Noida’s New Landlords
Noida’s real estate boom is bouyed by small entrepreneurs, but marred by controversies over execution and land acquisition
Since 2008, residents of the National Capital Region (NCR) have had to contend with a very annoying problem: Endless text messages about yet another upcoming real estate project in the Noida and Greater Noida region.
Those messages reflect the bustle of a new urban centre at the south-eastern edge of New Delhi. The Noida -Greater Noida region has steadily risen to become the leader in residential real estate sales in the country in 2010, overtaking its more celebrated cousin Gurgaon and zooming ahead of many suburban appendages of metros such as Chennai and Bangalore.
“The Noida-Greater Noida region is the second largest destination in the country in terms of rupee value of residential real estate assets. It comes a close second after Mumbai [within a 10 percent difference margin],” says Samir Jasuja, CEO, PropEquity, one of India’s leading provider of real estate intelligence. Within the NCR market, Noida’s share of housing rose from a paltry 13 percent before 2008 to over 50 percent by the end of 2010.
This real estate boom has been almost single-handedly driven by the so-called ‘affordable housing’ market. This has been possible because of the coming together of some innovative policy changes in 2008 and some very aggressive entrepreneurs who have taken advantage of these changes to build houses and companies.
To be sure, this growth isn’t totally free from controversy. People have raised questions about whether the Noida policy changes — especially the government’s acquisition of land on behalf of private developers — is the right thing to do. Such questions may acquire a sharper tone in the light of villagers clashing with police at Bhatta-Parsaul, 60 km from Noida city centre.
Enter the Entrepreneurs
But these questions do not bother 51-year-old Anil Kumar Sharma, chairman of Noida-based Amrapali Developers, who could well be the poster boy of the Noida-Greater Noida real estate story since 2008.
Sharma, a civil engineer from IIT Kharagpur and a former Bihar civil service officer, joined his father’s company, Amrapali Developers, in 2003. Until 2008, it was a small company. Today, its turnover is Rs. 2,500 crore. It sells flats mostly in the Rs. 15 lakh to Rs. 35 lakh range and has announced almost one residential project every month for the last year-and-a-half.
What explains the rapid growth of Amrapali and other such real estate developers such as Supertech in Noida? Something changed in 2008.
Earlier land prices in Noida were very high and government regulations ensured that the density of construction in any piece of land, measured by Floor Area Ratio (FAR) was low. This meant that to recover his costs, a developer had to build large, costly houses.
Post the global downturn, land prices in Noida crashed from as high as Rs. 6,000 per square feet to below Rs. 3,000 per square feet. Many of the big developers, who had many projects across the country, suffered an acute cash crunch and put a halt to almost all construction activities. But the demand for housing, especially affordable housing, did not halt and the Noida Development Authority, prompted by some builders, decided to get into the act with some innovative policy changes.
A Policy Boost
The central idea behind the policy changes was to make it easy for property development to happen,” says R.P. Kaushik, senior town planner, Noida Development Authority. The first big change was that developers were now required to pay just 10 percent of the land price at the time of registration, instead of the earlier 30 percent or 100 percent in places such as Gurgaon. Moreover, the remaining 90 percent was allowed to be paid over a period of 10 years.
This move allowed small developers like Amrapali and Supertech, which were still unencumbered by the worries of the downturn, to expand fast. It also freed bulk of their funds for developing the property. So, instead of paying Rs. 1,000 crore just for the land upfront, they could start their projects after paying merely Rs. 100 crore. As the project took off, money from the customers started funding the projects.
The other change was to increase the FAR in Noida and Greater Noida, ranging from 1.5 and 2 to 2.75, without charging the developer anything extra. This essentially meant that builders could construct more flats on the same piece of land without paying any extra money to the Authority. A clear 35 percent drop in per unit cost allowed them to focus on more affordable houses.
What sweetened the deal further was the Noida Development Authority not increasing land prices between March 2009 and March 2010.
