-IB (10), commercialpremises within the residential complex should also get tax incentive.As a developer, it is much more viable for us to build commercial ameni-ties such as shops etc and this is also of use to the end-user.“The development on the outskirts of Jaipur being witnessed after thegrant of Section 80-IB (10) incentives has outstripped the pace of devel-opment in the last 50 years.

2.2.9 Kochi

Of the 48 members of the Kerala Builder’s Forum, only about eightdevelopers qualified for the tax incentive. Most of the developers acrossKerala were either unaware of the incentive or recently aware. Eventhose who qualified were availing of the incentive either for recent proj-ects or for future projects.According to Riaz Ahmed of the Abad group, there is lack of clarity withthe IT department. Many are planning to avail of the incentive but arenot sure that they will get it.Apartments between 1200 to 1500 sq ft are in demand in the market,whether they are premium or budget are in great demand. Since bothmake economic sense in this market, developers are building both.Ahmed says after availing of the 30per cent tax benefit, developersshould be able to pass on 15per cent. These are in the form of betteramenities.If the incentive is withdrawn, developers expect the prices to go up byat least 15per cent.Some developers maintained that there should be a clarification onwhat is the plinth area?There are still some ambiguities such as who is get the benefit- is it theland owner, the builder or the contractor. Who is availing of the benefithas to be sure that he has got everything right.


The delay in sanctioning process because of the new environmentalclearance laws were a cause for concern.

2.3 DEVELOPER RESPONSE ANALYSISOf the developers contacted across nine cities, about 70 per cent haveresponded so far. The analyses thus far are based on these responses.

2.3.1 Developers Availing Section 80-IB (10)

Of the total respondents, 53 per cent have availed of the incentivewhile 47 per cent are yet to avail of the incentive. About 25 per centhave already availed of the incentive and are filing fresh IT returnsclaiming benefits under Section 80-IB (10) for the projects that are cur-rently sanctioned or underway.

If the incentive is withdrawn, 72per cent say they will continue in thecategory but may reduce the number of apartments in the 1000/1500sq ft category or sell at increased values. About 28per cent of develop-ers feel they will exit the category and build in the larger apartmentcategory where the input costs are lower by about 15per cent and thereturns are higher.Cities such as Jaipur and Chennai, where there is a strong market

demand for houses in the 1500 sq ft category may not be significantlyimpacted. Almost all developers contacted in these cities stated thatthey intend to continue in the segment. What remains to be seen iswhether they will continue to sell at an affordable price.Developers across the Kolkata market felt the withdrawal would bedetrimental to the development of the 1500 sq ft apartment category.Most development across the Kolkata market are in the Public Privatepartnership model where the state government brings land as equityand the developer builds houses in the LIG, MIG and HIG categories.There is a large percentage of cross-subsidisation and developersacross the board felt while the price-sensitive lower income categorieswould maintain status quo, the Higher Income Group would have toshell out the differential.Even today, the HIG category is shelling out the differential to keep theprices of the upto 1000/1,500 sq ft category within reasonable levels.According to the economics of the project a larger unit always shouldshow lesser per sq ft value, all other specifications remaining the same.

Today both units retail at the same cost because developers are able toavail of the benefits of the tax incentive and rationalize the price of thesmaller units.


Continue in Mass housing

No

Yes 72%

28%

Price EconomicsUnit size Cost Price Notional Actual

Sale Price Sale Price>1,000 x y-70 y<1,000 X+70 y y

2.3.2 Case Study: Jaipur & Pune

Jaipur

Of the developers covered in the Jaipur survey, most build in the upto1,500 sq ft category. New developer groups are availing tax incentivesfor between 60-100per cent of their developments. Older developergroups too have started availing of these incentives in newer projects.

Pune

Pune developers have been building in the 1500 sq ft category. Theproportion has increased recently. But the general opinion is that saythey will not continue in this segment without any incentive as prof-itability is higher in larger apartments.

2.3.3 Increase in Number of Developers

Statistics have shown a large growth in the number of developers inthe last decade.This number has started increasing over the last coupleof years.As more new groups enter the fray, they need to enter those segmentsof the market where the offtake is high.The mass housing market is onesuch. So they enter it because of market demand. But to keep theminterested in the mass housing segment and to ensure that all develop-


Percentage of projects availing incentive

Developer Incentive Developing Units less Name in percentage Since than 1500 sq ft

Kumar Builders 100 1966 1200

Beharaj & Rathi 20 1970ConstructionsKumar Properties 12 1971 1000Parmar Constructions 1988 1000Naiknavare 60 1988 1500Parmar Properties 30 1994 65Devi Constructions 5 1995 74BU Bhandari 50 1995 1660Magarpatta 15 2000

Percentage of projects availing incentive

Developer Incentive Developing Units less Name in percentage Since than 1500 sq ft

GHP group 1950 2800Satya Prakash 100 1992 55Trimurti New Projects 1993 3500Mahima Real Estate 1994 2320Narvik Nirman 50 1995 900Jai Shri 50 but no 1998 60Developers incentive < 1 acreDharti Ratna 100 2005 225

ers do not choose to build for the premium segment, incentives such asSection 80-IB (10) work well.

