Tag Archives: Best practices in property market

Desirable best practices in Indian real estate

Posted on by Track2Realty
Track2Realty Exclusive

Bottom Line: The urgent need of desirable best practices in the Indian real estate is indicative of harsh reality of the absence of regulation. Ravi Sinha writes that even beyond the RERA ambit, developers must adopt some of the best practices voluntarily to make sure they stay ahead of the competition.  

Best Practices, Indian real estate news, Indian property market news, Track2Realty, Transparency in Indian real estateDesirable practices in real estate are all about paradigm shift in the mindset that cannot be enforced. It comes with the higher awareness of how best practices rewards the developers in the current times.

The Indian real estate market has always been notorious for its lack of transparency, and the changes in recent times has been less than desirable. As India aspires to get clean money into the sector, the foreign funds too have high standards in terms of service quality and clarity.

The unethical practices in real estate are the product of a short-term, mercenary approach to the business. This phenomenon is most evident in smaller brokerages, which often have no more than a single dealing with many of their customers. The much-touted ‘Code of Conduct’ by industry body CREDAI just proved to be the lip service.

The fact remains that less than desirable practices are not only followed by the small-time operators but even some of the largest developers are biggest defaulters today.

In Mumbai an FIR was registered a couple of years back with the Malad Police Station, against a real estate developer and his sales manager for allegedly denying a Goregaon resident to buy a flat in a ‘veg-only’ under-construction residential building. 

This is not one of the incidents but in many cases the builders in their quest to attract a particular caste, community, religion or people having similar food habits cross the line that could easily be termed as not just arbitrary clause but also housing apartheid.

Missing best practices

A business that is way short of implementing mandatory compliances does not seem to care about desirable best practices

Desirable best practices nevertheless helps the company to step ahead of competition

Desirable best practices need paradigm shift in the mindset; this cannot be enforced by legislation alone

A section of developers maintains arbitrary policies to the extent of having housing apartheid to some caste, communities or food habits

Realty rating can be a differentiating factor in the market for both lenders and homebuyers to make an informed choice 

Cash deal is a market reality of real estate that no one would like to accept 

Realty rating needed

Realty ratings have not grown in India and the issue of objectivity also makes it prone to criticism. However, there is no second opinion that if a standardised mechanism of real estate rating is evolved, it can differentiate between the men and the boys in the business.

Analyst even point out that the real estate rating has to evolve beyond the mere financial rating of the account books. There has to be comprehensive rating, including the brand equity, buyers’ trust, past track record and his overall standing in the market. 

This will definitely differentiate between the serious developers and the fly-by-night operators. Objective and comprehensive real estate rating can also help the buyers in making an informed choice in a business where authentic research is a critical missing link.

Today, in any given micro market across the country the projects of various developers in the same segment of housing have more or less the same specifications. The claims are the same; offers are the same; and most of the time the marketing brochure of one company from the other is no different than just using different artistic elevations.

It really confuses the prospective buyers who have no scientific tool to cross check the developers’ past track record.

Many within the built environment of the Indian real estate admit that the sector is characterised by the presence of a large number of unorganised players, low level of institutional funding, labour and raw material shortages, and lack of adequate and timely operational information.

These inherent characteristics expose all the stakeholders to a very high degree of risk of delivery on account of the track record and ability of the promoter, legal clearances to the project, financial backing of the project and quality of construction. A rating therefore has the potential to be the differentiator.

Ratings are in fact objective assessment of various project related parameters. A robust due diligence process, strong methodology and rating/grading expertise of rating agencies are key enablers to the rating exercise. With the product being evolved recently and the sample size being small in comparison to numerous projects that are under construction pan-India, it is a long journey. With more projects being rated across cities, comparisons will be meaningful across projects.

A committee set-up by the Finance Ministry a few years back had more or less the same outlook when they had recommended rating based mechanism for lending. The committee had gone to the extent of suggesting that a developer who has a certain level of rating can afford capital at a lower rate of interest as against those who do not have higher rating.

Many of the developers had then objected these recommendations saying that it should not be made mandatory. That nevertheless does not undermine the fact that those who get themselves rated should be benefitted and then only it will encourage others also to adopt it.

Once the highly rated developers start getting the capital at a lesser rate and there is advantage of doing the right things, more and more developers will do it voluntarily and that may be the beginning of change.

No cash deals?

An advertisement by a real estate company proudly proclaims that ‘only cheque payments accepted’. Prima facie what it says is that no cash payment and no black money in buying the project. It, however, raises more questions in the minds of the buyers than answering the doubts about the acceptance of cash component by the developer.

Parking of black money is very much a reality of Indian real estate; though on face value everyone denies it. Despite of sitting over record inventory, liquidity crunch at company level and general macro-economic problems affecting the buyers’ affordability, if the real estate is still constantly appreciating in its capital values it is just due to the fact that ‘cash is king’ in the business.

