How industry status can help Mumbai real estate

Articles, 99acres.comBy Deepesh Salgia, Director, Shapoorji Pallonji Group

December 24, 2015

“What comes to your mind when you think of  Mumbai?” Bollywood, commercial capital of India, Hotel  Taj,  Gateway of India or textile mills? However no lay man would remember Mumbai for its palatial homes.

To  most unaware about the  real estate  market  in  the  city,  the  term  ‘Homes  in Mumbai’  conjures  up images of  slums  or dilapidated  ‘chawls’.    A strange paradox emerges as Mumbai also houses some  of the ‘most expensive homes in India’. Why does the housing  sector in Mumbai reflect such a stark disparity? Quality housing  has not yet reached millions in the city even after 25  years of liberalization and de-licensing of industries in India.

The answer to the above lies in the question itself. Is housing an “industry”? It may surprise many   but the fact remains that real estate is still a ‘business activity’ and not an industry . This remains  the root cause of a large number of problems associated with housing in Mumbai.

Almost every industry in the country has experienced lowered tariffs in the last 25 years.

However,  the  reverse  is  true  for  real  estate,  especially  in  Mumbai.  Today, 25-30  per  cent  of  what a home  buyer  pays  in  Mumbai  goes  to  the  government  in  some  form  or  the  other;  and  this  figure  is amongst the highest for any business in the country. Tariff rates can always be a subject of debate   but what makes matters worse is the time involved in the collection of these government duties.

For instance, a manufacturing factory is liable to pay excise duty at the time of delivery of goods.   A trader   is   liable   to   pay   VAT   after   the   goods   have   been   sold .   Service  tax  is  payable  by  a consultant after the service has been rendered. But VAT and stamp duty on property purchases are  not  linked  to delivery of  property. They are payable  on signing the agreement, which could be  three years before the actual delivery. Payment towards premium for fungible FSI is made even   before the plans are approved.

This phenomenon of pre-collection of taxes means a large portion of the initial capital goes towards payment of government taxes than towards improving the quality of the product. Contrary to this, an industry spends its initial capital on research and development.

Further, the Mumbai real estate market is plagued by a large number of disputes. Long disputes  and lack  of  clarity  on  regulation  means  developers  spend  their  energies  and  resources  on  litigation  & liasioning. Industries have the luxury of focusing their energies on design and innovation.

The third biggest problem faced by the sector is poor city infrastructure. For instance, good infrastructure would make far-flung areas accessible thereby making it easier to provide quality   homes in  large  numbers.  However,  the  current  state  of  roads  in  Mumbai,  is  far  from  what  citizens   of  a metropolitan should expect. Public transportation still remains within the government domain and needs a substantial overhaul. Contrary to this, infrastructure that impacts industrial activities  such  as  ports, national highways,  airports, airlines etc. are  all predominantly within  the  private  domain and thus have seen huge quality improvements since 1990s.

Better  infrastructure   and   lowered   tariffs  have   helped  other  industries  in  India  innovate  and  thus achieve   substantial  gains   both  in  quality   as   well   as  affordability   of   their   products.  If    the government expects similar benefits for home buyers then the agenda of the government should   not stop just at Real Estate Regulation Bill or the new Development Control Regulations. The Regulator and the Legislation will need to approach issues in the sector with an industrial mindset.