2.3.4 Uniform Interest Across Cities

Our study across nine cities showed a high level of interest in the incen-tive across cities.While cities such as Pune. Kolkata and Chennai had huge township proj-ects availing of the incentive, in other cities such as Jaipur and Kochi, theresponse was to market demand. But, as the representative from SouthIndian properties in Chennai said,“when we have some buffer amountto play with, we are able to give users better value for money. Otherwisethis segment works on wafer thin margins and builders give users onlyno-frills products.” But our user survey has demonstrated that even inthe mass housing categories, users are today looking for some amountof frills that contribute to a better lifestyle.

2.4 KEY FINDINGS

Section 80-IB (10) incentive & market dynamics

It was noticed that most of the developers have availed of the incentivein the recent past or are currently executing the projects. While theincentive was offered in 1998, the actual planning process took about acouple of years. By that time the real estate market across the countryhad gone into a recession. The years 2000-2002 presented a bleak sce-nario where there was no buoyancy in the market. The real estate mar-ket came out of its trough in 2003 and most 80IB projects came up inthis period.2004-2005 saw the lowest rates of interest in the housing finance rates.


Year of Incorporation of Developers

MUMBAISKalpataru 200000Mittal 100000Ekta Shelters 600000CHENNAIChaitanya 2560000Ceebros 1200000South Indian 450000Sumanth 575000KOCHIInfra 233152Skyline Kochi 307634Abad 600000Trinity 400000

Galaxy 50000Jain Housing K 348000KOLKATABelani 200,000Bengal Park 700000PS Group 30000000Diamond 240600NCRAshiana 120000Aerens Builders 400000Assotech 300000AEZ -Vipul -Nitishree 1286600

JAIPURDharti Ratna 250000Trimurty 3400000Jayshree 84,000Narvik Nirman 570000SatyaPrakash 82000Mahima 204170GHP 600000N Choudhary 600000PUNEBU Bhandari 2780000Kumar Builders 3000000Magarpatta 1515601Beharay 142749

Kumar Prop 2211960Naiknavare 1216005Devi Const 86,285Goel Ganga 1500000Parmar Prop 197000Parmar Const 2550000BANGALOREChartered 700000Akme -Renaissance 1100000Skyline Bang 600000Narayan 120000Sterling 1261000

Total sq ft in Section 80IB 10

List of builders from left to right

MMUUMMBBAAII CCHHEENNNNAAII KKOOCCHHII KKOOLLKKAATTAA NNCCRR JJAAIIPPUURR PPUUNNEE BBAANNGGAALLOORREE

22001100

22000000

11999900

11998800

11997700

11996600

11995500

11994400

11993300

11992200

Coupled with rising salaries, this led to a rise in consumer interest. As themarket turned buoyant, developers also stepped up building activity.This was the period when most developers started planning propertiesfor the end user. And the level of interest in Section 80-IB (10) incentivesrose. While there is no structured documentation of the volume ofincentives claimed by developers, because no data is being compiledand developers are availing incentives individually, market perceptionand the sample data gathered by our team, points to an increased inter-est in the mass housing.However, with rising land values since 2005, there has been a movetowards larger, premium housing, especially because the developersfind this category more profitable. At this point of time, the latent 18-20per cent demand for LIG and MIG housing is largely being neglected.If offered intelligently, a tax incentive to build for this category shouldhelp pump private sector money where the unmet demand is.While theweak housing market and plethora of clarifications were requiredbefore the developers started availing of the incentive, today the inter-est in Section 80-IB (10) is at its highest yet.Studies show that housing boards and development authorities havesignificantly slowed down their house building activity. (Annexure XIII,X) If the same pace of development continues, the current estimatedrequirement will rise and the growing new demand will push the actu-al shortages even higher. If the estimated 24 million housing unitsshortage during the 11th Plan period has to be met, this has to comefrom incentivising the private sector to build for the masses.The estimated requirement for meeting the supply is Rs 5,41,247 crore,according to Planning Commission estimates. Of this the funds allocat-ed by the Central and State bodies is a meager Rs 20,000 crore.With thishuge deficit to contend with over the next five years, innovative mobi-lizing of private sector funds for mass housing is the need of the hour.

2.4.2 Deterrents

While the intention was to encourage private sector participation toboost affordable housing, there were several loopholes in the law as itwas enacted, that proved deterrents to efficient functioning.These were:

Clarity on what constituted the size of the apartment: In the Indiancontext the users get to use carpet area, the assessment is on built-uparea and what is sold by developers to users is super area. This marketreality was not taken into consideration and so many developers wentinto litigation. Also, since there was lack of clarity, different assessmentofficers, developers and tribunals took differing views and precioustime was lost.

