RBI interest rate cut positive for housing sector

For the first time in three years, Reserve Bank of India (RBI) has slashed interest rates by 50 basis points to 8%. This move will reduce the home, auto and corporate loan rates. A fall in interest rates of home loans spells relief for the common man who up till now had been postponing the decision to buy property due to increased prices and high inflation.

Anuj Goel, Executive Director of KDP Infrastructure believes that this is a good move from the RBI’s side as this will improve cash flow. “As the housing loan interest rate reduces, it facilitates home seekers to buy house and ultimately it will be beneficial for real estate industry. However, the move will only benefit new borrowers while the existing borrowers will have to grapple with the old rates,” he added.

Banks should allow existing home loan customers to reduce their interest burden by allowing them to re-price their existing loans at lower rates so that borrowers can switch to prevailing floating rates that are at a discount to the prime lending rate, Goel pointed out.

Navin Raheja, President, NAREDCO & CMD, Raheja Developers is happy with the move, saying that home loan EMIs will come down resulting in a boost to residential real estate. “But, the banker’s reaction to maintain the interest rates irrespective of cut in repo rates is a cause of concern because we feel that banks should pass the rate cut to the borrowers enabling them to invest in real estate,” he said.

Sailesh Kumar, Chief Operating Officer, Lotus Infra Projects Pvt. Ltd agreed with the view, saying that keeping in view the upside risk of inflation, the RBI could not afford to cut repo rate for the last couple of years.

“It seems that growth is likely to improve supported by pick up in consumption demand. The RBI has cut the repo rate which is a welcome step for real estate sector as high interest was impacting the demand on one hand and increasing the cost of construction on the other hand increasing the cost of construction,” Kumar added.

Gaurav Mittal, Managing Director, CHD Developers Ltd said that this step is slated to be beneficial for both the buyers as well as the developers who have been struggling with cash crunch in recent times. This significant move would reduce the cost of funds to home buyers as well as developers as it will allow the banks to lower down the interest rates. “This will ensure heightened property demand in the coming times. Removal of the pre-payment penalty clause will spread cheer amongst developers and would ensure fresh loans and hence boosting the market,” he added.

Now that rates are cut, consumer demand is expected to revive and overall sentiment will also improve. It is expected that banks will reduce the home loan interest by 50 basis points which will ultimately perk up the demand and will help developers to dispose off their unsold stock, Kumar added.

Rajesh Goyal, Managing Director (MD), RG Group said that the announcement in the new credit policy to cut interest rate by 50 basis points is a move towards the right direction. It will provide much-needed boost to the sector and a relief to home buyers.

However, Om Ahuja, CEO – Residential Services, JLL India does not consider this cut to be a positive move for the housing sector. It should be borne in mind that the RBI has hiked interest rates a total of 13 times between March 2010 and October 2011. “Given the ongoing concerns over inflation and excessive liquidity on the market, this spate of rate hikes as created a compounded problem for the residential real estate sector whose effects are not easily dispelled. The series of hikes in the past have also affected the price that builders put on their properties, since their own cost of borrowing has increased. It is unlikely that property prices will come down because of this rate cut, and it is the price of properties that is the decisive factor in residential real estate sales,” he said.

Implications of guideline value revisions in Tamil Nadu

The government of Tamil Nadu has revised the rates of guideline value of land in all zones, including residential, commercial and agricultural land across the state with effect from April 1, 2012. This revision comes after five years with the last set of values having come into effect in August 2007.

The revenue policy note, presented in July last year, reflected that this change was due to be ushered in and speculations were rife over the last eight months as to when the revision wouldcome into effect. In November 2011, the proposed revision of values for each region was put up for public opinion in all the Tahsildar offices and reviews were taken into consideration, before the current set of rates were introduced in the state.

The new values affect all types of land including agricultural, residential, industrial and commercial property in urban and rural areas equally. With a rise of almost 300% in many areas, the reaction to this revision has been mixed. There are three main aspects that this change brings in, the first being the prevention of black money and the loss of revenue to the state and country.

