Rea­sons to not give up on In­dian real es­tate

A well­reg­u­lated realty mar­ket will spur the world’s big­gest as­set man­agers to look at In­dia more se­ri­ously over the long­term

Hindustan Times (Chandigarh) - Estates - - ESTATES - The au­thor is is a colum­nist and an in­de­pen­dent in­vest­ment banker Uday Khan­de­parkar n let­ters@hin­dus­tan­

MUM­BAI: Real es­tate maybe down in the dumps right now. But even so, com­pared with most other big busi­nesses, real es­tate re­mains one of the best to put your money into. At its core, real es­tate is the coolest even in fail­ure. You build an air­line on leased planes and if it fails all that the lenders are left with is a brand with which they can have ‘Good Times’ while hum­ming Oo La La, La, La, Le, Oo. If real es­tate fails, lenders to the project still have the land and noth­ing as an as­set gets as real as this.

Yet, it’s been a busi­ness that most re­spectable en­trepreneurs have so far shied away from be­cause it’s a trade vil­i­fied— mostly for the right rea­sons. For one, real es­tate has been the coolest way to gen­er­ate and park slush funds for po­lit­i­cal par­ties. Much of the surg­ing value of real es­tate springs from pick­ing ob­scure land on the cheap and watch­ing the lo­ca­tion turn into gold af­ter ev­ery­one else re­al­izes it’s right next to a Metro sta­tion. Po­lit­i­cal in­ter­ests in the sec­tor and the need for cash in the busi­ness to pay bribes in order to get the dozen­sof re­quired ap­provals gave real es­tate in In­dia a bad im­age.


That’s chang­ing now with the im­ple­men­ta­tion of The Real Es­tate (Reg­u­la­tion and De­vel­op­ment) Act, 2016 or RERA. RERA has a re­quire­ment that no project can goto mar­ket with­out ap­proval sand that 70% of the money re­ceived from cus­tomers has to be spent only on projects for which they have been re­ceived. This has knocked the bot­tom out of the ear­lier realty busi­ness model, which if trans­posed to an­other in­dus­try would look ridicu­lous.

In the au­to­mo­bile busi­ness, for in­stance, car man­u­fac­tur­ers are the big boys with deep pock­ets and their ri­vals are other com­pa­nies with sim­i­lar traits, not road­side garage own­ers. But in real es­tate, un­til RERA, any­one with enough gump­tion could turn a “builder”.

In the short-term, RERA is bring­ing more pain than joy just as a ma­jor surgery does un­til con­va­les­cence and a jour­ney to full re­cov­ery. The pain is be­ing felt mainly by home­buy­ers whose projects fall into de­fault as their bor­der line builders are un­able to cope with the strin­gent con­di­tions of the Real Es­tate Act.

Once this phase is over, real es­tate in In­dia will re­flect its true place in the coun­try’s econ­omy. Real es­tate ac­counts for about 7% of In­dia’ s gross do­mes­tic prod­uct (GDP) which is now at about $2.5 tril­lion, which means the sec­tor cre­ates $180 bil­lion in wealth an­nu­ally. In China, real es­tate ac­counts for 14% of the coun­try’ s GDP and In­dia will fol­low that pat­tern in a mar­ket well-reg­u­lated by RERA.


It’s clear that the vested in­ter­ests of po­lit­i­cal par­ties in real es­tate de­layed for decades the for­ma­tion of a reg­u­la­tor. In­dia’s stock mar­kets were opened to for­eign in­vestors for the first time in 1992 and the Se­cu­ri­ties and Ex­change Board of In­dia (Sebi) was given teeth to tackle in­sider trad­ing in the same year. The Tele­com Reg­u­la­tory Au­thor­ity of In­dia (Trai), to con­trol voice and in­ter­net con­nec­tiv­ity, was formed 20 years ago in 1997; the In­sur­ance Reg­u­la­tory and De­vel­op­ment Au­thor­ity of In­dia (Irda) came to life in 1999.

Po­lit­i­cal in­ter­ests gave real es­tate a bad im­age. But all that is chang­ing now with the im­ple­men­ta­tion of RERA

The size of In­dia’s in­sur­ance mar­ket is cur­rently about $60 bil­lion, the tele­com mar­ket is half of that. Real es­tate gen­er­ates twice as much as both tele­com and the in­sur­ance in­dus­tries put to­gether. The learn­ing from this is that suc­ces­sive gov­ern­ments have preached re­form to all sec­tors, ex­cept those where their fund­ing is tied. The flip side of this coin is the be­lated and half­hearted ef­forts to make po­lit­i­cal fund­ing trans­par­ent.