Contradiction between municipal and central laws: While byelawsdo not take terraces and open areas into the Floor Area Ratio (FAR), thetax authorities include terraces too as areas open to assessment. Thistoo created a lot of disputes. In Karnataka, the local chapter of Credai,the Karnataka Ownership Apartments Promoters Association (KOAPA)came up with a suggestion that the tax incentive should be on thebuilt-up area.This has been accepted by the assessment officers as well.This issue has been resolved only in 2005 when the Finance Ministeramended the law to the effect that the incentive would be on built-uparea. However, from 1998-2005 there have been several disputes onwhether the developer can claim the incentive for a particular projector not. Municipal laws allow developers to provide social infrastructure


such as clubs, gyms and swimming pools. But these are sometimes dis-allowed by the tax authorities. It would be much better if the govern-ment issues an amendment clarifying the issue.

Lengthy Sanctioning Process: The sanctioning process for housingprojects typically ranges between 4 months to 24 months across thecountry. Currently, with the issue of environmental clearances from theCentre, the time taken can be even greater. The tax incentive is availedof after the completion of the project. Therefore the volume of projectsthat have actually come up for assessment is very small. A number ofprojects are underway and developers intend to claim the tax incentive.It is sometimes observed that not receiving the completion certificatewithin the time limit of four years, despite the fact that all the forms arecomplete, disqualifies the developer from claiming the incentive. Theclaim can also be rejected by the assessing officer on many grounds.This means even developers who want to pass on the benefit to theconsumer would be doing so at their own risk. We suggest that anadvance ruling as applicable to Non-Resident Indians be applicablehere too where the developer gets the approval from the date of sub-mission for completion rather than on receipt.

Delay in Issuing Completion certificates: A completion certificate isessential to avail of the tax incentive. In cities like Chennai and Mumbai,completion certificates are withheld on grounds such as a 4 inch varia-tion in height of the basement for parking. This delays the completionand developers miss the four-year completion deadline that has beenlaid down for availing of the incentive.No time-frame for granting of the incentive:After the developer filed for the incentive, there was no time framewithin which the project is cleared. Developers typically sell the residen-tial apartments to buyers and hand over the complex to resident's wel-fare associations. If there are any violations post-handing over too, thedeveloper's tax incentive is cancelled.

Disincentive for large developments: The incentive states that theproject should not have shops and other commercial establishmentsincluded in the housing project over 2,000 sq ft. In Kolkata where mostprojects are of the scale of a township under the public private partner-ship model, and other large developments across the country, this sizeof commercial development is highly inadequate.This needed a changein classification, on the commercial space allowed when the project ison hundreds of such acres.

Lack of Awareness-Building Efforts: The benefits of developing forthe masses has not percolated within the developer community. As aresult, many developers have only recently started considering this cat-egory seriously. A number of developers in Rajkot, Surat, Baroda, Kochietc have recently come to know of this incentive. As a result of all theseproblems, the number of developers availing of the Section 80-IB (10)tax incentive has been growing only since 2004. Another reason for thislate interest in the incentive could also be the fact that the momentumof the housing industry has picked up only since 2004 when the econ-omy of the country also registered a steady and rapid growth. It is rec-ommended that the provisions of Section 80HHC be applied here too.The IT boom has already arrived in India and impacts all segments ofsociety. Now is the time for the housing boom of similar proportions tocater to all sections of society. Small government spends on promotingawareness on the benefits of building for all may result in large benefits


to the masses. In many instances, in smaller towns developers were noteven aware of the 80-IB (10) incentive when contacted by the MB studyteam.

2.4.2.1 SPECIFIC CASES

While the creamy layer with the large format requirement has beenserviced, the lower middle layer even in this category of salaried profes-sionals has by and large been neglected.With lower housing loan inter-est rates and better tax breaks, the demand for larger housing had goneup, especially in the larger cities. This demand seems to be stabilizingwith another rise in housing loan interest rates and rising values.Take the instance of Bangalore. The market is shaking itself into a morerational level and a KOAPA study (Annexure XIV) finds a slowdown inthe market. Unlike the mindless buying during the peak boom period,“Pricing and current demand for apartments certainly depended a loton the location and the amenities provided “Economy flats or apart-ments for the middle class, in the vicinity of Rs 25 lakhs to Rs 30 lakhs,was much in demand but hardly available.”The study finds both buyers and sellers now maturing into rational seg-ments and therefore may be the time for more incentives which maypush the private sector to plug the existing gaps in supply, with the risein actual end users developing confidence to buy. This must further beencouraged.

