Layouts lock land but unlock prices

Layouts lock land but unlock prices

Excessive regulations by the government and inept land acquisition process are largely contributory for unrealistic rise of property prices.

Deccan Herald

THE city of Bangalore is strategically located when compared to cities like Mumbai or Chennai which are limited by sea coast, coastal zone regulations, Bangalore has no such problems limiting its expansion, since land is available in plenty. In spite of this availability, the property rates are increasing due to several factors. The rates, which started falling during 1997, are moving upwards from 2001. Though this phenomenon is being attributed to the real estate cycle, the occurrence appears to be too frequent in Bangalore to be generalised as being due to the real estate cycle.

Real estate agents are exploiting this boom in real estate prices, by quoting highly inflated value of the property at the first enquiry and only persons with good market knowledge can negotiate and settle the property transaction for a reasonable rate. Many a times, two adjacent and similar properties are sold for different rates with the difference unjustifiably uneven. The sellers quote the rates based on their liabilities, requirements, the real estate agents play a dubious role to pocket fat commissions.

The table shows the growth rate in certain selected areas of Bangalore from 2001 to 2004. It may be observed HSR Layout has recorded a growth of 61.30 per cent during 2003, the highest among selected centres. Koramangala has registered a growth of 33.33 per cent during 2001-2002, Yeshwanthapura, hitherto neglected area has an impressive growth of 57.57 per cent during the year 2004, in contrast to a growth of 3.12 per cent during 2003.

The growth in old areas like Malleswaram and Rajajinagar is not so abnormal as the development is almost saturated, any growth in construction/development of land is because of demolition of old structures and due to demolishing of residential premises, which are then replaced by commercial buildings. Most of the residents in these areas are moving to peripheral areas and once a peaceful residential area these areas are gradually becoming highly polluted and crowded.
The most frequently explained reason for growth is inflation. Income Tax Act has cost inflection index to account for inflation, with 1980 as a base with 100 points, which goes on increasing based on inflation. The inflation aided for the years 2001-02, 2002-03, 2003-04 and 2004-05 are also fallling.

One may observe that the increase in the rates has not much relevance to the inflation. Though inflation has a part to play in increase of property rates, there are various other factors, which propel the rise of property price in Bangalore. The universally accepted supply-demand position plays an important role, which is again influenced by the local factors.

Acquisition by government
The government of Karnataka acquires land in peripheral areas of Bangalore supposedly for a social cause like providing sites to the needy person, and also for development. But more often than not the various agencies of government acquire more land than required. The proposed projects Arkavathy Layout and Bangalore-Mysore infrastructure corridor are classical examples of the recurring mistakes committed by the government. There seems, to be no proper assessment of requirements of the citizens for whom the said land is being acquired/distributed and some influential persons/land sharks operate in acquisitions. Such excess lands are retained by the government and allotted to persons who have a say in the government. As such land gets locked causing paucity, curtailing the free supply.

BDA’s failure
The Bangalore Development Authority (BDA) though is super active in land acquisition, and allotment, it is, however, lethargic in developing the layouts. The Anjanapura layout, Visveswaraiah layouts are underdeveloped and may take years to have proper infrastructure in order for people to construct houses and reside there. The allotment in Arkavathy layout is yet to be completed. Thus due to the inability of the BDA to complete any project undertaken by it within its own estimated time leads to rise in property rises.

Further it is faulty compensatory packages for acquisition of property, which forces the land owners to resort to litigation. This is especially true in Arkravathy layout where the compensation package is not even close to the real market price at which the land in the same area is being privately traded. Thus whereas the compensation package in some other areas were at least 80 per cent of the real market value in most parts of Akravathy layout the said land is being acquired for less than 20 per cent of its market value and it is this unrealistic valuation which has caused the landowners to oppose the the acquisition.

There are well-developed pockets in the proposed Arkavathy layout, which BDA proposes to bulldoze. This is a strange logic, when the purpose of acquisition is to allot sites to construct houses; the demolition of constructed houses belies any logic. The residents of many developed layouts claim that they have constructed houses much before notification and BDA has not done proper survey. This leads to BDA’s acquisition plans facing legal hurdles because in most cases the residents go to the court and obtain a stay of the proposed acquisition by the BDA and at present the High Court of Karnataka is looking into the matter and hence the BDA has not been able to achieve any break through in allotting the sites in the notified areas notified for acquisition.

Many such underdeveloped layouts in and around the city fuel the price rise, as the land gets locked up for some years and people seldom purchase sites in underdeveloped layouts.

