India Needs A Real Estate Regulator

India Needs A Real Estate Regulator

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Like the stock market indices, real estate in selective pockets seems to have shrugged off the shock of 2008 and has been totting up gains over the past 12 months. Is the price escalation that makes Mumbai more expensive in parts than Manhattan a bubble or is this sustainable? This was the topic of a Mint Clarity Through Debate conclave attended by experts from various parts of the real estate industry who look at the same area, but through different windows.

One thread through the discussion that emerged was this: Prices are high due to a blend of cheap overseas money, slush funds in India and unsatiated domestic demand. No, the real estate market will not crash, but there is a period of flat prices up ahead in 2011. Panellists also agreed on the need for a nationwide regulator who looks at the industry from the point of view of the consumer to make the real estate industry more transparent.

Participants in the 25 November discussion, moderated by Mint Money editor Monika Halan, were R.V. Verma, chairman and managing director, National Housing Bank; Anshul Jain, CEO-India, DTZ International Property Advisors; Rahul Bhasin, managing partner, Baring Private Equity Partners (India) Ltd; Anil Sachidanand, chief executive officer, Dewan Housing Finance Corp. Ltd; and R. Sukumar, editor, Mint.

Halan: Is the real estate boom for real?

Verma: The topic has always remained a matter of debate between the industry, the regulators, among policymakersthose who were inclined towards growth and controlling inflation. The issues that have been flagged by the moderator are apt.

One, you are having to deal with the economy and the sector domestically in the light of the growth and various impulses which are captured in the growth process by the economy overall, of which the real estate and the housing sector are a very important constituent.

Since 2002-03, when commercial banks got into the housing market, they havent looked back. We have seen a quantum jump in the flow of funds into the housing sector that have come from the financial sector, which has meant that the financial sector and the real housing sector are pretty much integrated today.

Two, the financial sector of our country is pretty much integrated with the global financial markets.

Three, there is disconnect where the housing market is not as much integrated with the global housing market. Perhaps that was the reason we did not see the kind of crisis which happened globally and which was not really transmitted to the Indian housing market.

To take the first issue first, we have seen the very positive correlation between the increase in the flow of funds and the real estate prices moving up. However, to determine whether the price escalation in the property market is stable and whether it adequately reflects the preference of the people buying the property and what is the composition of the people who are buyinginvestors, end consumers, speculators, all these do have an impact on the property prices.

It is very difficult to determine whether there is a bubble building up in the system. We would definitely like to believe that the boom is for real but we would presume that the boom is not for real. From a regulatory perspective, we know that the property price cycle and the interest rate cycle, they tend to get procyclical. There is a correlation between the demand for credit and the demand for houses. If there is too much liquidity in the market and interest rates are low, we have seen property prices going up. It is a matter of concern if this trend reverses.

Jain: Yes, it is for real. You cant judge a boom by a six-month or nine-month period. If we are looking for the country to grow at 9-10% for the next decade, then we are totally undersupplied in the long run. To share some numbers, in the next four years, some 250,000 units are to hit the (domestic) marketthat translates to 60,000 units per annum.

For one, the developers do not have the capacity to deliver, and even if they able to deliver, then look at the population of Delhi and the growth in NCR (National Capital Region).

Therefore, in terms of pricing, there are enough people out there who are ready to pay that little bit extra to get a house. I think the pricing will get flattened out in the next six to nine months, but after that, as (consumers) salary catches up, the prices will go up. Even if interest rates go up, I think Indians are used to paying high rates of interest.

Bhasin: As far as demand is concerned, it is a complete no-brainer. The Indian marketplace, in terms of housing assets, is chronically undersupplied. If you go back to 1971, only 60 million Indians lived in cities; currently that number is around 340 million.

There has been no planning since 1991 to date, effectively there has been zero urban planning. It has been a comprehensive failure of governance, planning and delivery of public goods that there is chronic shortage of housing stock. So the pricing of housing stock is way out of whack.

The crux of the issue is that there are constraints on the supply side. Unless there is comprehensive planning and reform, there will always be constraint on the supply side. The only way to do it is to have high FSI (floor space index) and high growth. You cannot do that unless you plan for drains, storm-water evacuation, plan for urban transport. There has to be urban city planning.

If you all want to bet whether real estate prices would correct in the near future, you need to take into consideration whether reforms are going to happen or not. If reform happens, then prices will correct, or else the only way is up.