2.4.3 Unmet Demand

The private sector housing industry has been largely riding theInformation Technology boom and even today about 90 per cent of thesurveyed builders said they were building for the IT professionals whohave the purchasing power and repayment capacity. However thenewer developers which have commenced operations since 1998 suchas Ashiana and Shipra in Delhi NCR, Nitishree in Lucknow and ParmarConstruction Company and South India Shelters Pvt Ltd in Chennai,Pride and Expert in Bangalore, have no land banks or huge financialmuscle, have availed of the Section 80-IB (10) benefits in over 85-90 percent of their projects. But with incentives in this category, it made busi-ness sense to cater to the volumes market. Each of these groups haveavailed of the Section 80-IB (10) benefits in over 85-90 per cent of theirprojects. This is one of the symptoms of the growing market demandwhich is being plugged by new and upcoming builders who areresponding to the demand.Even established builder groups such as Sterling in Bangalore, Skylineand Abad in Kochi, Chaitanya and Ceebros in Chennai, Nyati and KumarBuilders in Pune and Mahima in Jaipur have started availing benefitsunder the Section 80-IB (10) projects. “The incentive is significantenough for us to launch entire projects in this category,” says RamaniShastri, Managing Director of Sterling Properties.It is not that developers will totally exit the upto 1,000-1,500 sq ft cate-gory, if the Section 80-IB (10) benefits are withdrawn.“We will still buildin the category because that is the market requirement, but atincreased prices,” says Ajay Goel of Dharti Ratna Builders Pvt Ltd ofJaipur. But, Says Riaz Ahmed of Abad Developers of Kochi,“the volumeswill go down and the prices may well go up.”For example, Jugraj Parmarof Parmar Construction Company says he will construct 500 units annu-ally if the tax incentive continues. But he will build only 20 per cent ofthat if the incentive goes.


HOUSING FINANCE

3.1 HOME LOAN DISBURSALS

The volume of housing finance disbursed is one vital metric that showsthe amount of institutional finance availed of for housing. As per indus-try records, the volume of housing finance in 1998 was about Rs 5,000Cr. This increased to Rs 60,000 Cr in 2005-06. It is estimated to close atRs 90,000 Cr in 2006-07.

3.1.1 State Bank of India

According to data received from the State Bank of India, the volume ofhousing finance sanctioned and disbursed has shown a steady rise.From 2,28,194 loans in March 2000 it has disbursed 10,82,372 loans inMarch 2006. (Annexure XV)According to Manish Tandon, Chief Manager, SBI Home Loans, DelhiNCR, “In Tier I cities, the average size of the loan taken is Rs 14-15 lacs,in Tier II cities it is Rs 9-10 lacs and in Tier III cities it is Rs 6-7 lacs. Thiscorresponds to the Planning Commission analysis that an HIG housecosts about Rs 18 lacs, an MIG house Rs 12 lacs and an LIG house Rs 2.4lacs. The maximum offtake for loans today is in the MIG and HIG cate-gory which is what the private sector is developing.The most popular tenure of loan is between 10-15 years and the urbanareas outside the metros are the largest seekers of SBI loans.The average size of loan is Rs 15 lacs in Delhi and this was Rs 6 lacs in1998. The turning point year was somewhere between 2004.This corresponds to our survey team’s analysis that the year 2004 wasthe turning point for the Indian housing industry when it came out ofits slump.

CHAPTER

3

SBI loan disbursement100008000600040002000

0

Mar‘01

Mar‘02

Mar‘03

Mar‘04

Mar‘05

Mar‘06

Sep‘06

How the loan cookie crumbles

Rural 10%

Semi-Urban 22%

Metro 31%

Urban 37%

Loan tenure

Above 20 years 0%Upto 5 years 11%15-20 years 37%5-10 years 22%10-15 years 43%


3.1.2 LIC Housing Finance

The volume of housing finance has consistently grown:From 2001-02 to 2005-06, the volume of housing finance has grown byover 40 per cent.According to Area Manager, LIC Housing Finance, Mahesh Adhikari,(Annexure XVI) “With the change in income and cost of property as wellas demographics, the size of loan has definitely gone up. On an average,

there is a 20per cent escalation each year in the size of loan. The aver-age size of loan is 15 lacs in Delhi and this was 5 lacs in 1998.”According to a media report in 2001, the Reserve Bank of India dataindicated that the majority of the home loans (more than half ) in Indiawere in the Rs. 2-10 lacs range, followed by another 33per cent of loansin the Rs.10-25 lacs range. In addition, there was also strong growth inborrowings of high amounts. Banks lent between Rs.50 lacs to Rs.2.5 Cras home loans to just 7,400 borrowers who borrowed a whoppingRs.8,600 Cr.

