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Saturday, December 16, 2006

Business Today - Real Estate And Reforms


If you thought real estate was catching the high tide in terms of fund flows, then think again. Were it not for a few snags, the industry could be attracting far more capital. Topping the list of impediments is the opaque nature of the business in India. "The challenges of investing in Indian real estate relate to transparency, limited market history and forecasting difficulties, as well as title complexities and imperfections," says Kurt Roeloffs, Head, RREEF Asia Pacific. Ownership records and land titles are one of the biggest blind spots in property valuations. Further, there is no title insurance in the country. Title insurance, as the name suggests, guarantees against massive losses in case of a faulty title. While domestic funds are able to negotiate these issues, foreign funds too are learning to handle them.

One interesting fall-out of such intense scrutiny by global and domestic funds is that transparency in the market is increasing. According to a global transparency index evolved by realty consultant, Jones Lang LaSalle (JLL), India stood at #41 this year in a list comprising 56 countries-its rank unchanged since 2004. On a scale of 1-5, with a score of 1 showing highest transparency, India's transparency score was a low 3.46. However, as India was among the top 10 countries (the 10th though) in showing the largest improvements, it moved from "low transparency" status to the band that includes "semi-transparent" countries. A flood of major retailers and other MNCs looking to capitalise on India's recent exceptional economic growth, plus an increasing presence of international property consultancies, have significantly improved the quality and availability of market information across all sectors," the JLL report says.

As more transactions between foreign firms and local developers get done, the general accounting and reporting processes are expected to improve, since the local firms will need to start matching global reporting benchmarks. The public offers by real estate developers and the attendant disclosure norms will also lead to more information about real estate assets being released into the market. Similarly, the introduction of real estate mutual funds will aid the process further.

The opaqueness is evident in customer sales as well, where the rampant malpractices are significant enough to inhibit demand. Issues such as cost of property related to built-up, super built-up areas or carpet area have created a lot of confusion in the market. Land use issues, as evidenced in the sealing drive in Delhi, are pointers to an overall lack of urban planning. Stamp duties and archaic laws such as Urban Land Ceiling Act and Rent Control Act need to be rationalised or scrapped. However, as with many other institutional reforms, much of the initiative rests with the state governments.

Even as the government talks of a real estate regulator, many in the industry are wondering what will be its terms of reference. "Considering its importance in economic growth, foreign direct investment and employment generation, it is high time to have a federal regulator for the sector," says Cushman & Wakefield's Verma. Fortunately, he won't have to wait for too long.