.....As the plot thickens

 

                           …..As the Plot thickens

 

                                                                      ( also published in 99acres.com )

 

While plotted development has its advantages but it also runs the risk of expanding cities horizontally without creating housing supply. The tax structure should be rationalised to increase the supply of housing and not just of empty plots

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During the last two years, almost every segment of real estate has experienced some action. While the quantum of growth may remain a subject of dispute but what would certainly have consensus is that the most action-packed growth has been seen in the plotted developments category. The reasons are multitude. However, before that a flashback on the brief history of plotting in India.

 

 

Till about 1930s, land was largely owned by the rich landlord community and most of their holdings comprised large plots. The innovation called ‘plotted development’ resulted in development of new roads and carving out of small plots so that the ownership of land could be transferred in smaller sizes. This structure of ownership also safeguarded the new land owners – the middle class - from any eviction that they would then face as tenants in rented properties. 

 

The partition brought in larger number of refugees from Pakistan into Delhi. Their housing need gave a big boost to plotted development in Delhi which coincided with the rise of DLF (then Delhi Land & Finance). However, the Delhi Development Act ( DDA ), 1958 put brakes to such private sector developments in Delhi. In Mumbai limited land availability restricted plotted development. Plotted development, of course, continued in many other cities and remained an important source of housing over the years.

 

The post-covid world saw a sudden rise in plotted developments across cities. Land prices have doubled or even tripled in a very short period. This unique phenomenon has numerous reasons. The most obvious being that post-covid a section of home buyers started seeing more value in independent house as they felt independent houses had lower risk of contagious diseases compared to apartment buildings. Secondly, WFH made it possible to live at distant location which is where most people could afford independent homes. Thirdly, covid filled many people with an increased a sense of fright. A fearful person looks for security and ownership of land provides a sense of security that cannot be matched by any other asset. Fourthly, post-Covid, people saw reduced interest rates on bank deposits and those lending in parallel market saw increased the risk levels with hundis and private deposits. Both these factors led to a significant supply of money in land markets

 

It now here that the linear story takes a twist. Despite huge liquidity and an abnormally high demand for assets that provided security, the action in the apartment market remained considerably subdued ( compared to plotted developments ) 

 

To appreciate this finer difference, one must have a wide-angle view of the way investors perceive the two assets. Investment in apartments - especially in under construction apartments - has much larger risks than buying land in a plotted development. Apartment investing attracts much larger taxes and demands much larger investments which necessitates borrowing. Investors, therefore, see better Risk-adjusted-Return in plotted developments compared to investment in apartments. Moreover, plotted developments also offer options even to investor active in parallel economy. These investors, however, see limited opportunities in apartment developments. Thus, former is able to attract more capital.

 

 

As the story moves towards the climax, it raises a few intellectual questions. Plotted development expands cities horizontally, it puts strain on public transportation, provides investment avenues to parallel economy, does not result in immediately supply of housing (as most plots are kept vacant by investors) and yet plotted developments have lower incidence of tax. 

 

As against this, construction of apartments offers huge employment, results in large revenues  to the govt, gives huge busines to housing finance companies and results in immediate supply of housing stock. Despite this, it gets taxed more ...!

 

Further, the investor who invests in under-construction apartments takes risks and provides working capital to developers which the developer uses to employ a large workforce. But this investor has to pay GST whereas investor in plotted development (that hardly results in any major employment) pays zero GST. This is clear disincentive for investment in creation of housing stock. 

 

The skewed taxation structure is also against the general principle of taxing which says investments in riskier assets should be incentivized ( e.g. gains from equity investment are taxed lower than in debt investments). 

 

Before, it gets misconstrued, the suggestions here is not to increases taxes on plotted developments or do away with taxes on housing construction. But there is definitely a case for rationalization of taxes so that investments move towards creation of more housing and not towards creation of empty land parcels. 

 

More often than not, success lies only in stories that have a happy ending and not those have a complex plot. Happy homes create happy ending. So let there be a corrective action before the plot thickens.

 

 

 

 

 

 

 

-       Deepesh Salgia is the author of the book 

     REAL ESTATE : The Good, The Bad & The Unanswered