3.1.3 PNB Housing Finance

This is another category of lender which has been lending to the lowerincome groups. The risk taken is higher but the group is growing thebase of the pyramid. The government needs to take a leaf out of thisbook. (Annexure XVII)

3.1.4 ICICI

According to Balaji Raghavan, Head of Retail Finance, ICICI Home Loans-“There has been a growth both in size of loan as well as volume dis-bursed in the last decade. However, in the Rs 2-10 lakh category, the vol-


SBI Interest Rate vs Offtake

7% &below

Offtake of SBI Housing Loan1500000

1000000

500000

0Mar‘01

Mar‘02

Mar‘03

Mar‘04

Mar‘05

Mar‘06

Volume of Housing FinanceYear Disbursals (Rs/cr)2001-02 147.66 2002-03 180.082003-04 167.472004-05 143.722005-06 208.57

Mar‘06

7-8% 8-9% 9%&Above

12.0523.29

43.49

16.86

figures in per cent

ume has not grown substantially though there is a latent demand. Thismay be attributed to the non-availability of housing products in thiscategory. The average size of the loan has been growing.” (AnnexureXVII

ICICI as one of the biggest lender in the Indian housing finance markethas registered an increased book size from Rs 1,04,380 Cr In March 2004to Rs 1,95,050 Cr in March 2006.

It is obvious from the chart above that while the loan volumes havebeen growing, the mass housing category has given way to the middle,rich and premium layers.

Average Size of Loan


Category Income requirement Ticket Size per annum / Rs lakh / Rs lakh

Mass 1.62 10Middle 4.86 10-30Rich 11.25 30-75Luxury 15 Over 75

Book Size (in Rs Billion)

2003-04 2004-05 2005-06

1,0431,454

1,950

Amount Disbursed & Average Ticket Size

2003-04 2004-05 2005-06

Amount Disbursed (Bn Rs)

Average Ticket Size (Mn Rs)

537 604 800

0.92

0.60

0.45

2003-04 2004-05 2005-062002-03

76%

20%3%

1%

65%

28%6%

2% 5% 11%

37%10%

41%

20%

48% 27%

Mass Middle Rich Luxury


DEMAND

4.1 MIDDLE BUDGET HOUSING

According to Assocham’s estimates, the Indian middle class, which num-bered around 59 million in 2001-02 is expected to swell to around 100million by 2006-07 and cross the 153 million mark by 2009-10.The residential property market constituted almost 75per cent of thereal estate market in India in 2002 in terms of value. The lower interestrates, easy availability of housing finance, high rise in salaries and newjob opportunities have given tremendous encouragement to the resi-dential sector.As quoted earlier in the study, Economist Rakesh Mohan’s analysis of theNCAER report (Annexure V) illustrates clearly that the demand is grow-ing across categories. As part of its social obligations, the government,under various schemes such as the Rajiv Gandhi Awas Yojana and theVambay projects has been able to more or less fulfil the EWS categorydemand. But the Lower Income Housing that includes housing for theservice sector in urban conglomerations has been progressivelyallowed to languish.This is typically the 400-800 sq ft category housing.With the problems associated with Slum Redevelopment, that too hasbeen allowed to languish. In both these categories, there is no way thegovernment can raise the resources to meet the demand. Only creativeincentives for the private sector to cross-subsidise this category ofhousing would help the government meet its obligation of Housing forAll.There is a pressing demand to meet the social obligation of housing forall, and this provides an opportunity to boost real estate investmentthat has the potential for rapid growth of the Indian economy. With apotential of drawing more than 60per cent of investment from overseaseither as direct investments through joint ventures or as venture funds,there is a strong case for evolving an investment friendly market byclearing barriers in product development and removing legal distor-tions to property markets and by streamlining monetary and creditpolicies.

4.2 HOUSING FOR ALL

The Prime Minister in 1998 declared his mission of `Housing for All’ by2010. To this end 2 million housing units were to be constructed by thestate agencies annually.However National Housing Bank statistics show an abysmal level ofconstruction by the state agencies currently. While the JaipurDevelopment Authority spokesperson maintained that to be a regula-tor, the authority needs to also play the market and to provide LIG andEWS housing, the Bangalore Commissioner explained that to keephousing going, elaborate planning process to include fresh areas in thesuburbs was important. In Kochi, the state government authorities havemore or less left the market forces to rule while many others such as theDelhi Development Authority are releasing whatever stock remains. Allauthorities today are consolidators of land and sell to the private sector.As the veteran banker Deepak Parekh told then Urban Developmentsecretary, Anil Baijal, at a real estate seminar organized by FICCI,“Todayall development authorities are the biggest speculators in the market.”The Ghaziabad Development Authority is a case in point. The housingboom has spurred it to rise out of years of slumber to start acquiringland again. But the former social objective of housing for all has some-

CHAPTER

4

1,043


where dropped by the wayside.This clearly proves that while the EWS category is being fed with fundsreleased by the government, the LIG and Slum categories are neglect-ed. As quoted earlier, the demand for urban housing as estimated in the11th Five-Year Plan estimates a LIG housing shortfall of 5.4 million units.This is not being catered to by the private sector. In addition to the 1.55million MIG housing too which is left partially unaddressed by the pri-vate sector, the numbers are too large for the government to ignore.The West Bengal and Punjab governments have evolved a system ofpublic private partnerships while in Bangalore in Karnataka there hasbeen a consistent release of land in layouts by the state government.However, housing units being constructed across remaining parts ofthe country are only from the private sector.With crucial backward and forward linkages to 250 associated indus-tries, it is the second largest employer after agriculture. An investmentof Rs 1 Cr in the housing industry contributes to the generation of 750

