The Balance Sheet: The next stage of Indian real estate growth

This article is part of an ongoing series of articles by EPG in India Incorporated, entitled The Balance Sheet – Taking Stock of India. This article was first published here.

The Indian Parliament is likely to discuss the Real Estate (Regulation and Development) Bill in its upcoming Budget Session. Although the draft Bill has been pending since 2009, if passed as anticipated in 2013, it is likely to inject transparency and accountability into an industry which needs to institutionalise consumer protection.

One key proposal is to create a regulatory authority for the sector in each state. In particular, the proposed Bill will compel development to disclose project details and contractual obligations, and declare the status of the relevant clearances needed. Failure to do so may result in the developer paying a hefty fine of up to 10 per cent of the cost of the project or, worse, prison. The Bill may also introduce an “escrow-lite” facility whereby the developer must hold a high proportion of funds in a particular bank account, to ensure a more accurate money trail. I hope that in the future, the government can also consider allowing retail investors to invest in REITs, but again this proposal has been on the cards for many years.

After the reduction in Reserve Bank of India repo rates in 2001, India’s property market at first grew slowly, and then boomed. But it took until 2005 for average house prices to reach their previous peak of 1996. The next chapter in real estate’s growth, however, needs to address some significant challenges.

 Due to the lack of regulations and effective policies, and lack of clarity on some land titles makes investors – particularly foreign investors – nervous.

One such example that has spooked investors is the announcement last week by the Securities and Exchange Board of India (SEBI) that it could freeze up to $3 billion of real estate assets from the Sahara Group, following the Supreme Court’s agreement with SEBI that Sahara had masked a bond issuance in 2011 as a private placement in order to avoid regulatory scrutiny.

At international property investment firm Unesta’s conference in London last week, Yomesh Rao, its executive director, spoke about the need to sometimes acquire up to 50 permits from various government departments before the construction of a project can begin. On the one hand, the progress of each permit is trackable by potential investors online via http://goidirectory.nic.in, which is a significant improvement for consumers. On the other hand, 50 permits is still a ridiculous figure, and that it can take up to two years to obtain these permits is equally absurd for a market the size of India.

Vikram Goyal, managing director of Unesta – offering India property services, said careful homework by investors can lead to better returns and easier liquidity, especially in urban areas. He added: “A quick survey of the other developments within the vicinity will help evaluate if the area has the real estate potential and also help understand the demand vs supply housing dynamics in the region. It is advantageous if the project has been pre-approved by a reputed lending institution.”

The reasons for investing remain the same as they were in the previous boom in 1995-1997, before the stock market and real estate markets crashed in quick succession – favourable demographics, higher disposable incomes, negative real interest rates, excess demand of land especially in urban areas. But one factor is different this time – the emergence of a more favourable environment for real estate investment, such as the policy change to permit up to 100 per cent foreign direct investment (FDI) in real estate projects.

Overseas investors have invested $14 billion into the Indian real estate sector over the period from 2006 to 2012, according to Alastair Hughes, Asia-Pacific CEO of real estate consultancy firm Jones Lang LeSalle.

Around half of these were invested in residential property and a quarter in offices. Hughes reckons that in 2013-14, there will be foreign investment of $4-5 billion, mainly to buy income-yielding Special Economic Zone assets. This figure could well be an underestimate if much-needed regulatory reforms are pushed through Parliament in pre-election year 2013.

This article was published by India Incorporated here.

Posted in: News & Press

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