“The revision is a welcome move and is set to usher in a cleansing of the real estate industry and land transactions across the state,” states A S Shivaramakrishnan, Head, Residential Services, Jones Lang LaSalle India, Chennai, a premier international real estate consultancy firm. “The revision of the guideline values equaling the market value of land in most part across the state will greatly enhance the transparency index of real estate transactions in the city and promote investment and growth in a big way.”

A major concern in India is cash transactions in real estate deals, which is encouraged by the divergence of guideline value and market value. People often register the transaction at guideline value (sometimes as low as 20% of the transaction value itself), pay the registration and stamp duties based on the guideline value alone (affecting the buyer of property) and reflects the accounted portion equivalent to the guideline value alone for capital gains and tax purposes (affecting the seller of the property). With such high degree transactions happening in cash in most deals, it had become rare to find buyers or sellers insisting on a fully transparent deal. This led to huge revenue losses for the state exchequer. This is not only illegal, but also creates a vicious cycle of investment of black money in the real estate sector.

“Major legal reforms are still required with respect to property valuation and land acquisitions,” says RS Nambi, a Tax and Legal expert and advisor to the World Bank. “An ombudsman and valuation officer in every registering office to examine and evaluate the transactions, disputes and divergences between published values and the market can go a long way in ushering greater fluidity to real estate transactions. This revision of guideline values is the first step towards preventing the loss of revenue for the state and unearthing black money. We have to wait to see how the latest measures of the budget with respect to bringing in TDS on amounts greater than 2 lakhs will apply to property sales this year. The capital gains tax that the seller has to pay is calculated on transaction value or guideline value, whichever is higher according to law. “

The previous year saw close to `3,200 crores worth of stamp duties and registration fees being paid for property transactions between October 2011 and March 2012. The revision is expected to boost the revenue in the state this year to a figure greater than `8,500 crores in 2012-2013. Targets for revenue collections for the month of March were set for all the sub-registrar offices across the state by the Inspector-General of Registrations.

With expectations of a hike in the values, there has been a rush of registrations and many people who might have otherwise waited to conclude their transactions, were pushed to finish them before March 31. “With a high number of transactions having happened in March, the target of 21 crores set for the Neelankarai SRO was successfully achieved by the middle of the month itself,” states Vimala Jayakumar who runs a document services outfit in Neelankarai.

“Usually, there are around 40 registrations per day and in March it rises to about 60-70 per day. But this year, there was a heavy rush in the last two weeks of March, with more than 200 registrations happening per day.” This clearly shows that the revision of guideline values will not only promote transparency and usher in more revenue to the state, but it will also act as a mechanism to force people to complete delayed transactions all at once and bring in a combined revenue to the state, which has been starved of funds. It is estimated that the combined revenue of 1000 crores has been collected by the state for the month of March 2012 through these transactions alone.

The Inspector-General of registrations chairs the committee formed by different sub-collectors across the state to determine the guideline values. The proposed values were published in November 2011 and public opinion was invited. Accordingly, they were modified before coming into effect in April of this year. Says Vimala, “Overall, the new values reflect the market rates. Wherever people disagreed with the rates, appeals were submitted and they were taken into consideration. The older and newer guideline values have been listed by survey number, street and category on the official website of the Registration Department of Tamil Nadu (www.tnreginet.net) and the website itself mentions that values relating to 1.1 lakh streets and over 29 million survey numbers.

While it is a great move to bring in transparency in the state’s real estate industry, there are some concerns as to how this revision will affect the public and developers. With steep revisions of up to 270% in most cases, the question on how this re-evaluation of property will affect the common folk remains. The hardest hit areas are the centers of urban development and the heart of Chennai city. “In the peripheral areas, it is business as usual even with the hike in values. Similarly, for multi-storeyed buildings, the direct impact is not as high, since the undivided share values come up only to 20-30% of overall values. The significant impact is within city areas where the values have jumped up to unaffordable levels,” says AS Shivaramakrishnan.

