Thursday, January 12, 2006

Reality of Indian Realty!

Shekhar Gupta in his article Who’s afraid of the bulldozer does point out to one true bottleneck affecting India.
Have you sometimes wondered why reform in some areas of our infrastructure proceeds much faster than in others? You will see a clear pattern there. Anything that does not involve real estate, moves much faster. Telecom is a good example. Anything that involves land takes much longer.
However his diagnosis is faulty. It indicts politicians instead of the regulations that provide those powers to politicians. Politicans are people like you and me and react no differently to their incentives. And land planning and regulations by governments in India provide huge incentives for a status-quo.

In Delhi, the archaic property rules and Master Plans do not take into account "natural markets" like the locations of office spaces and shopping destinations. It is easy to blame offices for encroaching onto residential space but not easy to see that property regulations and Plans by constricting supply of legal real estate (I mean land with infrastructure for commerical usage), push rates artificially higher. The Master Plan of Delhi in a self-diagnosis in the 1960s acknowledged its faulty foresight regarding the demand for office space and consequent transportation issues. However the powers granted to legislators and bureaucracies in Delhi regarding land mean that reforms will not happen soon. Incidentally the Master Plans and the Delhi Development Act serve as models for the other urban centres in India.

The demand for commercial space has also been magnified by the up-trend in the Indian economy.That only means more money for those willing to supply commercial property. Andy Mukherjee in his article Missed India's Software Boom? Try Real Estate writes on this.
The entire country has a little more than 70-million-square feet of A-grade office space, less than Shanghai and Beijing put together. Technology services account for as much as 85 percent of India's office space demand ... An undersupplied market means that the net yield on office property in India is 11 percent ... That yield is among the highest in Asia. Add to that a 20 percent to 40 percent price appreciation in the past 15 months, and office space in Mumbai, New Delhi and Bangalore starts to look like a very attractive asset class. Supply is expanding, though demand is rising at a faster pace.
A few caveats are in order. There are more than hundred (yes, 100!) 19th century rules and regulations governing various aspects of land in India.

A few Central laws governing real estate are
  • Indian Contract Act, 1872
  • Transfer of Property Act, 1882
  • Registration Act, 1908
  • Special Relief Act, 1963
  • Urban Land (Ceiling And Regulation) Act (ULCRA), 1976
  • Land Acquisition Act, 1894
  • The Indian Evidence Act, 1872
  • Rent Control Act (state law)
Taxes and Stamp Duty Rates

  • Stamp Duty
  • Property Tax
  • Entertainment Tax
These and other issues are covered here in the Planning Commission document on real estate in India, an unusually useful document, I must admit, given the scarcity of such information. Another useful article is here.

Deregulation of real estate will increase supply of housing as well. However this depends on the government's initiatives in the supply of roads. This artificial scarcity of land is the prime reason for our problem of overcrowding. Again, our problem is not population but overcrowding. But that is fodder for another blog note.

Cross-posted on the Indian Economy blog.

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