As per a rough assessment of cash transactions in the real estate there are no less than 40 per cent of the money in the business as black. Many of the developers privately admit that they cannot do away with it as it starts from the entry point itself. The absence of financial modeling of the business and the lack of transparency and well-defined regulatory practices are fuelling this cartel.  

Since the banks do not finance the basic raw material, that is land, the developers have no choice but to look for money from sources which is often illegitimate. In this high risk transaction the major component is often unaccounted in the books. From there starts a vicious cycle of cash recycle as many of the initial investors in the project also play with black money only. They invest in the project for speculative reasons with cash in hands and are more often not backed by any bank finance.

Political money deep in system

When several Cabinet Ministers, Chief Ministers and Members of Parliament showed up at a wedding reception hosted by a developer, it fuelled media speculation of the developers’ proximity with them and supposedly their investment in his company. However, the insiders do not see anything unusual in it.

Requesting anonymity, a broker who claims to specialise in making high-profile real estate deals in the Delhi-NCR market says it is the best investment vehicle for politicians to park funds, as it is a safe avenue and fetches the highest return with the guarantee of a physical asset in case deal goes sour at any point of time. 

It is a symbiotic relation and if politicians need developers to park funds and convert black to white, realtors are too keen on linkages with politicians, both for funds and power. Such connections often help speed projects and in some cases get what is illegal converted into legal for clearances.

Many of the developers privately admit that it is very tough to do business without political backing in a system where even beyond the finance all the approvals and land holding is with the politicians.

Pranab Mukherjee as the then Finance Minister had presented a White Paper in the Parliament which suggested many initiatives to curb black money. The White Paper had even pitched for reforms in the cash vulnerable sector like real estate. Nothing seems to have moved in that direction and business goes on without bothering much about the colour, source or legitimacy of the currency.

Not all are still ready to admit the existence of black money in the sector. However, most of the real estate companies are not listed ones and account books do not get even the entry of unaccounted money collected in cash. As a matter of fact, it made headlines for weeks when the Income Tax raid found over Rs. 100 crore in the basement of a Delhi-NCR based developers’ mall.

 

Property market yet not transparent

Posted on by Track2Realty
Track2Realty Exclusive

Bottom Line: Some reports suggest India has improved in global rankings in terms of transparency in real estate sector in Asia Pacific. The homebuyers on the ground maintain that their experience has been no better. Track2Realty takes a look at the paradox.

Transparency in real estate, Disclosures in real estate, Best practices in property market, Cheating in property market, Frauds in real estate, Builder Buyer Agreements in real estate, Transparent deals in property market, India real estate news, Indian realty news, Real estate news India, Indian property market news, Track2RealtyA study titled ‘Global Real Estate Transparency Index (GRETI) 2016’, by property consultant Jones Lang LaSalle suggests India has improved in overall transparency scores across all markets and has achieved higher ranks for its Tier-I and Tier-II cities. Tier-I cities in India ranked 36th, vis-à-vis transparency levels, followed by Tier-II and Tier-III cities at 39th and 52nd positions, respectively. The index measures transparency by looking at factors including data availability, governance, transaction processes and the regulatory and legal environment.

According to JLL, the country’s rankings is likely to improve further in the GRETI 2018 index, owing to the implementation of the Real Estate (Regulation and Development) Act, 2016, which is likely to be fully functional in all states by then.

However, this overt optimism does not go well with the homebuyers on the ground. The buyers in the market maintain that it is the developer’s obligation to disclose all relevant issues, approvals etc, which they more often than not deny.

Transparency challenges in Indian real estate 

Reports suggest Indian realty catching up on transparency index; ground realities challenge

Disclosure norms missing in the property market and builders even don’t show Builder-Buyers Agreements before booking amount is paid

Courts have questioned the legality of Builder-Buyer Agreements, calling it not sacrosanct

Majority of developers don’t carry Builder-Buyer Agreements on their website

Developers continue to use misleading terms in marketing brochures

Subvention scheme invites speculators; buyers caught in lurch if the project is delayed

Selling on carpet area has the potential to reduce litigations to a greater extent

Buyers expect straight marketing discounts and not discounts & freebies

Disclosure missing

Disclosure statements, which can come in a variety of forms, are the buyer’s opportunity to learn as much as they can about the property and the builder’s experience, approvals & risk factors in it. Potential seller disclosures range from knowledge of not only the property but also infrastructure issues in the vicinity. Not only do disclosure documents serve to inform buyers, they can protect the sellers from future legal action. It is the developer’s chance to lay out anything that can negatively affect the value, usefulness or enjoyment of the property. 