RERA and the con­se­quent sweep­ing away of un­pro­fes­sional builders will help the en­tire ecosys­tem, in­clud­ing then on- bank­ing fi­nan­cial com­pa­nies( NB F Cs) whose stocks are in a melt­down since 21 Septem­ber af­ter In­fra­struc­ture Leas­ing and Fi­nan­cial Ser­vices (IL&FS) loan de­faults and the sale of De­wan Hous­ing Fi­nance Corp. Ltd’ s( DH FL) com­mer­cial pa­per by DSP Mu­tual Fund at a deep dis­count.

An­a­lysts have mostly laid the blame for in­vestor con­cern on the as­set-li­a­bil­ity mis­matches at these NBFCs. It’s worth look­ing at how many of these N BF C loans been given to devel­op­ers who had lit­tle cap­i­tal, no risk man­age­ment prac­tices and ex­isted only be­cause they could play the per­verted sys­tem—get­ting land, us­ing that as lever­age to get ad­vance book­ing money, di­vert­ing most of it to buy yet an­other plot of land and do­ing that cy­cle all over again. That sus­tained in an ir­ra­tionally ex­u­ber­ant mar­ket where po­ten­tial home­own­ers rushed to book flats at cur­rent prices in the be­lief that prices would keep ris­ing.


Un­til 2014, surg­ing prices that al­most dou­bled the value of an apart­ment ev­ery five years was not just a be­lief but a fact. That hap­pened for two rea­sons—Y 2 K, the Year 2000 prob­lem, and the open­ing of for­eign di­rect in­vest­ment (FDI) in 2004 with the first flow of dol­lars com­ing in two years later.

Once the clean-up phase of RERA is over, real es­tate will re­flect its true place in the coun­try’s econ­omy

Y2K was a sim­ple prob­lem to fix, chang­ing vin­tage com­puter pro­grammes that ab­bre­vi­ated four-digit years as two dig­its to save mem­ory space. These com­put­ers could rec­og­nize ‘98’ as ‘1998’ and it caused hys­te­ria for the world to think that at the mid­night stroke of the mil­len­nium com­put­ers around the world would as­sume we were back in 1900. It needed hordes of pro­gram­mers to fix it in sys­tems around the world. In­dian soft- ware com­pa­nies, which had those mil­lions of work­ers, got a foot into the door at For­tune 500 com­pa­nies. Mov­ing on to higher and more com­plex jobs was a nat­u­ral evo­lu­tion.

In­dian in­for­ma­tion tech­nol­ogy (IT) caused a tec­tonic shift as mil­lions of 20-plus girls and boys chose to leave their par­ents’ homes to take up jobs in the tech ci­ties of Ben ga lu ru, Pu ne, Hy­der­abad, Mum­bai and Delhi. They needed places to stay and they had the high salaries to back them in their quest. That was also a time when the ben­e­fits of In­dia’ s 1991 eco­nomic lib­er­al­iza­tion had fil­tered through and fi­nance com­pa­nies be­gan lend­ing money freely to buy new homes.


The en­try of for­eign in­vest­ments into the real es­tate sec­tor sent the mar­ket into lu­natic over­drive and some big global names made hur­ried in­vest­ment de­ci­sions that ended up in dis­mal fail­ure. El­bit Imag­ing Ltd, Is­rael’s lead­ing de­vel­oper in the early part of the mil­len­nium, which had big in­vest­ments across Eastern Europe picked large land parcels in Ben ga lu ru, Chen na ia nd Pu ne at in­flated prices. The firm barely man­aged to com­plete a shop­ping mall at its Pune site and ex­ited all of its as­sets at dis­tress value. The com­pany went bank­rupt in 2014.

New York-based Tish­man Sp eyer Prop­er­ties bought land in Hy­der­abad for a 2.5 mil­lion sq. ft com­plex called WaveRock de­signed by the firm of leg­endary ar­chi­tect I.M. Pei. That was Tish­man Speyer’s only project in the coun­try and the com­pany is now try­ing to exit it.

Un­til 2014, surg­ing prices that al­most dou­bled the value of an apart­ment ev­ery five years was not just a be­lief but a fact

But sub­se­quent waves of for- eign in­vestors such as Sin­ga­pore’s sov­er­eign wealth fund GIC, Black­stone Group Lp, JPMor­gan and Chase Co. have been more pru­dent. They brought in more than just money into In­dia’s real es­tate busi­ness. They brought in gov­er­nance sys­tems, pro­fes­sional man­age­ments and busi­ness mod­els that will in the long-term create In­dia’s big­gest-ci­ties—world-class busi­ness dis­tricts of the kind seen in New York, Sin­ga­pore and Lon­don.

GIC and Black­stone have ac­quired mil­lions of square feet of com­mer­cial space and are hold­ing it for the long-term. The abil­ity to be pa­tient for 10 years, or even longer, will al­low them to exit their in­vest­ments when they see the fol­low­ing three fac­tors in favour:

A fall in the cap­i­tal­iza­tion rate, which has al­ready started to hap­pen.