Sachidanand: The current boom is the real boom, because we have to go beyond metros and go to tier II and tier III cities. When we see activities happening in these cities, the prices tend to go up. The large number of construction activities resulting in increase in employment, and hence prices, will remain high. Unless the cost of construction comes down, the prices of houses will always remain high.

Sukumar: I get very nervous when people speak of a real estate boom. If you look at what happened in the US in 2008 and in Ireland today, it was all about a real estate boom. I am not saying all real estate booms lead to this but as a journalist, the coincidence is just too obvious to ignore. I think we are still not into a bubble territory.

If you look at the prices of real estate across the country, apart from a few pockets, I dont think the prices are anywhere close to the last boom. If you look at it from the perspective of demand, then there is a boom. The fact is that lots of professionals do not work where they grow up. Therefore, most companies are driven by migrants. The number of people wanting to buy a house will keep increasing, so demand keeps increasing, and if supply doesnt keep up pace, then it will artificially create booms that soon enough becomes bubbles.

Halan: So the sense that we are getting is that there is a highway where lots of people are wanting to get on, but its the sheer lack of rules which are common for all, and certain people with special privileges, which causes a lot of ambiguity in the market. Real estate remains one of the most non-transparent asset classes in India. Why is it outside the ambit of serious regulation now? Why is it that circle rates kept low? Why is there no equivalent regulator in the housing market like in the equity market?

Verma: Lets accept the fact that housing is a state government subject. Stamp duty, provision for infrastructure, registration, regulation of land, approvalsall these are in the domain of the state government. Financing is a Central government issue. There is a big disconnect there, (thats) why regulation is not happening.

I am talking from the point of view of the government as the issue has been debated for so many yearsthe need for a regulatory body in the real estate sector. It hasnt seen the light of the day yet. But now they have been talking about self-regulation, at least have some sort of...self-regulation for the private sector. Let them regulate themselves, and that could be an intermediate step, and give confidence to the government for a formal centralized regulatory body. Like its happening in the SME (small and medium enterprises) sector, textile sector.

Halan: Self-regulation has not worked anywhere in India. The formation of a formal centralized regulator will take time. Formal finance is still not prevalent in real estate. So should we wait for the formal regulator, for finance to come in?

Bhasin: The disparity between demand and supply is so astronomical, which is why you see the high prices. This is a problem that needs to be addressed and solved by the governing systems, they simply cannot abdicate their responsibilities. Still you (can) have holistic solutions, like I said, by increasing FSI, proper urban planning and reforming taxation regimes. All of this will lead to increase in supply.

Jain: I have a contrarian view on this. I think the sector is slightly over-regulated. If you look at any development by-laws, there are external developments, infrastructure developments, there are FSI norms, safety norms, time and delivery norms and there are norms about everything. But the problem is that there is no accountability. So how do you actually insert accountability?

The second point is how can we lower the entry barriers for a person who wants to come into this business. And one of the ways is to simply deregulate the land laws. Land laws should be reformed. I should be able to buy a piece of land without any hindrances. There is enough land in the country, then why should we pay 60-70% higher on the price? It just doesnt make any sense. Perhaps thats where a central, clean regulatory body like Sebi (Securities and Exchange Board of India) can help.

Sachidanand: I think the real estate authority is being regulated in its own way, but as Anshul mentioned, there is a need for accountability. As a housing finance company, we look at all the documents before giving credit. So to say we need to regulate the sector much more is actually not needed. Halan: More jobs for retired bureaucrats as a super regulator in real estate or we really need somebody to tie this up?

Sukumar: See, the question is what is regulated. One reason why there is a huge demand-supply mismatch and one reason we have frequent booms and busts in them. Its not the problem the market itself can solve because there is no regulatory framework to solve the problem.

If you look at the industry, there are no economies of scale. The biggest builder in this country will probably be developing a few units. Clearly, as long as you dont solve the land conundrum, as long as you dont have an efficient tax mechanism.

I am not saying to make it a free market. But we definitely need to make the entire process of land acquisition transparent. At the very core of it is of titling. I dont see the government taking any step towards that. Once you do all that, you have an efficient and transparent market in place. Once you have the right kinds of regulations in place, then probably you will have different kind of players in the market.

About the Author:
For more information about property consultancy, real estate visit-

Anshul Jain,
DTZ India,
Real
Estate Consultancy,
International Property consultancy,
CEO DTZ india



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