“While the cost of land is already high in the city, the steep increase in guideline values will make it impossible for developers to be able to afford to get premium FSI for redevelopment projects. What this means is that, on old buildings that can come up for redevelopment with joint-development agreements between the owners and developers due to revision of the FSIs over the last two decades can be rendered unfeasible if the developer has to pay the kind of fees based on the new guideline values for the premium FSI that would be his profit centre. Any move to provide some incentives for redevelopment projects on 25-30 year old buildings are necessary to avoid bringing redevelopment to a grinding halt. The concern is that the move makes it all that more expensive and unfeasible for urban projects.”

“Similarly, peripheral development needs the social infrastructure to expand accordingly. In a city like Bangalore, this has happened in concentric circles and not in an unbalanced way like we are seeing in Chennai. With the city at a crucial stage of its metamorphosis, with major infrastructure projects like the metro in progress, a significant aspect that affects its citizens and growth itself is redevelopment of existing structures and buildings. New infrastructure is being built to raise a brand new city from the ashes of the former metropolis. This has been the story in cities all across the world, right from New York to Mumbai, where redevelopment has been key to boosting its growth ahead. Hence, while it is a positive move by the government to bring in equity in the values of transactions, it is important that the city and state authorities remember that the redevelopment of its buildings is necessary for growth. “

Buildings may get taller as Panel seeks higher FSI

The skyline of Indian cities could soar as the government considers permitting vertical growth with the aim of checking runaway realty prices and generating resources to upgrade urban infrastructure for future growth.

A Planning Commission steering committee, in its draft report, has recommended providing additional FSI (floor space index; the ratio between built-up area and plot size) as development rights, but said it should not come free of cost.

The panel said the charges for additional FSI and land-use conversions should be at least 50% of the circle rate in the area and should be determined professionally. It added that additional FSI should be permitted selectively.

The commission’s steering group on urbanization said the revenue from grant of additional FSI should be “suitably ringfenced for funding infrastructure projects to sustain higher FSI”.“The proposals, if accepted, would substantially increase availability of housing stock and moderate realty prices,” said an urban development ministry official.

Calling the present density regulations in Indian cities “archaic”, the report noted that Indian cities had the lowest FSI in the world. “This (densification) should be part of a balanced strategy for expanding the effective supply of prime land and, in the process, raising funds to finance urban infrastructure improvements,” the panel noted.

Real Estate Growth in Meerut

Meerut has rapidly come up as a strategic real estate destination owing to its close proximity to the Delhi NCR. It is connected to Delhi by NH-58.

Today, as the mid- and the lower-middle class end users find property in the NCR out of their reach with real estate prices hitting the roof here, Meerut has shaped up as an ideal destination catering to the increasing housing demands on one hand, while maintaining the prices within affordable limits on the other.

Forthcoming real estate projects

Real estate in Meerut is riding on the crest of increasing demand, boosted by large availability of land at low prices. The market is demonstrating buoyancy with the presence of prominent builders like Ansal API, Supertech Ltd, MSX Developers, Era Group, Majestic Properties, DLF, and Omaxe.

Meerut is also seeing an upswing in prices owing to the presence of leading construction companies, which are eager to buy land for their projects. Market watcher say property prices in Meerut have trebled in the past two years.

Residential property

Excellent infrastructure facilities, sound planning and top-grade security of some of the housing projects on the outskirts of Meerut has increased demand in this area. The most sought-after location is along the Meerut Bypass.

Also, the Hapur Road and the Cantonment Road are gaining prominence as ideal destinations for property investments and are attracting large-scale developments. Of late, commercial and residential complexes are coming up on Mawana Road and Modipuram on the Muzaffarnagar Highway.

Prominent builders are coming up with new projects like Ansal Housing, a residential township by Ansal API; Sports City, Shopprix and Palm Greens by the Supertech Group, and a two residential projects and a mall by the Era Group. Other builders like Saamag Group have residential projects like Saga Habitat, Ark City and Coral Springs, while the Gayatri Group is building many residential projects here.

