Why can’t builders sell houses at Rs 8-15 lakhs in India? The housing business is caught in a cleft stick between poor financing options from banks and greedy investors; will our Finance Minister iron out kinks in the Real Estate sector this Budget.

1. Why can’t builders sell houses at Rs 8-15 lakhs in India?
My perspective by :Mahboob ali khan
The housing business is caught in a cleft stick between poor financing options from banks and
greedy investors; will our Finance Minister iron out kinks in the Real Estate sector this Budget?
The building industry is at some sort of crossroads. It’s wrestling with the need to mature into an
industry. The banking sector and the government’s approach to the builder segment has been one
of treating it as a 'traders account' with no status of industry offered to builders although they are
supplementing a critical function of offering housing as infrastructure in cities that are rapidly
urbanizing.
A mid-size builder buys about 180 to 200 different products from vendors ranging from gross
materials like cement and steel to finer housing accessories like water faucets and fixtures and
glass, and so on. The taxation incidence at the universe level for a builder cascades at a
staggering 42 per cent on the topline revenue starting from direct taxes for land acquisition on to
secondary and tertiary cascades of taxes paid down the line in the supply chain, not to forget the
taxes that hit the buyer on the other side of the table.
The banking sector has not viewed the builder segment kindly from about 2005. Until the middle
of the last decade a builder could secure term loans for a housing project. This meant that he
could offer to a banker a proposal with the cost of the land included and set your monies from
any bank for the acquisition of the land as well as execution of the project in terms of project
costs. However, since that directive of 2005, builders have only been entitled to secure project
finance. This means that the stranglehold of NBFCs and others in the unorganized financial
sector on builders is extremely high. The opportunity for securing land for a builder is now
tremendously limited by the fact that he has to only secure such nonbanking finance at usurious
costs in order to create new projects.
This has had a telling impact on the industry’s landed cost for a customer. Besides, land costs
have been tremendously discounted by the customer’s ability to absorb the cost per square foot at
far higher levels in India than it is in Thailand, Hong Kong, Indonesia or in most parts of the
western world. You can buy a property of comparable quality and size in Bangkok at about 20
percent less as price than you do in most cities in India. You could say that of a few other cities
like Jakarta or Manila.
The high real estate values in India have also been fed by the speculative side of homebuyers in
India who have seen, happily, a steady appreciation in capital from about 2000. The run has
continued and it has not shown any sign of abatement so far. China saw a crash in the realty
sector some time in 2010-11. The subprime challenge in the U.S. led to a nosedive in realty
prices across the United States. The U.S. is yet to recover from that subprime shock of late last
decade. Properties in cities like Dallas of the same comparable size as any in India will be
available at about 50 percent the cost that you will pay here!

2. There has to be a radical change in the way the banking sector views the building sector. The
housing deficit in India by the planning commission’s own estimate of 2011 is at about 45
million houses. The catch is that only about 8-10 million of this massive housing deficit is in the
upper and middle income segments. The rest of it lies for homes that are statistically projected to
be for those who are in the income groups of 8,000 to 25,000 a month.
The affordable housing segment has been one that has generated a lot of interest in seminars and
in workshops, but has however not found economic moorings among builders because there are
really no buyers in that income segment that builders have found barring a few exceptions of
course.
The cost of land to what you are permitted to be doing as floor space index in most cities does
not permit a builder to be offering affordable homes at the price of Rs. 8 to 15 lakhs, that market
can actually absorb. Japan and Singapore perfected models where the arbitrage on land was
moved out of the equation for builders in their countries. That created an ecosystem of enterprise
initiatives that will need another column dedicated to it.