What is the biggest problem you see in Indian real estate?
The industry needs regulation but the problem is that the sector is over-regulated to a level, where there is duplication of approvals and taxation mechanism at the Centre and state-level civic bodies. For instance, there is no clarity on the proposed service tax and goods and services tax. Different states have different laws. Why can’t the policies and regulation be uniform across the country?
The other problem is high stamp duty rates in some states. States that have lowered these have seen an increase in stamp duty collection.
The actual transaction prices are higher than what is on paper. Will lowering of stamp duty solve the problem of the unaccounted part?
To a large extent. High stamp duty gives the market an incentive to under-declare the value of transaction, just like in the 1970s very high marginal rate of taxation gave businessmen a reason to under-declare their incomes and evade taxes. We are still facing the consequences of the parallel economy, which had its genesis in high tax rates. High stamp duty and multiple taxes indexed to the value of the transaction (property tax, wealth tax and service tax) are creating a perverse incentive to under-declare a property’s value and encouraging the generation and parking of black money.
Pankaj Bajaj, president of Confederation of Real Estate Developers’ Association of India, NCR, and managing director, Eldeco Infrastructure and Properties Ltd
How can the huge gap between actual transaction rates and marked prices be reduced?
High taxation of property transactions and values is a very big cause. Lowering of tax rates will go a long way in reducing this difference. In fact, there should be efforts to incentivize high declaration of property costs. One radical idea could be to lower stamp duty and transaction cost for a higher-value property as compared with an identical property declared at a lower value.
What problems do you see around land acquisition?
The main problem is lack of a proper regulation. There are two sides of land acquisition. First, farmers get less compensation when the land is acquired and second, when farmers sell the land on their own. Both should be allowed. But in the first case, the new Act passed by the Uttar Pradesh (UP) government should be followed where at least 70% of the farmers should agree to land acquisition and the compensation should be annuity based. The annuity-based compensation already followed in Haryana should be a model for other states. There are other successful models, too. For example, Gujarat has a policy where farmers get equity in the project. Often, farmers own 70-80% of a project.
Do you see rising interest rates as a big problem that homebuyers face?
More than anything, sentiments attached with home-buying will be impacted. Real estate markets such as Noida, Pune and Gurgaon are driven by salaried professional. So there will be slight negative sentiment in the market. People will be concerned. However, homebuyers in tier II cities where capital values are still not high will not be impacted.
Will there be a price correction in the residential market?
Overheated markets such Mumbai and Delhi-NCR may see price correction. However, a majority of the regions in the country will not witness any price correction. In fact, tier II cities will see appreciation of capital values.
How relevant is calculating the rental yield in a market like India, where two similar properties in the same location can have different rental rates? Is it worth tabulating such data?
There are two components of real estate—residential and non-residential space. For residential, the concept of rental yield will not work in India as a property can have different values depending on its condition and surrounding amenities. You convert your normal apartment by spending some money on the interiors and its value will go up. For non-residential space, there is a direct correlation between the rental yield and capital values.
Our (Indian valuers) model of calculation is incomplete. The emotional, social and safety quotient behind buying a property is not factored in while making that calculation. Most Indians think of property investments as safe compared with other asset classes. Also, the component of black money coming into the real estate is not factored in the calculation. While it is easier to put in unaccounted money in non-residential real estate, it is equally difficult to bring that in residential real estate.