Volume is the key to quality and affordable housing

geetanjali

Geetanjali Minhas | November 17, 2014


Niranjan Hiranandani, property developer
Photo Courtesy: Niranjan Hiranandani

From teaching chartered accountancy to running a textile weaving unit, real estate baron Niranjan Hiranandani has rich experience. He has been part of different state and national bodies for habitat and low-income housing for long, besides drafting Maharashtra’s slum rehabilitation policy. After their state-of-the-art mixed-user townships across 200 acres in Powai and Thane, the Hiranandani Group has gone international with 23 Marina – a 395-metre (90-storey) residential tower coming up in Dubai. In an interaction with Geetanjali Minhas he talks about the difficulties builders face and why creating millions of houses will bring parity in quality and prices. Excerpts:

What are the problems builders face in Maharashtra? Have you ever approached the state government to address these issues?
Over the last 10 years we have found that issues related to building permissions have grown manifold. We need 52-54 permissions to get approvals for a single building. While the number of approvals has gone up, the time taken has also increased – earlier, we would get approvals within 3-6 months; now they can take 3-5 years. As a result, the interest cost of holding properties that builders have bought has also shot up tremendously. Because of this a large number of properties has become unaffordable for the type of buildings and areas we are doing. This has led to cost escalation that is unreasonable and unwise.
On top of that cost of inputs, such as cement and steel, has also gone up due to taxation and other reasons. Without even considering the cost incurred on different approvals, a large part of the cost is the interest one has to pay due to delay in approvals. This is tremendously hard. If the government really wants to create affordable housing, in Maharashtra or elsewhere in the country, we will have to ensure that the permissions are expedited and those that are not required are done away with. And this must be done as fast as possible.

How much is the average increase in cost due to delay in permissions?
Even if we take 13-15 percent as interest cost here – as an example, if your cost of land is '100, you have already increased the price of land by 50 percent in three years – you have made it so expensive that the basic cost of land itself has shot up. Besides, other taxes have also increased.

How has the scarcity of cement and sand affected you?
Though cement has become expensive, it is available. (But) sand is just not available in some places, and those are the problems that we have to face locally. So we use sand substitutes like crushed materials etc., but obviously this means the cost has gone up.

The Maharashtra Housing (Regulation and Development) Act has faced a lot of flak from buyers. What is your opinion on the law?
The tussle where the industry wants ‘A’ set of regulations while the customer wants ‘B’ has always been there. Any regulation that does not increase the volume of the material coming in the market is ultimately a problem for the customer. Hypothetically speaking, there is a requirement for 1 lakh flats in the market but because of the regulations or constraints in approvals, or in the capital required, you are able to make only 20,000 houses. You thereby create slums, unauthorised houses, encroachment, and cost escalation. And that is what has happened to Mumbai.

In 1947, when the British left India, there was not a single unauthorised house in Mumbai. Today more than 55 percent of the population ‘officially’ lives in slums. The problem here is that slums grow at a faster pace than you make buildings, when in reality you should be making buildings at a faster pace than slums, so that the future is not such that people have to continue to stay in slums after moving out of slums.

There is a lot of ready housing stock lying unsold because flats are too expensive.

I have not seen ready unsold residential flats in Mumbai, though there are under-construction unsold flats. Most flats that are ready are sold. Large flats, like 3-5 bedroom units, could be a different story, but in the 1-2 bedroom categories you cannot find a flat that is ready and yet unsold. Smaller-sized tenements are just not available. So the reverse is true.

While there is demand for one-bedroom flats, nobody’s making them any longer. Why?
Earlier, we made one-bedroom flats in Thane. Now we are making 1,000 one-bedroom flats in Powai. People like us and others will continue to make them, and why not? There was a time when there was a higher demand for bigger flats, so we made bigger flats. We make what we sell. Though we construct an equal number of one-bedroom and larger flats, the sale of two-bedroom flats is faster than one-bedroom flats. While people say the requirement for one-bedroom flats is huge, we see bigger demand for two-bedroom flats. Though we do construct smaller flats, we make what the market asks for.