EWS HousingYear Target Achievement

1995-96 72,778 1,13,6461996-97 1,16,950 92,0001997-98 1,68,075 81,5921998-99 1,18,000 1,17,0001999-00 69,000 1,02,0002000-2001 1,96,000 2,39,0002001-2002 2,48,000 19,000*2002-2003 96571 28541*** Provisional ** Till Sep 2002 Source NHB quoting Ministry of Urban Development

LIG HousingYear Target Achievement

1994-95 40,305 19,0281995-96 34,273 34,0071996-97 62,000 26,0001997-98 37,541 16,9671998-1999 57,828 41,2441999-2000 44,000 27,0002000-2001 27,000 17,0002001-2002 44,630 2277** Provisional ** Till Sep 2002 Source NHB quoting

Ministry of Urban Development

Environmental Improvement of Urban Slums

Year Target Achievement

1994-95 14,62,660 8,81,0881995-96 15,88,871 17,40,8191996-97 15,70,532 20,10,0001997-98 11,89,898 8,84,8221999-2000 47,05,000 55,73,0002000-2001 50,97,000 60,88,0002001-2002 60,83,000 12,92,000*2002-2003 54,28,332 15,56,436*** Provisional ** Till Sep 2002 Source NHB quoting

Ministry of Urban Development


man years of employment.In 1998 the Hudco-Dholakia report on the Indian Housing Industry(Annexure XVIII) estimated that every rupee invested in the housingsector would result in 78 paise coming back to the economy.The figure,though not formally compiled since, is estimated by the ConstructionIndustry Development Council (CIDC) to have grown. (Annexure XIX).Roughly it is estimated that a rupee invested into the housing industryyields Rs 1.64 back into the economy. From an economic standpoint tootherefore, it makes sense to ensure that more private sector and foreign

funds flow into every segment of the real estate industry where theshortfall exists.While formal statistics about the construction industry is yet to be com-piled on a regular basis, there are several economic indicators showingthe rate of growth.According to the then chairman and managing director of the Housingand Urban Development Corporation, Mr V Suresh, there is also a needto source Rs 2 out of every Rs 3 that are to be spent to cover housingshortfall along with increased private-public sector partnership.

4.3 ENGINE FOR ECONOMIC GROWTH

The Rs 1800 crore strong Indian real estate industry, which has record-ed an annual growth of 25–30 per cent in last few years and contributed6 per cent of the GDP, is expected to grow over Rs 10,000 Cr billion innext 10 years. Dynamic reform initiatives in various sectors of economyundertaken by the Government have led to this up turn. The potentialof the sector is so high in terms of investment, employment and link-ages with other sectors that it has truly become the engine of econom-ic growth.The real estate and construction industry, growing at a whopping 30per cent annually is considered to be a prime driver of the economy.Approximately 50 per cent of India’s capital expenditure is debited toconstruction. According to statistics evolved by Deputy Governor ofthe RBI, Rakesh Mohan, construction and real estate as well as alliedindustries such as mining and quarrying are significant drivers of theGDP growth.

The potential of this sector may be gauged by the following:❑ Urbanization and development are synonymous. Urban Indiahas grown 10-fold in the 20th Century – from 26 million in 1901 to 285million in 2001 (28per cent of total population as per census 2001). It isfurther expected to rise to 40 per cent by 2020 and 50 per cent by 2050.❑ Over 30 million dwelling units with related infrastructure are

Cost wise percentage of materials and labourrequirements in housing

MATERIALS per cent LABOUR per cent

Cement 18 Mason 12Steel 9 Carpenter 4Bricks 13 Painter 1Timber 10 Unskilled labour 16Sand 6 Total 33Aggregate 5for concreteMisc. 6Total 67


