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.
Desirable 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.