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ASIAVIEW: Indian permissions

Why a proposed housing bill in India could scare off institutional investors as easily as attract them. PERE Magazine December 2009- January 2010 issue

Jonathan Brasse

If you speak to Indian real estate professionals about how money is made during the country’s recent economic boom, it won’t be long before you hear about gaining planning permissions. But while these regulatory steps are part of a broader value-add for many Indian property investors, for some “cowboy” speculators, permissions are the name of the game.

There may be another layer of permissions to come, and this has some market participants concerned. Next month, a seven-chapter bill entitled The Real Estate (Regulation of Development) Act will be tabled before India’s parliament by the Ministry of Housing and Urban Poverty Alleviation.

Its purpose is to protect the interests of home buyers, to cut fraud and put the brakes on reckless “cowboys” interested only in making profits from gaining consents to build while masquerading as true developers.

PERE’s recent conversations with Indian market participants revealed a diversity of views on the proposed new law. Some sources suggested the bill would provide transparency and level the proverbial playing field. Others believed it could actually prove a boon to cowboy speculators.

The bill calls for housing promoters to first register their projects with an authority appointed by India’s central government. It also requires that they make available all granted registrations, as well as a host of other documents, to prospective buyers on demand. These things need to be done before any ground is broken. The intent of the proposed regulation is to control pricing and ensure developers do as promised.

 A common concern from some businesses and lobbying bodies is that the regulations are too onerous, that they duplicate other rules that are already in place and that they will actually make homes more expensive for the end user, not cheaper as the cost in delays caused by the regulation is passed on.

There is also concern the Act might present a further hindrance for institutional investors in a market already rife with regulatory contradiction, heavy bureaucracy and scope for corruption. The fear is that the Act does little to weed out the cowboys who “add value” simply by gaining the various zoning, planning and building consents dished out by the various central and regional authorities.

Put simply, by adding a further layer of permissions for developers, speculators may claim a further layer of value is created without any “real estate expertise” needed. Real estate investors either buy from these “permission getters” or they become embroiled in the system themselves. Surely neither option would be attractive to a manager responsible for institutional capital?
Opponents of the bill argue adding a further layer of regulation entices the flipping of a parcel of land by a so-called “promoter” – to use the Indian label – who has no intention of developing it. They say the rules would increase the scope for quick gains, while India’s end-user, the homebuyer, is no closer to occupation.

One firm told PERE that 80 percent of the value created in real estate in India is down to gaining permissions from authorities. “Real estate is not the act of developing,” he said, “It is the act of getting permissions.” Attaining permissions, he added, was how many real estate firms gained an “edge”.

But some GPs take a more benign view of the potential new regime. One said the country is always trying to keep a “balance of providing the appropriate safeguards and protection for customers against creating an excessive administration” but that “whatever framework is established, we will work within it”.

Another firm currently exploring the launch of an I ndian residential fund sees the introduction of a new regulatory regime as bringing “a level playing field” and increased transparency.

It could be that India will succeed at killing irresponsible speculation just by letting the economic correction do its work. International Monetary Fund figures released in October pin the country’s GDP growth back to 5.4 percent for 2009, down from 7.3 percent in 2008 and 9.4 percent in 2007. A stagnating economy could freeze out the cowboys as the demand for their land weakens. But India’s growth engine may not be sputtering for long. Government figures released last month show that India’s economy grew by 7.9 percent in the three months to September, up considerably on the 6.3 percent growth anticipated.
In 2009, institutional investors grew wary of entering the Indian market, where the route to a worthwhile exit was riddled with too much risk.
Throughout the year, PERE learned of a number of international fund managers that had either shelved or cancelled India real estate vehicles. If India’s headline figures decline institutional investors will want to see the risk associated with their investments reduced, not increased, or they will continue to stay clear.

Perhaps this proposed regulation will be the key. Transparency attracts institutional capital, but a market in which “permission getters” enrich themselves becomes less attractive. These are not the right partners for the institutional investor.