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Corporatisation of the Indian Real Estate Sector: Sushil Kumar Sayal, CEO, Bharti Realty

Bharti-Realty

The following is the report by Sushil Kumar Sayal is the author of ‘Inside unreal Estate’ and MD & CEO, Bharti Realty

Investment in land and housing in India was always considered as the safest and the best option to make your money grow. Affluent people have long been making fortunes from the real estate sector. During the last decade starting 2003, Indian real estate prices saw an unprecedented rise, not only in metro cities but also in tier 2 & 3 cities as well. Growth remained sustained for quite a while. Riding on the economic boom and funding from banks, more and more people were thinking about owning their dream houses. Anticipating the surging demand ahead, all real estate developers launched projects beyond their capacity.

Buoyed by the huge growth in this industry, fly by night builders, who once used to be contractors and sub-contractors for the reputed builders also jumped into the sector to try their luck. While some have stayed in the business and have constructed many residential buildings, others who merely invested money in a piece of land or two, built a few apartments, made money and disappeared from the scene.

This continued for the next 5 years fuelled by a booming economy, increased salaries and affordable home loan rates. In September 2008, the collapse of Lehman Brothers gripped the world’s economy. Rising home costs, increased home loan rates and overall uncertainty of the global financial markets brought in a phase of slow growth in the real estate sector

The developer community was obviously not prepared for such a slowdown. The ensuing crisis led to a funding crunch and the developers struggled to complete their projects. This was compounded by poor project management, high level of inflation and escalating construction costs along with the lack of commitment from the developers. No wonder buyers lost faith on the developer community.

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Today, we are witnessing a huge trust deficit between builders and buyers. Now the perception about most builders is that they are out to dupe buyers of their hard-earned money. The loss of faith isn’t an overnight phenomenon though. It has taken place over a period of time. Developers in the past have launched massive townships and projects by the dozen, and often used customer advances to buy land or launch other projects, delaying construction by months and even years.

The need of the hour is to overcome the negative perception and regain the lost trust among the buyers community.

Over the last few years, the government has been trying to cleanse the system to help the sector to regain its lost status. The Real Estate (Regulation and Development) Bill 2015, which is all set to become a law very soon is a pioneering initiative to protect the interest of consumers, promote fair play in real estate transactions and ensure timely execution of projects. The Bill provides for a uniform regulatory environment to ensure speedy adjudication of disputes and orderly growth of the sector. It is expected to boost both domestic and foreign investment in the sector and help the Government to realize its avowed objective of ' Housing for All'. Further it will help to curb irregularities, delayed delivery of flats and office space.

The Bill also seeks to put the lid on the unsavoury practices prevalent in the sector. It clearly says that a builder cannot launch a product without all the requisite clearances; there needs to be standard definitions of super area, carpet area, etc; there should be a model sale-purchase agreement; and all brokers need to register with the regulator. It also says that builders need to keep 70 per cent of the money collected from sales in an escrow account, which can be used for developing the project and not diverted elsewhere.

In spite the best efforts of the Government, the sector is still going through a tough phase right now. Debt-laden developers are still struggling with slow sales, stalled projects, delayed construction and huge pile up of unsold inventory despite big marketing push. The lack of buyer confidence in developers has been impacting demand. Today the situation is that the projects are ready to deliver but the buyers are afraid to invest money in the projects.

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The next couple of years are going to be critical for the sectors revival. Big corporates like Tata, Bharti, Godrej and Mahindra already present in the sector and the ones likely to enter the sector in future are likely to play a big role in its resurrection.

People are showing great deal of trust in these developers, as these companies already carry strong brand equity in their respective sectors and already won consumer trust by strictly following ethical practices. The presence of these players is likely to change the dynamics of the industry in a slow but steady fashion. The market structure of the industry, which continues to be highly fragmented and unorganised too is going to change for the better.

With the entry of large corporates, it is also possible that real estate will finally receive the industry status it has been demanding for years. This will help it access funds from banks at a lower rate of interest. The sector actually needs larger players with a holistic view of development to win buyers confidence. Builders with a narrow world view only add to the mess.

This is why the entry of large corporations and the impending new law – Real Estate (Regulation and Development) Bill 2015 need to be welcomed.

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