Friday, September 11, 2015

LOCKING OF LAND AND PRICE RISE



Bangalore is strategically located whereas the growth of Mumbai and Chennai are limited by sea cost, coastal zone regulations, Bangalore has no such problem, the land is available in plenty. Inspite of availability of land in plenty, the property rates are increasing. The rates, which started falling during 1998, are moving upwards from 2001. Though this phenomenon may be attributed to Real Estate Cycle, the occurrence appears to be too frequent in Bangalore. Real estate agents are exploiting this boom, often rates quoted at the first enquiry are too unreasonable and only person with good market knowledge could negotiate and settle for a reasonable rate. Many a times, two adjacent similar properties are sold for different rates, the difference being too much. The sellers quote the rates based on their liabilities, requirements, the Real estate agents play a dubious role to pocket fat commissions.

Increase in Land Rates

Sl. No.
Location
2001
2002
Growth in Percen-tage
2003
Growth
In
Percen-tage
2004
Growth
In
Percen-
tage
Rate per Sft in Rs.
Rate per Sft.
Rate per Sft.
Rate in Sft.
01.
Banashankari
1125
1075
- 4.4
1175
+ 9.30
1400
+ 19.14
02.
Bannerghatta Road
____
650
____
775
+ 19.23
900
+ 16.13

HSR Layout







03.
J.P. Nagar
——
775
——
1250
+ 61.30
1700
+ 36
04.
Koramangala
1150
1175
+ 2.17
1200
+ 2.12
1625
+ 35.41
05.
Malleswaram
1350
1800
+ 33.33
1900
+ 5.56
2400
+ 26.31
06.
M.G. Road
1600
1600
——
1600
———
2100
+ 31.25
07.
Yeshwanthpur
3500
4250
+ 21.42
4250
———
4500
+ 5.88
08.
Rajajinagar
——
800
——
825
+ 3.12
1300
+ 57.57
09.
Vijayanagar
975
1300
+ 33.33
1375
+ 5.76
1550
+ 12.72
10.
Banashankari
1000
1075
+ 7.50
1300
+ 20.93
1700
+ 30.76

The chart above shows the rate growth in certain selected areas of Bangalore from 2001 to 2004. It may be observed HSR Layout has recorded a growth of 61.30% during 2003, the highest among selected centres. Koramangala has registered a growth of 33.33% during 2001-2002, where as Banashankari has shown a negative growth of 4.4.%, Yeshwanthapura, hither to neglected area has an impressive growth of 57.57% during the year 2004, in contrast to a growth of 3.12% during 2003.

The growth in old areas like Malleswaram, Rajajinagar, is not such abnormal as the development is almost saturated, any growth is because of demolition of old structures mostly residential which are replaced by commercial buildings. Most of the residents in these areas are moving to peripheral areas, once a peaceful residential areas are gradually becoming highly polluted.

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 as follows :

Year          Points              Percentage of growth            
2001-02    426    
2002-03    447                  4.93%                    
2003-04    463                  3.58%                    
2004-05   480                   3.67%          

One may observe that the increase in the rates have no 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 in Bangalore. The universally accepted supply-demand position plays an important role, which is again influenced by the local factors.
Acquisition of Land 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, the various agencies of government acquire more land than required. The proposed projects Arkavathy Layout and Bangalore-Mysore infrastructure corridor are classical examples. There seems, to be no proper assessment of requirements, or 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.

Failure of BDA to complete the projects:
BDA though is super active in land acquisition, and allotment, is lethargic in developing the layouts. The Anjanapura layout, Visveswaraiah layouts are underdeveloped and may take years to have proper infrastructure so that the people construct houses and reside there. The allotment in Arkavathy layout is yet to be completed. There are well-developed pockets in the said Arkavathy layout, which BDA proposes to buldose. 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. Many such under developed 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. Though the rates are marginally reduced; the apartments are at the receiving end. Formerly, the stamp duty on sale of apartments was on slab basics for the first sale as follows: -
see Table-1.

Table-1


Upto 3 Lakhs
2%
Above 3 Lakhs but
Not exceeding Five Lakhs
6000+3% for the amount
exceeding Three Lakhs
Above 5 Lakhs but
Not exceeding Ten Lakhs
12,000+6% for amount
exceeding Five Lakhs
So stamp duty on a flat purchased at ten lakhs was Rs. 42,000/- apart from local and infrastructure cess, where as at present it is 8% (Rs. 80,000) apart from local and infrastructure cess. Further every transfer   attracts the stamp duty and registration charges. So even if the property rate remain constant the stamp duty and registration charges increase the rates as illustrated below.

Assume that an immovable property, is transferred three times. Actual value of the immovable property is Rupees ten lakhs. The stamp duty and registration charges are 10%
(a)        Cost to the 1st transferee inclusive of stamp duty and registration charges Rs. 10,00,000+10% = Rs. 11,00,000.
(b)        The first transferee does not want to loose anything but transfers the property at acquisition rate, without any profit.
Rs. 11,00,000 + 10% = 12,10,000/- (cost to the IInd Tarnsferee)
(c)        The 2nd transferee also sells the property at acquisition cost without any lose or gain
Rs.12,10,000+10% = Rs.13,31,000/- (cost to the IIIrd Tarnsferee)

The stamp duty on any property includes the cost of the land and that of structure there on. There is provision for depreciation on old buildings. But registering authorities do not allow depreciation on old building and levies stamp duty as applicable to a new building. So, the frequent transfers of property leads to price because of Stamp duty and registration charges, though property rate remains constant.

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 2/8/2004. The revised values are more than the previous values. 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 soar. The rates have registered 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 were collecting betterment   charges and issuing khatas (Municipal administration record MAR 19) without any regard for procedures aspects, laws in force. This led to uncontrolled growth. In order to control, this unplanned and illegal developments, the Government of Karnataka issued a notification during 2003 prohibiting collection of betterment charges and issue of Kathas. 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 no. 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 Kathas, 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 out sourcing, 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.

GPA Holders and Agreement holders

There are many persons, firms companies who exploit the demand and create artificial scarcity. Vast areas of land are transacted, through power of attorneys. General power of Attorney holders pay sum nominal amounts to land owners and procure Power of Attorney to convert the agricultural land to residential, commercial use, and also to sell. But they do not sell the land immediately. As the vast areas of lands are held by a very few individuals firms, companies, an artificial scarcity will be created leading to price rise. This amounts to hoarding. When the prices increase, these Power of Attorney holders enter the market quoting the fancy rates.


Apart from Power of Attorney holders, another class, agreement holders also pay a role in price rise. The individuals enter into agreement of sale on payment of some amount. The agreements contain a clause stating that, the seller shall sell the property to the agreement holder (Purchaser) or his nominee. The proposed purchaser will not immediately purchase the property. The seller has no option but has to wait until the sale transaction is completed. He cannot sell the property to any other person. The purchaser shall wait until the prices are increased and thereafter nominates some other person as purchaser by whom he receives higher price.

Construction Costs / 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.

Conclusion:

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. But these restrictions are man-made and not natural. They are temporary. Added to this situation is the role of Real Estate Agents who indulge speculative price rise creating bubbles. But these bubbles will soon burst.
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