required to meet current shortages. It would need an investment ofapproximately US $ 80 bn.❑ Current demand of housing and real estate is approximatelyUS $ 25 bn per annum and would touch US $ 50 bn in next five years.❑ JNNURM envisages investment of US $ 26 bn in seven yearsstarting 2005-2006 for renewal of city infrastructure of 63 identifiedcities.❑ NASSCOM – McKinsey Survey has predicted requirement of100 million sq.ft. office space by 2008. 1.5 million people are likely to beemployed in IT & ITES related businesses. Developers across the coun-try who responded to the Section 80-IB (10) study indicated that cur-rently the residential development is all targeted at the IT and ITES seg-ment. As a result of the IT and ITES hubs moving to non-traditionalbases, the residential development too is following that trend.❑ Water supply and sanitation projects alone offer scope forannual investment of US $ 7.1 billion.❑ Hospitality and Health care services require doubling by 2010.These are all offshoots of the township movement where currentlybuyers demand Grade A social infrastructure such as utilities andhealth and hospitality facilities. All these services are covered by theservice tax gambit. Already of the Rs 1,100 Cr budget of the PuneMunicipal Corporation, approximately Rs 220 Cr is contributed by con-struction related activities.❑ SEZ provides huge potential for quality residential, commer-cial and office spaces in selected areas. The Government expectsapproximately US $ 2 bn FDI in SEZ in next three years and 50,000 addi-tional employment.❑ There is adequate liquidity to sustain fund requirement ofhousing and real estate sector. Urban reforms and tax incentives haveaccelerated demand and growth of the industry has been 25-30 percent in last few years.

4.4 INDIAN ECONOMY: NEXT TO CHINA

The Indian economy is today the world’s second fastest growing econ-omy after China. In terms of purchasing power parity (PPP) GDP, India isthe world’s fourth largest economy after the US, China and Japan.India’s share in world GDP (PPP basis) has increased from 4.3 per centin 1991 to almost 6.0 per cent in 2005 (Chart 1). However, in China, thepercentage of premium housing is growing at a much faster pace thanthe mass housing. Unless India incentivises development of mass hous-ing with tax breaks, here too mass housing is likely to get left behind.

The burgeoning middle class population of over 300 million and rising,has given tremendous impetus to housing and real estate sector.General spending has increased by about 12 per cent.Current demand of housing and real estate is approximately US $ 25billion per annum and would touch US $ 50 billion in the next fiveyears.Rapid rise in country’s population has resulted in higher demand fordwelling units. This coupled with the growth in household formationand the increase in urbanization, in search of employment opportuni-ties, has resulted in severe pressure on urban infrastructure in recentyears. The consequence has been overcrowding and unhealthy livingenvironment, shortages of basic amenities and finally social and eco-nomic deprivation. All major urban centers in our country are gradual-ly experiencing such deficiencies in civic amenities.Studies show that doubling of city size is associated with large produc-


tivity gains of 3-8 per cent, i.e., moving from a city of 100,000 inhabitantsto one of 10 million is predicted to increase productivity by more than40 per cent. These benefits emanate from the proximity to product aswell as labour markets; proximity provides savings in trade and trans-port costs on the one hand and the availability of skilled labour on theother hand. Economic concentration economises on infrastructureinvestment that would have been larger had it been spread out over alarger part of the country. Thus, the evidence suggests that urbanagglomerates provide large productivity gains. Accordingly, substantialimprovement in the quality, governance and management of urbaninfrastructure in the country is essential for India to maintain and accel-erate the momentum of economic growth and productivity.A study by a rating agency ICRA shows that the construction industry

ranks 3rd among the 14 major sectors in terms of direct, indirect andinduced effects in all sectors of the economy.

