Commentators advocate land monetisation to unlock value and raises fiscal resources. Apart from generating revenues, it is argued that this would increase the supply of real estate and thereby put downward pressure on rising property prices. This is a perfectly logical argument. But reality can be very different.
This post will illustrate this dissonance with two examples of property sales and real-estate development through PPP.
On sales of government lands, there are at least three practical problems. For one, there is the difficult political economy of selling government lands and consequent bureaucratic reluctance to undertake potentially controversial land sales. Then there are also the issues of vacant government lands being mired with encumbrances and private claims, and the likelihood of large land sales getting stuck up in litigations including public interest litigations. Even if both of these are overcome, the bigger challenge is with the market's ability to absorb meaningful volumes (in raising resources or adding to supply) at an acceptable price point. This is a very strongly under-estimated constraint even in the metropolitan cities.
An alternative to outright land sale that is often suggested is to capture greater value through property development by public private partnerships (PPP). Conventional wisdom is that bus and railway stations are ideal locations for such development. Here too reality diverges from theory.
Even overlooking the formidable task of undertaking such contracting in capacity constrained public systems, there is the questionable commercial viability of such projects. Apart from Class A commercial real estate, rental yields are low in India. Rental yields on residential real estate are very low, and those on regular commercial property are only slightly better. Then there is the old problem of market demand that can absorb all but limited supply of Class A property.
In case of transit stations, there are also cultural factors. They are stigmatised locations in developing countries. Home owners loath living inside stations. The vast majority of people working in Class A commercial real estate use personal transport, thereby reducing the attraction of transit oriented development. The combination of these two factors work against other commercial developments too - malls, shopping complexes, theatres and other entertainment etc.
These problems apply just as much to PPP development of lands in general. The daunting realities of political economy, contracting capacity weakness, commercial viability of most rental real estate in India, and the market's ability to absorb significant supply means that public land monetisation anywhere is far from being the low-hanging fruit that it's portrayed in mainstream commentary. Conventional wisdom bites the dust when faced with these harsh realities.
It's not as though public land monetisation has been successful elsewhere. Even the much discussed example of Canada Land Company is confined to selling a couple of thousand acres in nearly 70 years of existence and managing a modest land portfolio. By that yardstick of scale, some Urban Development Authorities in India could boast bigger achievements.
Peter Drucker famously said that "culture eats strategy for breakfast", implying that no matter how rigorous and comprehensive the strategy, absence of organisational culture will necessarily lead to failure. Much the same can be said about reality and theory in public policy. How much so ever rigorous and comprehensive the theory, reality has funny ways of dismantling it. Reality eats theory for breakfast, lunch, and dinner!
This is not to reject public land monetisation, but merely to put the issue in perspective.
Foremost, the objective of the policy should be to manage property prices and resource mobilisation should merely be the incidental benefit from sales. Unfortunately, the theory-reality dissonance strikes here too. Fiscally strained governments (as most often governments are) are disincentivised to take the long view when the illusion of fiscal returns from the short-view (resource mobilisation) are very high.
In any case, some specific useful steps could be the establishment of a dedicated entity in Government of India and states entrusted with all land sales (instead of asking individual Departments and agencies to undertake the same); creation of land banks; scheduling sales in the form of a pipeline with calibrated draw down; the pipeline to be calibrated based on some objective criteria like an index of property prices like Residex; the principle behind the extents to be monetised and periodicity of monetisation to be clearly outlined etc. These are essential to shape market expectations and enhance the credibility of such sales, which is critical to both influencing the real estate market meaningfully as well as to maximise value capture for governments.
In this context, two pointers about how one could structure such sales. One, the periodic number plate auctions that authorities in places like Shanghai use to calibrate the numbers of vehicles on the city's roads is a good example to keep in mind while designing a policy. Second is a co-authored paper here with Dr TV Somanathan where we propose a Floor Area Ratio (FAR) trading model involving the calibrated release of FAR as Transferable Development Rights (TDR) on a digital platform.
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