When the ru­pee ap­pre­ci­ates ver­sus the dol­lar, giv­ing them more bang for ev­ery buck.

When their Real Es­tate In­vest­ment Trusts (REITs) are formed and listed, which will yield them the whole­sale to re­tail pre­mium.

Ben­galuru-based Em­bassy Of­fice Parks Pvt. Ltd, in which Black stone is an in­vestor, filed an of­fer doc­u­ment with Sebi on 24 Septem­ber to raise ₹5,000 crore and ex­pects to list its REIT next year.


Read­ing about these mar­quee global in­vestors bets on In­dia im­parts a good feel to real es­tate here. But the re­al­ity is the size of their in­vest­ments so far have been a pit­tance and the flow of for­eign funds can eas­ily go up by three to four times once RERA is fully im­ple­mented. FDI in real es­tate in 17 years from April 2000 to De­cem­ber 2017 has to­tal led just $24.67 bil­lion, data from the Depart­ment of In­dus­trial Pol­icy and Pro­mo­tion (DIPP) shows.

RERA is a rare win for all con­cerned. Good for the in­vestors and end con­sumers be­cause it will clear away the clut­ter of small rob­bers. Black­stone has over the past eight years in­vested about $5 bil­lion in In­dian real es­tate, which is a tad more than 1% of the $449.6 bil­lion it man­ages world­wide. JPMor­gan has over the past 10 years in­vested $600 mil­lion in In­dian real es­tate— that is 0.04% of the $1.68 tril­lion of as­sets it man­ages world­wide.

As a bet the size of these in­vest­ments by Black stone and JP Mor­gan areas in sig­nif­i­cant as some­one wa­ger­ing on a tur­tle hat ching ex­er­cise. For the sea tur­tles, it’s a big day—they break out of their shells on the banks and dash across the sand to reach the wa­ters be­fore they turn prey to the preda­tors aplenty—wild dogs, foxes and rac­coons among mam­mals and gulls and vul­tures among birds. Only one out of 1,000 tur­tles make it to these a that day.

A cleaner, trans­par­ent and well-reg­u­lated mar­ket will spur the world’ s big­gest as­set man­agers to look at In­dia more se­ri­ously than a tur­tle ona beach.For now to the world’s big­gest in­vestors, ear­mark­ing 1%, or less, of what they have to real es­tate in In­dia is just hav­ing a foot in the door. It doesn’t mean they don’t care about these in­vest­ments, but if they make no profit… no big deal!


JP Mor­gan and Black stone’ s bets on In­dia would yield In­ter­nal rates of re­turn of about 15%, which are rich by any stan­dards. But those are In­dian ru­pee gains—If they were to con­vert their profit into dol­lars and take it home to­day, their gains would whit­tle down to zero. For now there has been no re­ward and the risk has been huge—any bean count­ing in­vest­ment com­mit­tee sit­ting in New York would pull the plug on any fur­ther in­vest­ments into real es­tate in In­dia. Only per­cep­tive busi­ness lead­ers would see the huge in­tan­gi­ble ben­e­fits that these for­eign in­vestors have gained so far. They have built on ground ex­pe­ri­ence and re­la­tion­ships that will yield rich re­turns once the In­dian econ­omy and ru­pee turn sta­ble and they de­cide to in­crease their bets in a well-reg­u­lated and trans­par­ent real es­tate mar­ket.

In real es­tate, in­vestors put their money on the peo­ple run­ning it rather than on the project. That’s be­cause of the quirk­i­ness at the ex­e­cu­tion level. De­vel­op­ment Con­trol Reg­u­la­tions in Thane Mu­nic­i­pal Cor­po­ra­tion are dif­fer­ent from the Mum­bai Mu­nic­i­pal Cor­po­ra­tion, just as it varies widely be­tween Delhi, No ida and Guru gram. Area- spe­cial­ist devel­op­ers such as DLF Ltd in the Na­tional Cap­i­tal Re­gion (NCR); Ra­heja Devel­op­ers, Hi­ranan­dani Group and Wad­hwa Group in Mum­bai; Panchsheel Realty in Pune and Em­bassy Group in Ben­galuru know how to deal with these nu­ances.

In con­clu­sion, RERA is a rare win for all con­cerned. Good for the in­vestors and end con­sumers be­cause it will clear away the clut­ter of small rob­bers. Good for the big-time politi­cians too be­cause R ERA doesn’ t have ju­ris­dic­tion over long-term price- sen­si­tive in­for­ma­tion.

The en­try of for­eign in­vest­ments into the real es­tate sec­tor sent the mar­ket into lu­natic over­drive MINT/FILE

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