India’s Real GDP Growth

FULL YEAR APRIL -JUNE ‘03-04 Sector ‘04-05 ‘05-06 ‘05 ‘05 ‘06

(QE) (RE)1 2 3 4 5 6 7

1 Agriculture 10.0 0.7 3.9 3.4 3.4 and Allied Activities

2 Industry 6.6 7.4 7.6 9.5 9.7

2.1 Mining and 5.3 5.8 0.9 3.1 3.4 Quarrying

2.2 Manufacturing 7.1 8.1 9.0 10.7 11.3

2.3 Electricity, Gas 4.8 4.3 5.3 7.4 5.4and Water Supply

3 Services 8.5 10.2 10.3 10.1 10.5

3.1 Construction 10.9 12.5 12.1 12.4 9.5

3.2 Trade, Hotels 12.0 10.6 11.5 11.7 13.2and Restaurants, Transport,Storage and Communication

3.3 Financing, 4.5 9.2 9.7 8.8 8.9Insurance, Real Estate and Business Services

3.4 Community, 5.4 9.2 7.8 7.3 9.5Social and Personal Services

4 Gross Domestic 8.5 7.5 8.4 8.5 8.9Product



RECOMMENDATIONS❑ As the volume of housing shortfall is still a whopping 24 million inthe next five years, there is a case for extending this benefit for at leastanother five years, till the housing shortfall is reduced. The benefitshould be extended because the momentum has only recently pickedup. A sudden withdrawal will either push up prices or result in fewer forthe mass housing category ❑ The benefit should also include a clause on LIG and MIG housingspecifically because our study shows that the demand is huge andgrowing. With the severe crunch on government finances, there is acase for incentivising private sector funds to build in the volume hous-ing market. Cross subsidies as evolved in the Bengal model would bean obvious model.❑ The law may be amended for clarity and the municipal byelaws andtaxation laws be brought in harmony to avoid confusion.❑ A few additional clauses such as providing for a greater componentof EWS housing category or contributions for this category when avail-ing of tax incentives may help in meeting the existing shortfall as well.The government may also consider incentivising private sector involve-ment in this segment by perfecting slum redevelopment norms withincentives to the private sector for participation in such ventures. Thiswould revolve around the principle of cross-subsidisation where themoney spent on the weaker section housing would be recovered fromthe middle and upper income housing sold at market values. Currentlydevelopers primarily in the Mumbai/Pune region have supported thisthinking.❑ Of this 24 million housing units shortage, the Planning Commissionestimates about 8 million housing units to be in the EconomicallyWeaker Section housing. Since this segment has to be fulfilled by thegovernment's social sector obligation, the bulk of allocated resourcesgo into this segment. However, to promote private sector participationin this segment, there has to be active incentives such as tax breaks andland consolidation and grievance redressal by the government, for theprivate sector to be actively involved.❑ The government may also consider incentivising private sectorinvolvement in the lower income segment by perfecting slum redevel-opment norms with incentives to the private sector for participation insuch ventures.This would revolve around the principle of cross-subsidi-sation where the spends on the weaker section housing would berecovered from the middle and upper income housing sold at marketvalues.❑ As the housing industry booms and there is increased interest inpurchase of land for development, this opportunity cost has beensteadily pushing up actual values payable by developers and retail buy-ers. Even at the base levels computed by the Planning Commission,there is a huge gap in funds. This is devoid of opportunity costs. Thereis obviously a clear case for boosting private sector participation.❑ The four-year sunset clause is not sufficient as the entire processtakes very long - the survey of the place, listing of eligibility criteria,accommodation in transit camps takes up a lot of time.❑ The time should not include any litigation that may be involved,which is quite frequent.❑ As the housing loan interest rates rise, the affordability of apart-ments is already coming down. At this time, it is imperative that thereshould be a check on prices and an incentive to build where the vol-ume demand is. However, a clause mandating that this incentive bepassed on to end users may be beneficial to the market.

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❑ Commercial establishments clause is highly inadequate. The incen-tive states that the project should not have shops and other commer-cial establishments included in the housing project over 2,000 sq ft. InKolkata where most projects are of the scale of a township under thepublic private partnership model, and other large developmentsacross the country, this size of commercial development is highly inad-equate.This warrants a change in classification according to the size ofthe project.❑ Housing demand has now become so dynamic that a periodicassessment of market needs and the supply needs to be undertakenby government agencies. This would show where the unmet demandis and remedial measures can be taken mid-stream.❑ The loopholes and delaying factors should be addressed so that thenumbers scale up instantly.❑ Awareness building exercise was not undertaken earlier. This timeround it should be done.❑ While smaller cities earlier had only plotted developments, with thenew connotation of service/safety and security, apartments are findingacceptability even in Tier II and III cities.This has led to an unprecedent-ed rise in the number of apartments that are being constructed today.This trend needs to be refined so that the housing boom includes allsegments of the society and will reduce the risk of unscrupulous fly-by-night operators entering the fray and also segments of society hav-ing to resort to squatting on common land because they have notbeen catered to.


CONCLUSIONThe housing boom emanated from a series of government initiativesthat were initiated in 1998.The government efforts were targeted bothat the supply side where developers were incentivised to build for themasses and at the demand side where the borrowers were encouragedto avail of institutional finance to purchase real estate. Both strategiesworked, as is evident from the increased offtake of housing finance aswell as the increase in supply across categories.The suppliers had to work hard on seeking clarifications on the devel-opments that classified for tax incentives. Now that the market is in aboom and developers have fanned out across cities large and smalland are creating projects specifically for the Incentive, any suddenwithdrawal of the incentive may be detrimental to mass housing.The volume of housing required in the 11th Five-Year Plan period is awhopping 24 million and the requirement of finance too is over 5 lakhCrore. At a time when foreign investors are seeking an entry into thesector, any withdrawal of incentives will push domestic developers intothe creamy layer. That will again eliminate the mass housing from thepurview of private sector funds.A clear policy extension, with efficient time frames for availing of theincentives and also granting of the incentive, a transparent mechanismof encouraging developers to build in the category by availing of theincentive is urgently required.The problem area is the issue of housing for the masses. The road mapis yet to be drawn. The problem of finances persists and the issue iswhether the government wants to incentivise mass housing develop-ment or not.

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DISCLAIMERThe report compiled by MagicBricks is intended to provide indicativeinformation on Indian real estate industry. MagicBricks gives no war-ranty, express or implied, as to the accuracy, reliability and complete-ness of any information and does not accept any liability on the infor-mation which may or may not be subject to change from time to timedue to Governmental or non Governmental regulations/directions.

Documents

CREDAI Study on - Magicbricksproperty.magicbricks.com/newproperty/img/credai18june.pdfFor organizing participation of members in the survey A special thanks is due to the city authorities