The entry of new entrepreneurs changed the landscape in Noida-Greater Noida. From the developers’ perspective, construction was made cheaper and most of them started functioning on ‘cost plus’ pricing. This was quite different from the pre-2008 phase, where margins were kept much higher in order to cover for the high land prices. Typically, land prices, as a component of the total cost, fell from 50 to 60 percent (before 2008) to 30 to 35 percent after the new regulations.
According to PropEquity, the Noida-Greater Noida market, which used to be less than one-third the size of Gurgaon (in terms of new supply) in 2008, rapidly grew to 1.5 times in 2009 and then almost six times in 2010.
Trouble in Boomtown
Now, consider the vexing questions. One, is it the government’s business to offer sops to stimulate demand for ‘affordable housing’? Two, who benefited once the government implemented the policy changes? And three, was this a giant deception to appease the middle-class and shortchange farmers in the Greater Noida region?
The Noida region is today a bustling industrial hub, with electronics, software and textile companies operating there. The government set up New Okhla Industrial Development Authority or NOIDA in 1976 with the express purpose of developing this area as an integrated industrial township near Delhi. So, clearly, enabling this integrated development — industries and housing — is very much in the charter of this government arm.
The policy change that meant builders had to make an upfront payment of only 10 percent has to stand the test of benefiting the end consumer. To be fair, it passes that test. Average property prices have fallen from Rs. 4,650 per square feet in 2008 to Rs. 2,750 per square feet in 2010. Also, the bulk of the estimated 1.5 lakh new apartments being constructed in the Noida-Greater Noida region are priced at less than Rs. 35 lakh with an average area of 1,400 to 1,600 square feet. At four people per household, that implies fresh housing for an estimated 6 lakh people. With Noida’s existing population at 7 lakh, it is almost like creating a separate Noida.
The government too would have gained 6 percent of all the land value as stamp duty from the rise in sales. The rupee value of sales jumped from approximately Rs. 7,500 crore in 2008 to Rs. 41,000 crore in 2010.
According to one ballpark estimate, the total lease rent earned by the Noida and Greater Noida authorities for all the new flats announced since 2008 would be about Rs. 1,100 crore.
The policy also encouraged competition because it reduced barriers to entry. The more established players like Omaxe, Ansal, Parsavnath and Unitech could not capitalise on this opportunity. “For such players it did not make commercial sense to build five small projects. They were used to making one big project,” says Anshuman Magazine, chairman and managing director of real estate consulting firm CB Richard Ellis. The number of developers too saw a quantum jump from just 10 to 15 reputable players to almost 50 real estate companies. R.K. Arora, chairman of Supertech, a builder that has grown very fast in the last two years, says, “The changed regulations implied that the margins were reduced and it became a volume game.”
Supertech itself has launched several projects over the past two years, accounting for as many as 25,000 flats and units to be delivered over the next two to four years. In contrast, it has delivered just 12,000 units in the previous two decades of its existence.
The Land Issue
So what about the poor farmer? Wasn’t he given the shaft? The first thing to note here is that the protestors in Bhatta-Parsaul are not against their land being acquired. The main issue is the compensation. As such, it should not be confused with a Singur or Nandigram where, irrespective of the price, the farmers did not wish to sell the land.
The second thing is that the Noida policy changes did not directly result in these clashes. At best, they are an unintended consequence. As more and more projects are announced further away from Delhi, along the Yamuna Expressway (which will link Delhi to Agra), and land prices appreciate, land acquisition becomes more costly and tricky. The trouble in Bhatta Parsaul indicates that.
The farmers have grown aware that they can get a better deal than the one initially offered. This is due to lacunae in the Land Acquisition Bill, where compensation is linked to current use of the land (farming) and not future use (real estate development). This issue afflicts all land acquisition and is not something particular to Noida. Hopefully, this session of Parliament will bring clarity on this matter.