Commercial property

High-end commercial development is also taking place in Meerut, in a limited way though. Rates of agricultural land here are growing mainly in the areas adjacent the main roads; they hover between Rs 26 lakh and Rs 34 lakh per hectare, whereas for other purposes, the prices have increased from Rs 43 lakh to Rs 54 lakh per hectare. Prices of agricultural lands along the city roads are also appreciating by the day, with the rates ranging from Rs 21 lakh per hectare to Rs 24 lakh per hectare. For the other purposes, the rates are over Rs 26 lakh per hectare.

Why Meerut?

Pranav Ansal, the vice-chairman of Ansal API, says: “With an increase in the number of domestic and foreign players across industries shifting base to Tier II cities, demand for such townships is on a high. With this mission, we have planned to develop a Signature Township, Sushant City, over 300 acres. It would offer an array of options like built-up houses, independent floors, bungalows and villas. The township will cater to housing requirements of more than 5,000 families.”

R K Arora, the chairman and managing director of Supertech Group, says: “Here

 price of residential property varies from Rs 2,350 per sq metre to Rs 16,500 per sq metre, depending on the location. Earlier, property prices in Gurgaon and Noida were considered to be going through the roof, which drove property buyers to the other parts of the NCR. Price of land in Meerut is not so high but the property market is certainly showing phenomenal potential for growth. For the people who cannot afford an apartment in Delhi and yet want to remain near the city, Meerut offers a cost effective option.”

Manoj Gaur, the managing director of Gaursons Ltd, says: “Meerut is a fast developing city and is giving a tough competition to other NCR cities like Noida, Gurgaon, Ghaziabad, which have become very costly for the middle class. As land is still freely available here, builders are making a beeline for Meerut. The city is only around 70km from Delhi.”

Connectivity

Thousands of people commute daily to the Delhi NCR for work from Meerut. Keeping this in mind, various development authorities in the NCR, in concert with the Meerut Development Authority, have planned for an expressway between Delhi and Meerut, as well as for the extension of the Metro line from Delhi border to Meerut.

This is expected to bring down the commuting time between Delhi and Meerut to just 45 minutes. This will boost the overall real estate development in the city and, in the long run, return impressive returns on investment on property here.

Now, it will be easy to move from Delhi (Anand Vihar) to Meerut as the authority is all set to start the work on Rapid Rail Transit System and Delhi-Meerut Expressway.

An elevated railway track will be aligned to the expressway route. The length of this proposed track is 67km, with an estimated cost of Rs 1,040 crore. The 64km long expressway itself is estimated to cost Rs 4,500 crore and is likely to be completed by 2015. The first 8km of the expressway from Nizamuddin Bridge to Ghaziabad border will have 16 lanes.

The expressway will cover 28km of NH-24 between Ghaziabad border and Dasna and this stretch will be widened to 14 lanes, from six lanes, according to the final plan. Also, a 36km stretch between Dasna and Meerut will be constructed as a fourlane highway. The tender of this project has been given to the Delhi Integrated Multimodal Transport System (DIMTS) by the NCR planning board. Under this project, stations are likely to be constructed at a gap of 4-5km.

Anand Vihar, Vaishali, Mohan Nagar, Meerut Road (Airtel Cut) Morta, Duhai, Murad Nagar, Gang Nahar, Modi Nagar, Mohiuddinpur, Meerut Bypass Cut and Pallavpuram are the proposed halts of this Rapid Rail Transit System (RRTS). An underground track will be set up from Anand Vihar to Dabur, due to the Metro project.

However, there is a consensus among the officers concerned that the Metro Rail will not come in the way of the high speed train. The consultant company has designed the entire project in a manner that there is no need to acquire or demolish any existing property. The track will be underground from Anand Vihar to Dabur and then run on elevated track up to Meerut.

The average speed of the Metro rail in Delhi is approximately 30-40km per hour but the speed of this rapid train will be 150km per hour. It is hoped that one can reach Meerut from Delhi within 50 minutes, which was not possible earlier. The services of two passenger and express trains could be available on the two proposed track.