This article of mine first appeared in Mint, Nov 2017
The Minister of State for Housing and Urban Affairs, Mr Hardeep Singh Puri tore into the real estate sector this week citing that the “biggest fall-outs affecting the long-term growth of the real estate sector came from project delays, diversion of funds by builders, one-sided builder-buyer agreements, unfulfilled promises and lack of finances”. The intermediate step between the above factors and the Industry not doing well was the current state of crisis of confidence on the part of consumers stemming from possibly, the same factors that the Minister alluded to. Members of the Real Estate Industry can no longer sweep these reasons under the rug, since these have become big enough to threaten the viability of the sector itself, or at least a part of the sector.
So, what should the different players – Real Estate Developers, Government, Intermediaries (Brokers), Online portals and You, the Consumer – do differently, for this Sector to do well in the long term? “Doing well” does not only mean that people start buying more homes than today and prices start rising. Doing well would encompass a deep correction of practices and building up of a long-term confidence in consumers.
Government : This is the only entity in the entire eco-system which seems to have taken the bull by its horns and done the most progress in the past one year. Starting from DeMonetization to establishing the RERA to launching a slew of measures enabling affordable homes, the Central Government has indeed walked the talk in its contribution to repair the malaise. However, the Govt should have introspected that cash has come into this sector not because the Developers want it or because the consumers want it, but this has come largely from a historical demand of cash from the local authorities giving approvals for Projects. The maze of up to 50 approvals needed for every Project encourages this rent-seeking behavior, in turn encouraging mediocre Industry participants, and finally discouraging clean business houses from entering this Sector. State-wise variations in construction norms, occupancy certificates, joint development rules again discourage from large national players emerging in India. Since relationship with local authorities is sadly a critical success factor, we see most of the Developer companies expanding to 2-3 cities at the maximum. A true stream-lining and standardization of these on-the-ground processes and policies at state level and local municipal level will take this sector ahead by 10-20 years! Automating and making online all these processes is the only way forward. This will get a huge pushback from the ground in various states and various local bodies. But no Central Government has been as strong and as determined as the current one to make this happen and thereby, create the roadmap for a 25-year bull-run in real estate!
Real Estate Developers : The main protagonists in this Sector need to heed the lessons from other sectors which got regulation forced down their throats because of the excesses being committed in the sector (remember, Life Insurance?). No self-respecting entrepreneur wants to hear what the Minister of Housing has said last week about the Sector and in effect, about the players in this sector. In all other industries, Consumer is the king; what is good for the consumer is good for the business. Real estate sector is not being run on Mars! The same rules of business and long-term prudence should apply here too.
We need to fight on the basis of superior construction, smooth deliveries, after-sales service, great brands, and finally, superior & predictable returns to the Investors. In the process, we would have to engage with the Central Government on ways to solve our predicament of local approval policies. The great news is that there are quite a few real estate companies in India which are trying to run their businesses on sound business principles. It is the longer tail of companies which is trying to win through short-cuts, and these should be reined in urgently. RERA has fired the first salvo; if the local approval processes are cleaned up, many of these smaller companies would lose their dubious competitive advantage on their own and fall by the wayside. Till then, the prudent companies need to continue to walk the talk, supported by RERA, and grab share through robust business strategy and excellence in execution.
Brokers and Online portals : Brokers have a duty to be on the side of the consumer and to explain pros & cons of the deal. Most of the brokers in India are local brokers and continue to live in the same locality as the consumers do, after the deal is done. So no broker wants to lie to the consumer or pull a fast one, since he is going to meet the consumer daily in real life, after that. Still, the broker community has a bad name in the market, and should take pains to work on that. Possibly, it is the proverbial rotten apples who are spoiling the perception of the lot in the market. In any case, now that all Brokers have got registered under RERA, they should understand the implications of the same, and try to play by the rules.
We need to win business through hard work, more options shown, understanding clearly the needs of the consumers, and acting on behalf of the consumers. There is of course revenue pressure and the kitchen fire to be kept warm, but abiding by the above principles will also bring in more wealth in the long run.
Online portals have done a good job so far in de-mystifying the Real Estate market and making the “discovery” process for the consumers much easier. They need to continue to work to improve the quality of listings by verifying the listings more, and thereby giving the consumers a what-you-see-is-what-you-get experience.
Mr & Ms. Consumer : You have got the Central Government, the big daddy, looking out after you now, protecting you with the RERA clauses. Your money will be used in the Project you have bought into, you will get what you saw in the marketing brochures, no changes will be made in the Project Plan till 50% of your Building mates agree to that, you will get a penal interest if your Project is delayed. You need to start walking with a swagger, be more confident and assertive of your rights. You need to be more aware of what you are buying, the agreement you are signing, the long-term investment prospects, the best loans available. You need to help the Industry by selecting the right developer by looking at track records in construction, delays, quality and very importantly, in delivering-what-they-promised. The good Developers need your support in out-shining the rest, and in building a great Industry. This may be the largest investment decision you make – you owe a responsibility to your family that you have really thought through this.
Finally, you should stop thinking that your real estate investment is going to give you 50% p.a. returns. As our country’s economy matures and sectors develop, equity and real estate should continue to give you Fixed Deposit + 7-10% returns p.a.. There is no reason why any investment will give you super-normal returns, going forward. In fact, you should run away from anyone promising you >20% returns in any asset class.
Whew! That’s a long list of to-dos for all the constituents of the Real Estate market, for the sector to start doing great. However, the die has been cast and many of the above moves have begun already. The India Real Estate juggernaut is all set to roll. The next two decades might well be remembered as the golden era of Indian Real Estate! But we all have work to do before that!