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Getting real estate back on track

Ramesh Pathania/Mint

Ramesh Pathania/Mint

The Minister of State for Housing and Urban Affairs, Hardeep Singh Puri tore into the real estate sector this week citing that the “biggest fall-outs affecting the long-term growth of the real estate sector came from project delays, diversion of funds by builders, one-sided builder-buyer agreements, unfulfilled promises and lack of finances”. The intermediate step between the above factors and the industry not doing well was the current state of crisis of confidence on the part of consumers, stemming possibly from the same factors that the minister alluded to. Members of the real estate industry can no longer sweep these reasons under the rug, since these have become big enough to threaten the viability of the sector itself, or at least a part of it.

So, what should the different participants—real estate developers, government, intermediaries (brokers), online portals and you, the consumer—do differently for this sector to do well in the long term? ‘Doing well’ does not only mean that people start buying more homes than today and prices start rising. ‘Doing well’ would encompass a deep correction of practices and building up of a long-term confidence in consumers.

Government: This is the only entity in the entire eco-system that seems to have taken the bull by its horns and made the most progress in the past one year. Starting from demonetization to establishing the Real Estate (Regulation and Development) Act, 2016, (RERA) to launching a slew of measures enabling affordable homes, the central government has tried to repair the malaise. However, the government should have introspected that cash has come into this sector not because the developers want it or because the consumers want it, but largely because local authorities have historically demanded cash to give approvals for projects. The maze of up to 50 approvals needed for every project encourages this rent-seeking behaviour, in turn encouraging mediocre industry participants, and finally discouraging clean business houses from entering this sector.

State-wise variations in construction norms, occupancy certificates, joint development rules and others again discourage large national entities from emerging in India. Since the relationship with local authorities is sadly a critical success factor, we see most developer companies expanding to a maximum of 2-3 cities. A true stream-lining and standardization of these on-the-ground processes and policies at the level of states and local municipals will take this sector ahead by 10-20 years. Automating and making online all these processes is the only way forward. This will get a huge pushback from the ground in various states and various local bodies, but a determined government can make this happen.

Real estate developers: The main protagonists in this sector need to pay heed to the lessons from other sectors that got regulation forced down their throats because of the excesses being committed (remember life insurance?). In all other industries, the consumer is the king; what is good for the consumer is good for the business. The same rules of business and long-term prudence should apply to real estate too.

We need to fight on the basis of superior construction, smooth deliveries, after-sales service, great brands, and finally, superior and predictable returns to investors. In the process, we would have to engage with the central government on ways to solve our predicament of local approval policies. The good news is that there are quite a few real estate companies in India that are trying to run their businesses on sound business principles. It is the longer tail of companies that is trying to win through short-cuts, and these should be reined in urgently. RERA has fired the first salvo. If the local approval processes are cleaned up, many of the smaller companies would lose their dubious competitive advantage on their own. But till then, the prudent companies need to continue to walk the talk, supported by RERA, and grab share through robust business strategy and excellence in execution.

Brokers and online portals: Brokers should be on the side of the consumer and explain the pros and cons of the deal. But the broker community has a bad name, and should take pains to work on that. Now that all brokers need to get registered under RERA, they should understand the implications of the same, and try to play by the rules. We need to win business through hard work, more options shown, understanding clearly the needs of the consumers, and acting on behalf of the consumers. There is, of course, revenue pressure, but abiding by the above principles will also bring in more wealth in the long run. They need to continue to work to improve the quality of listings by verifying these more, and thereby give the consumers a what-you-see-is-what-you-get experience.

The consumer: RERA is on your side. Your money will be used in the project you have bought into, you will get what you saw in the marketing brochures, no changes will be made in the project plan till 50% of your building mates agree to that, and you will get a penal interest if your project is delayed. You need to be more assertive of your rights.

You need to be more aware of what you are buying, the agreement you are signing, the long-term investment prospects, and the best loans available. Select the right developer by looking at track records in construction, delays, quality and, very importantly, in delivering what they promised. This may be the largest investment decision you make—so you owe a responsibility to your family to really think this through.

Finally, you should stop thinking that your real estate investment is going to give you returns of 50% per annum. As India’s economy matures and sectors develop, equity and real estate should continue to give you returns that are fixed deposit-plus 7-10% per annum. There is no reason why any investment will give you super-normal returns. In fact, you should run away from anyone promising more than 20% returns in any asset class.

It’s a long list of to-dos for all the constituents of the real estate market, but the die has been cast.

[“Source-livemint”]