What changes would you like to see in land acquisition policies? Do builders prefer dealing directly with land owners or do they like to go through the government?

We don’t go for government land. The new law is skewed and time-consuming. It has pushed up cost of land acquisition, so it doesn’t make sense to go through the process. Under the new law, buying government land is such a protracted process that it’s not just very difficult but impossible to buy. No builder in his senses will go through a lengthy land acquisition process to get government land; he would prefer to directly deal with landowners.

What are your expectations from the real estate bill?

The bill is good in the sense that it brings in transparency between the buyer and the seller, as the buyer should know exactly what he is getting. Also, disclosure norms have gone up, which is very good. Other issues are very scary, like the builder having to deposit 70 percent of the money received in escrow account. Unfortunately, liquidity in the real estate market is a concern and does not permit builders to put 70 percent in the bank and then work on the project.

Then, penal provisions in the law are too stiff, like if a builder has made some mistakes he should pay penalty, which is fair enough. Instead, as per the new law he can go to jail for making mistakes in a few square feet.

Now if a car manufacturer has made a mistake in the car he pays penalty. You cannot have Tata Motors (officials) going to jail for a mistake in manufacturing of a car. We require a bill that promotes housing and makes penal provisions that are rational and reasonable for any person.

Is finance a challenge for the real estate sector?

Of course. It is always a challenge because the sector is capital intensive. Land and permissions are expensive, taxes are very high, legal and mortgage costs, cost of materials, municipal taxes, stamp duty registration, etc., have shot up. And all this makes it very challenging.

Do you foresee any radical changes in the real estate sector after the amendments made to FDI in retail in the 2014 budget?

I am not heavily into retail so I will not be able to answer the question very well, but obviously any changes done by the government will bring in marginal players. They have not gone to such an extent that really all players will be interested. People who bring in 49 percent or 51 percent will be interested and it will be good enough for them. So at least the local players will still get a chance for a couple of years till finally they bring in open FDI position. It’s good that they are doing
it in stages.

Is Hiranandani Developers venturing into social housing?
As I said earlier, we do smaller houses much more than we ever did before. I don’t know about social housing, but we are seriously looking at affordable low-cost housing.

In recent times a lot of conflict has risen between builders and buyers. Mostly, buyers allege that the builders did not fulfill promises made at the time of purchase and late delivery is also becoming a huge issue. What is your view of this situation?
Whenever a product has a monopoly – whether it is from the side of the builders or from sellers – there are bound to be difficulties and problems. We would like to take forward prime minister Narendra Modi’s suggestions for creating millions and millions of houses so that they automatically become affordable. They have promised to build 25 million homes in urban areas and 45 million in rural houses by 2022. Once you get into creating volumes, people automatically get into quality of the product.
Today, you cannot sell a bad car at any price because people are aware and they will never buy it – similarly with a house. But the choice is not available. Even if you are willing to pay you cannot get affordable houses. Only volumes of houses will make prices rational and affordable.

Recently the competition commission of India (CCI) sought responses from builders for unfair trade practices. DLF has been penalised '630 crore and Supertech has been asked to refund money to buyers. Can you throw light on what leads to such strenuous circumstances for builders?
The CCI has been focusing across fields to find out if sections under the law have been followed. Since the competition law is new, many people may not be aware of it in great detail and are violating its sections without realising it. Fortunately, in Maharashtra the problem is not so serious because draft agreements are available under an existing local law. We would not be affected by the Competition Act, 2002, to a great extent because the provisions of the sections concerned are pari passu with the local law. In that sense, I feel because the agreement is as per the local law, the CCI cannot say it is against the Competition Act. But one has to study its legal aspects in greater detail in order to deduce.

Some or the other issue is always present with most builders...

For the same reason that there are not enough volumes... when only Fiat and Ambassador cars were available, there was a seven-year waiting period to get a car. It took three years to get a gas cylinder connection and six for a land-line telephone connection.

The interview appeared in November 16-30, 2014 issue

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