India: Global Realty Industry – A distant dream?!

Last Updated: 21 January 2003
Article by Raghavachari Nambi

"In order to be class of your own, you need to excel over others."

Introduction:

‘Roti, kapda and makaan’ for all has been the mantra of our state and its leaders from the days of our independence. The housing shortage still looms large on our faces despite having lived in independent India for over five decades now. Roughly, 75% of urban population is still living in slums / juggis / jhopdis and ramshackle dens. According to a recent estimate, we still need about

200 million houses towards our cherished goal of ‘home for all.’

In most of the foreign countries like Australia, New Zealand, U.S.A. and Europe, the Indian immigrants are able to buy a house within 2-3 years of their stay. The situation in India is different.

Due to heavy investments required in the sector, the industry is now allowed FDI in integrated townships. Are our builders ready for such a situation? It is proposed to analyse our preparedness to attract foreign capital in this sector.

Technocracy & Corporate governance

Most of the builders are not technocrats and they have become builders by sheer accident or due to their good fortunes. In order to build up credibility amongst investors and financial institutions, a minimum qualification must be prescribed. Corporatisation can improve the industry by attracting foreign capital (resource gap USD 20 billions). The entry of MNCs, FDIs and joint ventures are likely to catalyse developments in this direction.

Till the entry of Larsen & Toubro, Great Eastern Shipping, Unitech and industrial houses such as Godrej, Rahejas, Tatas and Mahindras, not many public limited companies were on the arena. This is mainly attributable to Land ceiling laws prevailing at that point in time. Even now many states have not taken steps to scrap the land ceiling laws. The Confederation of Real Estate Developers Association of India (CREDAI) has recently released a self-imposed 28-point code of conduct to be adopted by its members to establish transparency and fair dealings between developers, promoters and builders with their customers. The code covers everything right from the title of the sale deed to quality of construction, the components of costs and description of amenities.

Market Infrastructure - Legal Shackles:

Despite the fact that the construction industry is the second largest in this country next only to agriculture in terms of employment and size of operations, the industry is exposed to draconian laws, which await reforms with changing times. The doing away with the classification of lands and uniformity in regulation of multi storeyed buildings in a proactive way will add to the land bank. Added to this, the high stamp duties in some states act as deterrent to the promotion of the industry on balanced lines. The Ownership Apartment Acts passed by most of the states have, to some extent, redressed the problem of the investors. Still the high land costs, steep hike in registration charges and spiraling cost of building materials are making the ownership of a house beyond the reach of a common man. The computerisation of Land records and the registration process under the Act would go a long way in scientific management of natural resources.

Transparency

It is necessary that transparency be brought about in real estate development in the interests of the developer as well as the purchaser. The prescribed code of conduct recommends that all issues should be clearly spelt out in the flat purchasers agreement and there should be no room for surprises and unexpected add-ons in terms of costs and the purchaser be allowed to peruse all relevant documents and sanctions at the time of signing the agreement. The code further adds that the price of the premises should not be enhanced once the agreement for sale is executed unless the escalation clause has been mutually agreed upon at the time of signing the agreement. The saleable area should have various components and these have been detailed in the code suggested. The urgent need is to improve the time of delivery, transfer with clear legal title, deliver at agreed prices and to improve the quality of construction in conformity with the National Building Code of India, 1970.

Innovation/Technologies

The industry has been witnessing continuous upgradation of technology in the last few years. The typical distribution cost (in %) for an apartment is Land (20%), Foundation (15%), Structure with walls (15%), Plastering / painting (15%), Woodwork (10%), Flooring / CP / Sanitary (20%), Statutory fees / registration (5%). As far as the interiors are concerned, one can spare a significant amount of immediate expense under the heads of woodwork, furnishing and flooring material and fittings upto 50% of the post construction costs. The use of CAD / CAM, project management software, web marketing / e-tailing of properties etc are still in their nascent stages of development.

Market trends

The retail sector has started following international norms atleast in terms of the scale and format combined with local consumer ground realities. The broad objectives pursued can be classified as under:

  • Continuous brand building and brand recognition.
  • Providing value for money product.
  • Providing unique consumer experience (shopping centers, department stores, food and shopping combined etc).
  • Allowing consumers to participate in global experience whilst retaining distinct local flavour.
  • Ensuring a consistent long-term cash flow for shareholders and thereby ensuring the success of the business. The success stories so far revolve around the following attributes.

  • Judicious location - adequate footpath and car parking.
  • Tenant mix - room for wide range of complimentary occupiers.
  • Consumer friendly design, which allows free circulation within the mall.
  • Highest management quality.
  • Economic pricing - model based on flexibility of operation and turnover.

The performance of retail property would be linked to its ability to attract consumers consistently and to induce them to spend money.

Quality Standards

Changing attitudes and competition in a global market have focused management attention on quality. Construction firms account for a small fraction of ISO 9000 companies world-wide. The standards incorporate basic quality management principles that are similar for most industries (in fact the standards are remarkably generic). The introduction of ISO 9000 in a construction company may often be difficult because the management of the company will be open to scrutiny and criticism, which is often difficult for management to endure.

Regulatory Exchange and an Apex Body – need of the hour

There is an urgent need to establish a property exchange like the stock exchange where sale and transfer of property can be achieved. Centralising the knowledge and information of available real estate could help in better sales as this information could percolate to all levels in the industry. Despite its role as an economic barometer for the country, largest employment generator and largest in terms of industry size, the industry does not have an independent regulatory authority of the like of SEBI to promote, regulate, monitor and supervise, control and punish the offenders. There is also dearth of training institutions for workers who are forced to take up employment overseas on comparatively low wages due to poor skills.

Service Providers

The Estate Agent Association of India or similar recognised institutions should be authorised to issue a Diploma in estate agency for successful candidates. The industry must ensure that the rates and commissions prescribed by the Estate Agents Association of India alone is honoured by the builders / promoters / developers. Builders / promoters and developers can follow similar system. The architects / interior decorators must be qualified for the services they provide and shall be accredited members of the professional bodies to which they belong. The legal profession is already on the job of upgrading the skills of their members in providing qualitative services to the society, which interalia includes granting permission to foreign legal firms to open offices in India.

Conclusion

As can be seen from the above, we have just begun and the road is still long to traverse. As we gather more experience with cross border cultures, international technology, expertise and experience, the market would mature and the customers would benefit. The need is to galvanise people into a movement. Otherwise our grand vision of building organisations of the likes of Insituforin Technologies Inc., Bechtel, Mitsubishi, Wimpey and Waters would be a distant dream. This is a stupendous task calling for a movement of all concerned for achieving the cherished goal of globalising the industry.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

© Copyrights reserved by RSN & Associates, Chartered Accountants, Chennai, India.

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