It is the lack of proper disclosure that often results in litigations. Across the world, disclosure laws vary from state to state, even down to the city and local governance level. Though disclosure norms are very poor in India, the developers who conceal relevant information about the housing project can still be taken to courts for failure to disclose.

In some other matured markets the seller (both developer as well as reseller) can be sentenced for for up to ten years. In India the BBAs (Builder Buyer Agreements) are so one-sided in favour of the builders that, forget disclosure statements, even the legal validity of the BBAs have been challenged by the buyers and the developers could not defend their documents.

Some common disclosures that should ideally be there include the legal titles, approvals, delivery timelines, risk elements, financial liability of the developer with regard to the property, whether property already mortgaged, neighborhood nuisances, carpet area, loading percentage, any history of property line disputes, and amenities that would be part of the housing project.

A disclosure is something given to the buyer by the seller documenting their knowledge of the property. In most of the global markets, disclosure documents are provided to buyers once the developer has accepted their offer. In addition to their inspections or loan contingency, the buyer has an opportunity to review the seller’s disclosures.

If the buyer discovers something negative about the property through disclosure, he can usually back out of the offer without losing his deposit. In some matured markets, developers provide these disclosures to the buyers even before they receive an offer. Buyers are then required to sign off on disclosure documents and reports.

In some ways, providing full disclosure is not just a step towards best practices but also can actually help the developer. It shows that the developer is thoroughly transparent and upfront.

Even the National Consumer Disputes Redressal Commission (NCDRC) has rejected the arguments of a real estate company that provisions mutually agreed upon in a BBA are sacrosanct.

Developers continue to mislead

The developers continue to mislead the buyers with fancy jargons like project to be strategically located with 10 minutes distance to airport or 20 minutes distance to railway station. However, what the brochure does not tell you is that this distance is subject to your over-speeding drive with no traffic at all on the road. In the absence of this luxury, the distance of 20 minutes can also be one hour and 20 minutes.

Social infra is another area where the gullible buyers are duped with the promise of having very many good quality schools, hospitals and restaurants coming up near the project.

Façade of area that promises green zone around the project, that looks so very beautiful in the brochure, can also be drainage area with green bushes around. The artistically create project elevation or the sample flat pictures on the brochure are more often than not misleading to the homebuyers.

80 per cent green area with landscaping is what is an ideal answer to urban living. However, even with the permissible FAR of 2 that is allowed in most of the cities, this seems highly improbable. Moreover, the marketing brochure simultaneously also says that the developer will apply for more structures subject to permission. There have been cases of the developer later converting the green zone to raise another tower.

State-of-the-art amenities are probably the most over-used and abused claim in the marketing brochure of respective developers. Yes, there would be a gym, a swimming pool and a tennis court etc. But the question that is not answered is that will it be sufficient to serve the entire housing project. In most cases it is not.

Amidst all the misleading claims and marketing exaggerations, location mapping is the most glaring one. Generally maps are not to scale and give the wrong perception of the location of the project. For example, the brochure will say 10 minutes from the airport or commercial district; it does not state distance in kilometers.

Straight marketing package needed

When Archana Dalmiya bought her first apartment in the year 2011 she was quite tempted with the various marketing offers that were available in the market. She had then booked her apartment that was packaged with loads of discounts & freebies, though the developer had refused to give any straight discount. A novice in the housing market she was also rather looking for the maximum freebies. As a matter of fact, the freebies became one of the major differentiator in making her a final decision between the identical projects.

Not anymore! This year when she is planning to buy her second apartment it seems she has matured a lot. She understands the dynamics of housing market and difference between freebies and straight discounts. As a result, her negotiation is more on the lines of price point and straight jacket marketing offers that could lower the price burden.

“I think I have learnt some valuable lessons with my first home purchase. There is absolutely no gain in getting tempted for free air conditioners or free holidays. What I am interested in is the price point and to what extent the developer can offer me the price discount. It works much better for a home buyer than fancy symbolic offerings,” says Archana.

Requesting anonymity, the marketing head of a leading Mumbai-based developer admits that their research has made them understand that today’s buyer is very value conscious across the segment. Moreover, he can evaluate the cost & benefit of any marketing offer. He is not the one who would be tempted with the freebies anymore.

“It is no more home furnishing, holidays or gold coins that can translate a prospective client to book the deal. It used to be popular marketing tool for good number of years. Today, most of the developers also understand this change in buyers’ outlook and hence housing market is now very realistic in terms of its marketing offerings. Price cut is what seals the deal in most of the cases,” says the person above mentioned.

The housing market of major Indian cities have also changed over the years. No one is interested in offers like free air conditioner, holidays or other fancy attractions. Price point and usable carpet area is the focus of all the buyers today.

The game in the housing market has turned out to be on the price point and hence most of the developers and home buyers are evaluating what could be termed as substantive negotiation on price point than symbolic gesture of freebies.