Mumbai: The RBI has asked banks to charge loans to SEZs like they would charge loans to commercial real estate companies. Also, it is refusing to okay foreign venture capital funds in realty.
So, the big question is will SEZs and realty venture funds become a deadly mix - fuelling a real estate bubble? And is the Reserve Bank of India's, RBI's, caution justified?
Debating this issue is the Managing Director at Trammell Crow Meghraj, Anuj Purie and Chairman, Knight Frank India, Pranay Vakil.
Q: Is this a potent combination, the SEZ hunger for land as well as a potential hunger for land by foreign VCs, who will be investing in realty and therefore is the RBI justified in stopping both of them?
Purie: I don’t think so because if you look at it from a SEZ's point of view, then there is about 120 million hectares of cultivable land available in India and SEZs are taking about 25,000 odd hectares, which represents 0.00625 per cent of the total land that is available, and so if one looks at what SEZs have taken over - the 150 odd formal approvals that they have received from the Centre - it's miniscule compared to the availability of the total land.
We need these centres of excellence to be able to bring in manufacturing which is largely skill- based into India. China has got a number of SEZs, so does Dubai but we don’t have any and therefore it is extremely important for us to compete in this region. And if these centres need financial and physical benefits, then the government needs to provide it to them. There are not many venture funds who have invested in India and those who have, they have largely invested in FDI projects, which comprises retail, housing and IT.
About foreign realty funds, we have got a shortage of about 20 million housing units as per the 2001 Census, and just because of that reason, the government had allowed foreign venture capital funds to come into India and get involved in development. Therefore, they had put on the brakes - that you cannot get out of the country within the first three years of investing and you cannot sell the plots and you have to develop them.
Q: Both of you are assuming a certain kind of maturity on the part of both the VC fund managers as well as the SEZ promoters, but we know that the reality on the ground is something else altogether. We have seen a vast and huge run-up in prices of urban and semi-urban land in the past year, when the SEZ has not even started breaking ground although, we know that there a lot of SEZs are out there to make a fast buck only on real estate and not necessarily on manufacturing. In the light of this, is it not right that RBI has to space it out?
Purie: That is the real point, if one looks at it, the prices have started escalating in some of the areas even without the SEZs coming into play, even without a majority of the foreign funds coming into play. A single sector SEZ with 25 acres requires a minimum investment of Rs 250 crore and a multi-use SEZ requires a minimum investment of Rs 1,000 crore. So, corporate India is going to be able to play the game.
Now the SEZs, which are coming up, are largely coming up on the outskirts of the city, so they are not going to fuel the prices within the city, because the acquisition of a 100 acres for a multiuse SEZ is not going to be possible within the city. So, I don’t think SEZs are spiralling the prices and neither are the foreign funds because it is only a miniscule amount of investment that has come into play today.
Where the prices are rising today is largely because of the end user led demand. Some of the areas are hot and perhaps more speculative such as in Punjab. It's this market which is being led by speculation.
Q: Would you therefore justify the entire game being restricted in terms of homes and hotels that will be allowed in a particular area. Do you think that is a solution?
Vakil: In fact there are new solutions that are going to emerge. Something, which is completely absent in this country today - is rental housing. There is no organised player involved in rental housing and with foreign funds coming into the country, the rental housing is going to get a boost. There will be complexes developed only with a view to renting it out. Imagine what will happen to the industry with so many rental homes available for the floating population, which every city has.
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