Aspiring Reformist of Real Estate

C Shekar Reddy

National President - CREDAI

Mr. C Shekar Reddy, President, CREDAI-National is a farsighted who senses an improved infrastructural environment for the country. He has been reinforcing the stature of builders’ sorority in Andhra Pradesh. He shares exclusively with Built Expressions on how to implement such reforms across India through his role in CREDAI. "There are no secrets to success. It is the result of preparation, hard work, and learning from failure - Colin Powell." This aphorism is what Mr. Shekar Reddy, Chairman & Managing Director, CSR Estates Limited and President, CREDAI-National believes and his belief is apparent in his exertion too.

Undeniably, Mr. Reddy's role to ameliorate current the Real Estate Regulatory Authority (RERA) is apparent. RERA was introduced to streamline and regulate the realty sector to provide assistance and protection to buyers. However, it fails to meet certain parameters. “We welcome government’s initiative to contour real estate sector by introducing RERA. Nonetheless, the bill comes forth as a discriminatory and one-sided legislation putting sole onus on the promoter, with the important objective of ‘promotion of real estate sector’ completely missed out,” says Mr. Reddy. Eventually, this will adversely impact small and medium developers if the concerns of the promoters are not addressed, it will destroy the real estate industry, and create a massive housing shortage in the country.  The bill in its current form will lead to a cost escalation of up to 30% which will be passed on to the end user.

The bill is totally armed against the developers with stringent provisions and penalties, and talks nothing about the other stake holders involved in the process. This will put the entire burden on the developers, leaving other stake holders like ‘competent authority’ or functional agencies or financial agencies free to act as per their will. This will surely increase the corruption many folds and result in opening additional fronts for delay and harassments.

CREDAI suggests a “Multi- stake holder approach” with all stake holders concerned directly or indirectly with the real estate being regulated and made accountable to the RERA Authority so as to ensure a healthy balance and address unfairness and transparency issues at all levels. Just imposing penalty on the Developer will not solve the issues. CREDAI also suggests inclusion of force majeur clause (to include delays beyond the control of the developer like delays in approvals and clearances, shortage of building materials, sand, skilled labor, title issues, line agencies, financial institutions adverse market conditions and delay in external infrastructure) in the Bill.

The mandate to park 70% of money with the bank will make the projects unviable and escalate the cost and restrict the ability of small and medium builders to bring money upfront for land purchase, make advance payment to the contractors and pay the upfront fees and charges. Majority of small and medium developers comprising 80% of the real estate sector and catering to 90% demand for Lower Income Group (LIG) and Middle Income Group (MIG) housing requirements particularly in Tier II and Tier III cities and sub- urban areas of Tier I cities will be wiped out.

 Moreover, due to the provisions of the Bill the promoters will ask the allottee to pay in installments and will not offer any benefits of discounts for lump sum payments. For a customer who is totally dependent on loan from financial institutions will thus lose out on the benefit of early EMI payment. He will have to pay pre-EMIs till the completion of the apartment and the time it’s handed over as per the clause in the Bill.

The Bill insists on disclosure of carpet area as per definition of New Building Code (NBC) by all developers. The carpet area ratios vary from flat to flat within the same project, as also in case of individual houses like detached, semi-detached, row housing, cluster housing, etc. If carpet area is used to fix the price for sale, it will encourage builders to reduce wall thickness to get better returns. A building with 4 inches outer wall will get a better yield for the developer than the one with 9 or 14 inches outer wall thickness, if we adopt the same price per sq. ft. Thus, an inferior building will be able to gain better sale value due to higher carpet area achieved. Will it benefit the purchaser? Instead CREDAI suggests that plinth area definition should be used.

He further adds, “Hence, we at CREDAI strongly feel that the provisions of the Bill will benefit neither the economy nor the industry and actually destroy the industry and the end user. We hope the Standing Committee on RERA Bill, 2013 takes cognizance of the representation by CREDAI and make suitable amendments to the Bill to make it a legislation that will truly benefit all the stakeholders, promotes and encourage the real estate developers to partner with the government and work towards the objective of  providing a shelter for every individual.”      

Outdated FSI Norms

India has about 18% of population and only about 2% of world’s geographical area and 1.5% of forest and pasture land, as per the GoI, Department of Land Resources. The per capita agriculture land has declined from 0.48 hectares in 1951 to 0.16 hectares in 1991. China has almost 3 times more per capita land availability. In view of this it is important that the land use has to be very efficient. Taking on this cause, Mr. Reddy took a lead role in removal of outdated FSI (Floor Space Index) norms in AP and its impact on the completion of projects.  

This efficiency is achieved by doing away the FSI concept adopted by the Andhra Pradesh State Building Rules, 2006, making the land cost per dwelling unit much lower, despite the land costs being high. The success story of these rules is that the Housing in Hyderabad is cheaper by 60 to 70% compared to Chennai. In addition, the municipal corporation also gets double the revenue because of impact fee levied on upper floors (beyond fifth floor) and more betterment charges owing to increased built up area, and providing better infrastructure. As the density of dwelling units increased the cost of services have also come down substantially, thereby making the housing more affordable. Further, the ground coverage in high-rise buildings is 20% and the open/lung space is 80% making these buildings Green Buildings.

“It is therefore recommended that the concept of FSI should be done away across the country as it makes the housing and infrastructure services affordable and the urban local bodies become self-sufficient to provide better infrastructure. We are drumming into the different state governments, Ministry of Housing Urban Poverty Alleviation (MoHUPA) and planning commission about the benefits of removing the concept of FSI in view of the benefits for providing affordable housing,” says Mr. Reddy.