Meanwhile, on May 12, the Allahabad High Court deemed the acquisition of land by the Greater Noida Authority in Shahberi village in Gautam Budh Nagar (Noida extension) as illegal and declared the entire land of Sahberi village as denotified. This means that the villagers will get back their land. Encouraged by this decision, villagers from Bisrakh Patwadi, Khairpur, Iteda, Milak Lacchi, and Sadullapur, (all Noida Extension), have filed cases asking the court to reverse acquisitions in their villagers as well.
The Execution Challenge
While the government and the villagers are fighting it out in court, the Greater Noida region population is more concerned about whether the real estate market will become more investor- and, therefore, speculation-driven, like it was before 2008.
According to PropEquity, a conservative estimate puts the share of investors at 70 percent in the Noida Extension market. All these flats will come back into the market at some point, adding to the already swelling supply.
Anil Agarwal, CFO of IREO, one of the more reputable residential developers in Gurgaon, suspects that supply in Noida far exceeds the demand. “No developer from Gurgaon sends SMSes. We get three to four times the response as soon as we announce,” he says. He feels that notwithstanding the better infrastructure facilities in Noida and proximity to South Delhi, people are still not sure whether there will be enough employment opportunities for them. In contrast, Agarwal says Gurgaon realty is more driven by end users.
An even bigger worry is about delivery of the record number of houses. Most firms in Noida are working at two to 10 times their previous capacity. Can they deliver the projects on time? This question meets with a largely unanimous response, whether it is from a developer, broker, customer or consultant. Just about everyone is concerned about the delivery.
“Many developers have sold very large volumes and they need to deliver more flats than they have ever delivered in the past. Developers will have to very rapidly scale-up in order to meet their commitments,” warns Jasuja.
Noida-Greater Noida will witness construction on 7.5 times the amount of space over the next three years as compared to the space that was built up over the past three years.
In the past, DLF and Jaypee Group, two of the biggest developers in NCR with access to a much larger financial pool, have delayed project executions by two to three years when they scaled up to just two times their operation.
Making this challenge more difficult is the escalating input costs like that of cement and steel and an expected increase in labour wages given the increase in demand.
According to Sanjay Soni, a contractor dealing with 24 separate projects across Noida, Greater Noida and Ghaziabad, the cost of construction has gone up from Rs. 850 per square feet to Rs. 1,050 per square feet over the past two years.
However, developers like Amrapali and Supertec insist that things are in control. They talk of bringing in ‘pre-cast’ technology, which basically involves bringing readymade walls and pillars to be assembled at the construction site. Developers say this technology will allow them to work at almost three times the current pace.
But, nobody thinks the changes brought about by the Noida regulatory framework are to be blamed for any delay there might be. “The developers themselves are to be blamed as apparently many have bitten off more than they can chew,” says Jasuja.
According to Samarjit Singh, managing director of Agni Properties, a property services provider, many state governments are looking to follow in Noida’s footsteps since this model not only makes real estate development more execution-friendly but also optimises the revenue generation for
the government.
What is Brewing in Greater Noida
In the last few weeks, there has been unrest in a few villages of Greater Noida. The central point of resentment among the villagers, who had sold their land to the Greater Noida Authority, is that they were not adequately compensated for their land.
This is unlike the situation in Noida, where the bulk of residential projects are on land that was part of the existing land bank of Noida Development Authority and was acquired a long time ago. In contentious cases such as Bhatta-Parsual, the land was purchased recently. In Shahberi, another village where the acquisition has been stayed under High Court order, the acquisition was done as recently as November 2010, almost at the same time the project was announced. Farmers here know the government is making a profit by selling their land at almost double the price to developers.
Naturally, they want a better compensation. But the problem is not caused by Noida’s policy changes; they are caused by lacunae in the Land Acquisition Act, which allows the government to acquire land for “planned development including housing”. But it doesn’t link compensation to the purpose for which the land will be used.
So, the farmer’s compensation is nowhere near what it would have been under the ‘intended land use’ concept. This is something that the proposed amendment to the Land Acquisition Act is expected to address.
(This story appears in the 17 June, 2011 issue of Forbes India. To visit our Archives, click here.)
