Land Acquisition Bill: DLF, Sobha, HDIL favourably positioned

The S&P BSE Realty index has gained nearly 1% as compared to the S&P BSE Sensex and Nifty that lost ground in opening moves

After the passage of the Food Security Bill, the Lok Sabha on Thursday gave its nod to adopt the Land Acquisition Bill.

The passage has brought some cheer to select listed real estate companies that are already siting on huge parcels of land. The S&P BSE Realty index has gained nearly 1% as compared to the S&P BSE Sensex and Nifty that lost ground in opening moves.

Among individual names, Anant Raj and Ansal Housing have rallied over 5% each, followed by Nitish Estates (up 4.3%), Ansal Properties (up 4.2%), Indiabulls Real Estate (up 2.6%), HDIL (up 2.2%), Unitech (up 1.6%) and DLF (up 1.2%).

New rules of the game

The Bill sets new rules for compensation for land acquired for infrastructure projects and industry. As compensation, the new bill provides for up to four times the market value of land acquired in rural areas and twice the market value in urban areas.

The Bill also provides compensation to those dependent on the land for livelihood; where acquired land is sold to a third party for a higher price, 40% of the appreciated land value (or profit) will be shared with the original owners. This would be exempt from tax and stamp duty.

Besides, developers will now have to get the consent of up to 80% of people whose land is acquired for private projects. For public-private partnerships, the approval limit has been set at 70%.

Impact

While the new rules are seen as a populist measure at a time when the country is heading into an election year, the industry has been left fuming.

“Cost of Land Acquisition is likely to increase by 3-3.5 times, making industrial projects unviable and raising costs in the overall Indian economy,” said S Gopalakrishnan, president, CII.

"For developers, the cost of land is going to increase significantly, impacting their project costs and therefore margins. Land valuations are already high and by further increasing them, land acquisition becomes even more difficult. Anyone without an existing land bank will now be looking at vastly increased entry costs," said Mayank Saksena, Managing Director - Land Services, Jones Lang LaSalle India.

“The Bill is expected to make key factor of production for manufacturing scarce and expensive. This certainly doesn't augur well for India's manufacturing sector. With passage of Bill, cost of land is not only go up significantly, even the process of acquiring land will get stretched by four – five years,” pointed out Dr. A. Didar Singh, Secretary General, FICCI.

Whilst within the listed space most of the real estate developers have land parcels for next 15-20 years of developments. The passage of this bill will largely impact housing segment where sensitivity of land acquisition cost wrecks havoc on project viability, analysts say. However, under current scenario of tightened liquidity, developers are going slow on new land acquisitions.

“Puravankara Projects currently undertakes affordable housing projects (under ‘Provident Housing’) at average land acquisition cost of Rs200/sqft and sells these apartments at Rs2000/sqft a 100% increase in land cost (urban area – 2x market price) would constitute about 10% of sales or a 1000bps drop in EBIDTA margins or 10% impact on project valuation of affordable housing subsidiary. Hence this will have a larger negative impact on real estate company’s valuation in case they are not able to pass on price increase to customers,” state Parikshit Kandpal and Varun Chakri, analysts at Karvy Research.

“The land acquisition cost will go up by 400% this may result in Puravankara Projects increasing its sales price by 18% to maintain current margins or increase prices by 10% to maintain current EBIDTA/sqft at the cost of margin contraction. On consolidated basis it may negatively impact margins by 1000bps on incremental new land acquisition done by the company,” they point out citing their interaction with Lalit Kumar Jain, president, CREDAI.

“Based on the competitive mapping of land bank positioning, DLF stands out as top Tier in Northern Market, HDIL in Western India and Sobha Developers in the Southern India. Oberoi, Prestige, Kolte Patil and Puravankara are mid-quartile in their respective macro-markets. LARR (Land Acquisition, Rehabilitation and Resettlement Bill) will impact these developers positively as property price increase shall augur well for profitability in case they are able to pass on,” the Karvy report says.