Bottom Line: Realty ratings have not grown in India and the issue of objectivity also makes it prone to criticism.
“Now that the RERA is a reality and the demonetisation is also going to curb the flow of the balck money into the sector, the issue of lack of financial modelling in the business needs to be addressed,” says Nikhil Hawelia, Managing Director of Hawelia Group.
Questioning the advantages of the real estate rating he asks why can not rating be the right benchmark to assess a developer’s credibility. “As of now, a higher rating is just another token appreciation for the developers and it is time that we make it count beyond the symbolic appreciation to substantive catalyst of funding.”
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.
How rating differentiates?
Ratings on four crucial parameters – developer, legal, construction and financial quality is important
Rating enables buyers take an informed decision and is due diligence tool for lenders
The rating provides a level-playing field based on quality and self imposed discipline amongst the developers
The final outcome of rating is on various input parameters and rating agencies assessment of the developer and the project
A higher rating (Scale is 1 star to 7 star, 7 being highest) indicates that project will be completed on scheduled time with delivering agreed specifications
The developer can use the rating for marketing, branding and loan request process
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 of the developers’ past track record.
Many within the built environment of the Indian realestate 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.
Revati Kasture, CGM-CARE Ratings says 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.
“The rating agencies are trying to create awareness about the rating process, methodology and benefits to various stakeholders of the sector viz, developers, lenders, regulators and customers. Ratings across projects enable comparison and provide a value added decision making tool to the purchaser of the property. Increasing acceptance of ratings amongst the developer community and lenders will improve the transparency levels for the sector as a whole and is expected to aid in access to the much needed institutional funding to the sector,” says Revati.
The question is how will this rating help the sector? If we go by the committee set-up by the Finance Ministry a few years back then what they had recommended was 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.
Though 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 will be benefitted and 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.
Ratings can definitely play a critical role in giving property buyers an objective perspective of projects on all critical parameters, and helping them take an informed decision. Analysts maintain there are several facets that constitute a brand, with credibility and transparency being the critical ones.
When a developer gets his projects rated by a credible third-party firm, it sends positive signals to the market and key stakeholders such as bankers, financers, customers and suppliers, thereby enhancing his reputation and brand.
By: Ravi Sinha