Private real estate sector must be encouraged to participate in Pradhan Mantri Awas Yojana
New Delhi, February 28, 2017
With the increasing demand and tremendous scope for affordable housing, this segment of the real estate sector will be the top runner in the next five years. This will be in line with Prime Minister Narendra Modi’s vision of ‘Housing for All by 2022’, which is a national objective, and we can expect more favourable provisions for affordable housing and Economically Weaker Section (EWS)/ Lower Income Group (LIG) Housing.
Reforms and policy initiatives of the Centre as well as some State Governments have encouraged private developers to evince interest in launching projects in the affordable segment in the recent times. But the participation forms a minuscule percentage.
The Pradhan Mantri Awas Yojana (PMAY) has been designed envisaging a big role for the private sector, but no private sector participation has been enlisted under the scheme and private developers remain reluctant to participate in the programme.
If we analyse this, there are several bottlenecks and reasons that restrict the private developers. The bottlenecks are: the long gestation period of housing projects, long and not so transparent approval process, expensive capital, non-availability of land with infrastructure and connectivity, spiralling land and construction costs, high fees and taxes as well as unfavourable development norms, not to mention the ‘wafer thin margin’ private developers get through this business segment.
Thus, the first and foremost need is to make these housing projects attractive and a viable proposition for private developers and to kindle their interest to take them up.
It must be appreciated that the private real estate sector faces considerable headwinds today. Rising cost pressures and a difficult regulatory scenario are among the primary areas of concern that hold back private developer’s participation in this segement in a big way.
Coming to the solutions, I would prioritize them as under:
Solution 1: Approval process should be streamlined
Currently, it takes nearly two to three years for a developer to commence construction after having entered into an agreement for land purchase. The real estate developers today are required to pass the approvals through 150 tables in about 40 departments of Central and State governments and municipal corporations. Every day's delay means that much more drain on profitability for the developers.
There must be a transparent digital online approval process, taking only minimum time for approval and putting an end to unethical practices. Digital approval mechanism and better co-ordination among the multiple authorities in dealing with various permissions/approvals will encourage private real estate developers to invest in the affordable housing segment.
States can be asked to frame bye-laws in a transparent manner for every division / region of a city and bring out a checklist for approval compliance and the approval process shall be made online, thus eliminating intermediaries, avoidable unethical payments and expenditure. Strict penal provisions should be imposed within a time limit of 10 years for any wrong reporting /compliance if it comes to notice in the future.
Solution 2: Infrastructure needs to be provided
Availability of land with infrastructure like road, water and sewerage is a big drag for private developers. It will be appreciated that providing infrastructure like road water and sewerage is the obligation of the state and may have to be met out of the cess and tax collected from the project. If the State can take care of this area, more private players are likely to evince interest in such projects.
Solution 3: ‘Big bang measures’ are necessary
We need measures similar to one brought in 2000 by then Prime Minister Atal Bihari Vajpayee by introducing Section 80 IB (10) of the Income Tax Act which aimed at promoting construction of housing projects. We can undoubtedly say that this was a breakthrough provision, which brought a big real estate revolution, particularly in augmenting the housing supply.
The years 2000-2004 was the turnaround period in the real estate sector and in housing supply - with a large number of private players entering and augmenting the housing stock/housing supply. But this good progress with increased housing supply was short lived. The subsequent Government brought in minimum alternate tax (MAT). This move by the next Government disincentivized many of the players and again there was a dip in housing supply.
The kind of measures which were introduced in 2000 will encourage private players to participate in a national mission like PMAY in a big way.
M. Murali is Managing Director, Shriram Properties