Stamp duty and registration charges
Stamp duty in Karnataka is very high and the government of the day increases the duty payable ever so often and coupled with the regular increase in prescribe guidance value for registration of transfer of immovable properties. Though the rates are marginally reduced; the apartments are at the receiving end. The government of Karnataka has fixed the stamp duty for flats for first sale at par with other properties and has removed the duty on slab basis thus an apartment valued Rs 10 lakh attracts a stamp duty of Rs 80,000 where as it was Rs 42,000 earlier.

Assuming that an immovable property is transferred three times. Actual value of the immovable property is Rs 10 lakh. The stamp duty and registration charges are 10 per cent.

(a) Cost to the first transferee inclusive of stamp duty and registration charges Rs 10,00,000 + 10 per cent = Rs 11,00,000.
(b) The first transferee does not want to lose anything but transfers the property at acquisition rate, without any profit Rs 11,00,000 + 10 per cent = 12,10,000 (cost to the second transferee).
(c) The second transferee also sells the property at acquisition cost without any loss or gain Rs 12,10,000 + 10 per cent = Rs 13,31,000 (cost to the III Transferee).

The stamp duty on any property includes the cost of land and that of structure thereon. There is provision in the Stamp Act for depreciation on old buildings, however the registering authorities do not allow for depreciation on old building and generally levy stamp duty as is applicable to a new building.

Further the purchasers of the old building do not avail of the said provisions due to the practical difficulties faced since the entire system for fixing market value is not transparent and the procedure for fixing and appraisal of the property is a cumbersome and time consuming process which discourages the genuine purchasers. Thus frequent transfers of property leads to increase in price due to addition of the cost of stamp duty and registration charges to the cost of the property, though the actual property rate remains constant during the said period.

Guidance value
The Department of Registration and Stamps prescribe guidance value for registration of transfer of immovable properties. These rates are revised every year. These are minimum values on which stamp duty and registration charges are payable. Even if a property is transferred for a value less than prescribed guidance value, the stamp duty are registration are payable as per the guidance value. The government revised the guidance value from August 2, 2004.

The revised values are more than the previous values, thus for instance in certain parts of M G Road, the market rate for the upper floors of a office building is in the range of Rs 2,500 to Rs 3,000, however the actual market rate prevailing is considerably higher at Rs 4,550. The revised guidance has prescribed separate values for apartments and flats, depending upon the type of flooring. Every time when guidance values are increased, the property rates correspondingly soar to higher rates. The rates have registered a huge growth from August 2004 on wards on account of increased guidance value.

Prohibition on issue of Khatas
The city is surrounded by seven City Municipal Councils and one Taluk Municipal Council. Many of the lands in these areas were notified for acquisition or agricultural lands or falls in green belt area. Municipal Council are collecting betterment charges and issuing khatas (Municipal administration record MAR 19) without any regard for procedures laws in force. This led to uncontrolled growth. In order to control, these unplanned and illegal developments, the government of Karnataka issued a notification during 2003 prohibiting collection of betterment charges and issue of Khathas from 29/05/2003.

Subsequently as the municipal councils faced resource crunch, the Government issued orders to municipal councils to collect property tax under self-assessment scheme through form Number 3, which is just a receipt for payment of property tax. The Katha (MAR19) is a prerequisite for approval of plan. As the municipal councils are not issuing Khathas, no building plans are approved and the construction activity has come to stand still around Bangalore, creating artificial scarcity of land.

Approval of layouts
Any layout formed needs approval of BDA, BMRDA. Though many layouts are developed around Bangalore, they are not approved by authorities. Such an unapproved layouts may be notified for acquisition by government agencies. Purchasers, mostly middle-income group do not prefer such layouts. BDA and BMRDA frequently publishes the list of unapproved layouts and cautions the people from purchasing sites in such layouts. So well developed layouts remain unsold, causing shortage of land.

Concentration of public offices, service centres
Many of the public offices are concentrated in and around Vidhana Soudha. The private offices are located in central business district. Even one can see the concentration of educational institutions, hospitals, and recreational centres at one place. Naturally people would like to reside near to their workspace. This is more so in case of offices of information technology, business process outsourcing and call centres, where employees have to stay late hours.

Commuting during late hours is risky. So one may find concentration of residential clusters around work places, which has influenced the price rise in certain pockets in east Bangalore. Persons employed in software and other related industries prefer group housing for safety. Such group housing colonies are concentrated around the work places, which have led to price rise. In spite of high price, IT personnel prefer such locations.

Construction Costs and lending rates
The cost of all construction materials has increased. The cement and steel form major portion of construction, and rates of both have increased abnormally. Many financial institutions have increased the lending rates for home loans, thus finance and acquiring a house has become costly, thus increasing the acquiring cost, leading to price rise. Mostly it is demand and supply factor responsible for price rise. As the population of the city is growing, the availability of land is restricted on account of various factors discussed.