India’s real estate- No Longer free for All
September 29, 2007
India’s government wants to set up state-level regulators for real estate, a sector that has been among the country’s fastest growing in the past few months but is plagued by the lack of an adequate legal framework.“A quasi-judicial regulator is required in big cities as both consumers and builders may need protection,” Urban Development Minister S. Jaipal Reddy told reporters on the sidelines of an industry conference here Thursday. “We will set up a regulator in Delhi which would serve as a model for other states to emulate.” The body is likely to be set up in the next six months. “Land is a state subject so there cannot be an all-India authority. But we will encourage this plan while giving assistance to state governments,” Reddy said. The initiative comes in response to domestic and foreign investors raising concerns about malpractice. A lack of proper land titles, delays by builders in completing projects and poor construction are among the problems.According to an Ernst & Young estimate, the real estate market is growing at a rate of about 30% annually, calculated from the amount of sales as well as the value of unsold completed properties. Some 18 real estate and construction companies have opted for exchange listings in India and overseas markets since last August, raising about $4.4 billion in capital. For the 16 companies with IPOs, average listing gains were 71.5%.But unregulated growth has led to the central bank tightening lending rates so that banks go slow on credit to real estate projects. Credit to commercial real estate has risen 83.9% year on year. Housing credit witnessed growth of 32.3%, according to government statistics. With the economy chugging along at rates exceeding 9%, the potential for growth in the field is huge, attracting plenty of foreign investment. In the past 18 months, foreign investors have pumped in about $4.5 billion into real estate, observed Anshuman Magazine, chairman of CB Richard Ellis South Asia.“Now, with banks open to real estate funding, there are plenty of investors around with money to pump in. The issue is how to get good projects and ensure they are on schedule,” he said.But foreign investors warn that India cannot sustain present property prices and expect investment to continue. “Land prices in key markets in India now exceed even those in prime cities like Manhattan. Wages in the sector are also very high. That doesn’t correspond to the risk appetite for developing markets,” said Daniel MacEachron, managing director for U.S. real estate firm Hines. In American cities, the ratio of land price to construction price is often 40:60, whereas in India that number is 70:30, MacEachron noted. “If you cut corners on construction, in 20-30 years, most of the buildings that come up now will need to be demolished, creating a huge drag on India’s capital.” Inflated land prices are attributable to the huge supply-demand gap, and as the various projects under development across the country reach fruition, prices are bound to correct, industry analysts remarked. But if listed foreign firms enter the Indian real estate market, there’s more pressure to stay away from corrupt practices, even if these may be initiated by the local partners, who are seen as critical to navigating the complexities of the market. “If India wants public investment, fiscal regulation needs to be in place. There needs to be a clear structure for taxes and proper titles. There’s a fair bit of things to do,” said Jonathan Yap, CEO of the India Fund at Ascendas Property Fund Trustee in Singapore.