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| Edited By: GT Kannan |Source: DNA |Updated: Mar 18, 2018, 02:49 AM IST
In the early 90s, being a builder was not something that anyone took seriously. The unbridled growth that the last two decades had seen brought in nearly anyone with a bit of money, some land, and the daring to enter business, into the realty sector. As a result, the industry grew without the professionalism that characterizes sectors like automotive. The question is: can the realty industry get organised with process values driven right down from the CXOs to professionals on the field?
The realty industry has been inextricably linked to the country’s economic stability contributing about 7% to GDP in India. It is estimated that the country will fall short of about 26.53 million houses in the Eleventh Five Year Plan (2007-12), thereby presenting a huge opportunity for the sector. Within realty itself, residential properties look slightly more promising than other segments.
The real estate growth is mainly due to the rise in demand for organised realty and availability of land at affordable prices. The trend has been that any amount of expenditure/investments can generate a five-fold increase in income/returns. According to an ICRA (credit agency) study, the construction industry ranks third among the 14 major sectors in terms of direct, indirect, and induced effects in all sectors of the Indian economy. A unit increase in expenditure in the real estate sector has the potential to generate a 5-fold increase in income.
The growth-drivers for this market are:
The market structure of this industry is highly fragmented and unorganised. It is necessary to see that the industry is by and large organised, especially when there are trends like many corporate houses entering the organised retail sector and international retail brands tying up with Indian partners.
First, in my opinion, this market is more vulnerable to black money due to speculation in the business and lack of governance. Hence, all grey transactions have to be put under the scanner and transparency ensured.
What is the driving force behind grey transactions?
The difference between valuation of land and the government guidance value which is far lower than the market price. People deal with this difference in their unique ways. Most of the people/corporate do like to pay the difference in cash. These cash transactions are unaccounted for. The question is: where is this cash generated from in the market? Where does it get accounted for?
There is no wide acceptance among the lenders to lend finance for such cash transactions to corporate/individuals for their project proposed for construction on this land since it is not possible to show such land valuation legally in the books of accounts. This further leads to misrepresentation of land values in corporate financials.
It is unorganised and unprofessional because it is easy for anyone to enter this market to act as a liaison between buyers and sellers of land. This only does disservice to the market by creating a price bubble and putting the public to misery as most brokers just eye brokerage and pay very little heed to ensuring clear title of the documents to the buyers.
Developers of real estate are watched with an eagle eye by many regulatory bodies as well as lending institutions. The reason behind this is that this sector faces a plethora of stringent regulations. A case in point - developers don’t have the opportunity to borrow towards purchase of land and thus forcing developers to target higher margins in development of property for project finance. There is no system to curb people without any professional backing from entering the market either.
I am sure, we all are aware that for developers, it is a capital-intensive industry and one business cycle is too long to complete the transaction. This apart, the market is so speculative. In many cases, it takes a long time to clear the project finance even for small projects. It is obvious that if there is no support, the developers are dragged into grey transactions to mobilize funds for land acquisition and meet shortage of funds for their working capital and for development, etc.
On the one hand it is apparent that the market is too tough to compete in and on the other hand it is rather too easy to get away with such problems with the power of money. Obviously, this cannot be done away with just through the efforts of several business professionals. It is clear that this market is too attractive and free to trade for any8one and the driving factor for the sector by and large is ‘speculation’.
It is necessary to have professionalism in the market
With great demand for housing for India's huge population and the demand for commercial and industrial premises for its booming economy, large-scale real estate projects have been launched across the country. This has helped transform the real estate business into one of the most lucrative sectors. A sector that has attracted venture capital and diversified sources of funding including overseas and private domestic funds.
Today it is a buyers’ market; no more a sellers’ market. Therefore, the product must be designed to cater to market needs. Today the market scenario is encouraging only because people can afford to buy. Realtors should look to reap the benefits of this not through profiteering but through realizing higher volumes. Designing and marketing houses at affordable prices is of course more challenging but It will be a good test of the professionalism of developers and brokerage firms. A set of guidelines / a licensing system for agents/brokerage would help bring in some element of professionalism in the market. Bringing price rationalisation in the market price of the land as well as completely built properties is also a must.
Secondly, enabling buyers to have the freedom to bring in transparency into the transaction value at the time of registration of sale deed for both land and fully developed properties by allowing them to pay registration fees only for the actual guidance value.
This might, to some extent, help the buyer to take part in a transparent transaction. Allowing the buyer to have 5% of the transaction value in the form of cash might bring in some kind of freedom. Further, reducing the tax burden on property transactions in the hands of individuals also can be explored and revised tax rates for such transactions can be explored.
Thirdly, being a capital-intensive industry, the sector faces liquidity crunch emanating largely from banks' cautious approach to financing real estate companies. This approach has been reflected in lower loan-to-property value, construction-linked payment and financing only for projects nearing completion.
Further, real estate developers also had to cope with other sources of funding, such as private equity and stock markets, drying up considerably, receivables from residential projects under construction getting blocked, falling demand and buyers deferring payments until they took possession of properties. The resultant fall in valuation in the past few years coupled with high interest rates and low availability of money have put real estate developers on the defensive and kept homebuyers away. There needs to be incentive for developers to re-negotiate increase in loan funding for construction against commercial securities of projects. Waiving of the requirement for collateral security from the companies land bank for providing working capital for projects can also be considered. What is also needed is support on land acquisition for social beneficial projects like green housing, affordable housing and introduction of attractive financing schemes for the same.
Some of the above steps, with the help of government initiatives and banking regulations should go some way towards transforming the real estate industry from an ‘unorganised’ sector into an ‘organised’ one.
— The author is chief financial officer (CFO) of Biodiversity Conservation India Ltd (BCIL), which specialises in green homes