The Rule Book

 A set of rules that work for every developer were introduced  by CREDAI as the voluntary ‘Code of Conduct’ with the objective to address the challenges faced by the housing sector, bring in transparency and a focused effort to build a sustainable and dynamic housing sector with private developers. The Consumer Grievance Redressal Forum was also set up to address and resolve the Consumer complaints, and to protect and safeguard the interests of the customers.

Further to encourage a level playing field for the developers, CREDAI advocates the removal of  FSI concept as adopted by the Andhra Pradesh State Building Rules, 2006, making the land cost per dwelling unit much lower, despite the land costs being high.

CREDAI partners with National Skill Development Council and undertakes skill development initiatives for the employees making more skilled personnel available for the industry. CREDAI also welcomes the RERA bill but wishes the inclusion of multiple stake holders approach to ensure accountability of all stake holders and some other amendments as discussed earlier to make it more balanced for both the developers and buyers. “With these initiatives, CREDAI is working in the right direction to bring credibility, technological knowledge across the spectrum of developers and facilitating increased healthy competition in the industry to ensure the end users get the best quality product at a reasonable price,” he states.

Finance in Housing Sector

Lack of finance is imposing two difficulties to the housing sector. Firstly, it is delaying the project implementation due to normal limitations of arranging the project finance. Secondly, as the non-bank finance is expensive the project cost is increasing. The housing sector in USA receives as high as 32% of the lendable funds of the banks. In China it is 22%, whereas in India it is barely 3% for Commercial Real Estate (CRE). “CREDAI has been representing this drawback to Finance Ministry through dialogue and deliberations in meetings with Indian Bankers Association and National Housing Bank. The bank finance must be increased to the housing sector at least to 15% by giving it priority status by declaring the Housing sector as the Infrastructure sector,” he adds. The Central Banks prejudice of marking Real Estate sector as a high risk sector is not called for as the % Non Performing Assets to CRE are 2.5% which is much lower as compared to Agriculture (5.3%) and other priority sector (2.94%) as on September 2013. He suggests, “We advocate a fair treatment to the real estate sector by the banks.”

CREDAI has been advocating that the sector be declared as ‘Infrastructure Sector’ and make get the benefits of taxation for 10 years under Section 80IA of the Income tax and also provide benefits of Section 35AD and AD(ac) of the Act. Further, the housing creates enormous capital formation for the growth of the economy through several multiplier effects. It is like a capital goods sector that stimulates the production of consumer goods lower down the supply chain in the economy. It is also base for creation of talent pool and healthy human capital. So such an asset should not be charged service tax. 

Roadmap for affordable housing

The Technical Group constituted by the Ministry of HUPA has estimated the housing shortage to be 18.78 million dwelling units in 2012, 95% of the shortfall is on account of the affordable housing segment. Moreover high inflation, increasing land costs, shortage of labour, high interest rates and delay in approvals make housing unaffordable for LIG and MIG segment.

Task force on promoting affordable housing under the Chairmanship of Mr. Arun Kumar Mishra, IAS, Secretary, MoHUPA has given a practical roadmap and CREDAI recommends that the report be implemented in full. CREDAI also seeks an Infrastructure status to the Housing sector with all its benefits as affordable housing projects involve high density of dwelling units which requires high infrastructure cost thereby higher cost per sq. ft. According to him, the affordable housing segment is price sensitive and highly risky business. Affordable housing can be developed and promoted in regions where extensive external infrastructure, social infrastructure and transport facilities are made available by the government agencies.

CREDAI recommends benefits under section 80IA for 10 years and benefit under Section 35AD of the IT Act to the developers, rationalization of stamp duties and the other non financial incentives recommended by the Task Force to encourage developers to take up projects in PPP module.

“A single window of approval for all housing projects to remove lengthy approval process, as it takes more than two years to buy a land and convert it into land for housing purposes. This delay pushes up the prices of the land consequently the housing prices,” complains Mr. Reddy. Further, a developer has to pass through 150 tables and 40 departments/agencies of central and state governments and municipal bodies in order to take up a housing project. This causes a cost-escalation of 30-40% as per Mckinsey report. To cut down the cost escalation due to the delay in approvals CREDAI recommends the implementation of SAPREP (Streamlining Approval Procedures for the Real Estate Projects) committee report for a single window, online approval immediately within six months.

To promote affordable housing projects the Government should promote efficient use of land. This efficiency can be achieved by doing away the FSI concept and adopting a policy similar to the Andhra Pradesh State Building Rules, 2006, making the land cost per dwelling unit much lower, he adds.

Besides these technical constraints, the developer also needs access to cheaper loans from banks to fund 75% of the working capital requirements for such projects and lower taxation to bring down the cost and make housing affordable. If such issues are addressed by the government, builders will come forward to partner with the government and work towards projects to provide affordable housing.

Box item:  Mr. C Shekar Reddy's public assignments

• President, CREDAI National
• Founder President, CREDAI Andhra Pradesh
• Director-National Skill Development Corporation (NSDC)
• Governing Board Member, National Academy of Construction (NAC)
• Founder Governing Board Member Construction Sector Skill Council
• Founder Governing Board Member Plumbing Sector Skill Council
• Chairman, IGBC, Hyderabad Chapter
• Founder Secretary--Alumni Association of Chaitanya Bharathi Insititute of Technology, Hyderabad