Risky real estate business to get a clean makeover

Land aggregators now want to sell to large corporations because their payment is guaranteed. Buyers, too, are more comfortable dealing with these corporations than run-of-the-mill builders, notes Bhupesh Bhandari.

The unthinkable has happened. During Google's Great Online Shopping Festival last month, Tata Housing sold 200 houses across its various projects in the country. In the 2013 edition of the shop-fest, it had sold 50 houses.

Most Indians buy one home during their lifetime. Luckier ones might buy two. Every purchase is preceded by several visits to the site and a thousand enquiries about the builder.

Any broker will tell you that it takes at least three months for a home buyer to make up his mind.

That's because mistrust in builders is high. Will he run away with my life's savings? Will he deliver on time? Will he keep all the promises he made? Is the land title above board? Has he got all the clearances?

The buyer cannot be accused of being unnecessarily paranoid: errant builders have over the years committed every misdemeanor possible, which has shaken the buyer's confidence.
Several have vanished with the money collected from buyers. Most have delayed projects extensively. Almost all play around with the carpet area, the floor area and the super area to dupe buyers.

This way, they have steadily destroyed trust. Online property buying shows that some trust has started to take shape. Of course, the "Tata" in the company's name has helped. Still, this is a sign that things could be changing for the better in real estate.

The conventional real estate business model is pretty straightforward. A builder pools resources from several brokers to acquire the land and do the construction. In return, the brokers get a certain number of flats at a deep discount.

The brokers then pre-sell these flats - even before the builder could get all the clearances - and book their profits. Thus, it doesn't take deep pockets to get started in real estate. The rule of thumb in the Delhi market is that for an investment of Rs 100 crore all you need in your bank account is Rs 10 crore.

The slowdown of the last two years has put a spanner in the works. Brokers are reluctant to invest because buyers have decided to stay away. This has choked the cash flows of the builders.

Those who had taken debt for their projects have no money for the quarterly interest payments. Many builders have raised debt from private sources, at interest rates of up to 30 per cent, to repay the banks. Their projects are sure to become unviable.

Real estate has, thus, become highly capital intensive - only those with financial muscle will be left standing. A lot of the smaller builders could soon be driven out of business. Some will get acquired by the larger ones.

This is how large corporations are getting into the picture. Apart from Tata Housing, groups like Godrej, Mahindra and Bharti are preparing for a big play in real estate.

In a few years' time, there is the possibility that real estate may become like any other business. The returns may fall from 100 per cent now to 18-20 per cent, but the business will be predictable and transparent.

Land aggregators now want to sell to large corporations because their payment is guaranteed. Buyers, too, are more comfortable dealing with these corporations than run-of-the-mill builders.

These corporations had in the past stayed away from real estate because of the inadequate regulatory ecosystem.

Speed money had to be paid at every stage. A lot of the transactions happened in cash. Many found it hard to do business that way. But the sector may soon have a regulator. The United Progressive Alliance had introduced a Bill in Parliament to this effect, and now the Narendra Modi government wants to take it forward.

Builders had objected to the Bill on the grounds that the onus for all delays was put on them, while these are caused by the long time taken in obtaining the various permissions and clearances.

There is substance in their argument. It can take two to four years just to get the permission to develop barren land. Speed money can inflate costs by up to six or seven per cent.

Builders would recover these "investments" either by cutting corners or over-constructing. Incidents have come to light where builders added extra floors, although with permission from the authorities.

Not only was this unfair to the buyers who would now have to share the common infrastructure with more people than initially promised but also a security hazard because the foundation would now have to bear the extra load. The acquiescence of the bureaucrats in these malpractices has been noticed even by the courts.

There has been a visible lack of enthusiasm on the part of the states to make the various processes in real estate transparent and introduce time-bound clearances. That's because there is so much money at stake. It will take a bold man to clear the Augean stables.

Real estate, more than one study has found, is perceived as the most corrupt sector of the economy. However, one state is known to be seriously looking at how to make processes transparent: Haryana.

Other states could follow its example. There might be some gentle prodding from the Centre because of real estate's potential as a catalyst for economic growth.

One estimate suggests that it has a positive rub-off on as many as 290 other industries. It is also a large employer of unskilled and semi-skilled workers.

All this could change real estate forever.