Wednesday, July 23, 2008

For better realty transparency

Shobhana Subramanian of Business Standard contrasts the real estate market rules in India / China leaning on CRISIL and CLSA reports. She finds Indian laws on real estate developers way too lenient. I found the piece pretty insightful. Excerpts –

- In China, mortgage payments have to be utilized for a specific project; Indian builders divert customer advances for other purposes as well (say, acquisition of new land).

- In China, developers must develop the land acquired within a certain time frame, failing which the appreciation in the value of the land is taxed. Back home there's really no hurry to start any construction, the land can simply lie vacant and can even be resold at premium.

- Chinese developers hold relatively small land banks; some estimates put it to be sufficient for development over a 4- to 10-year period, depending on growth targets; in India developers are estimated to be holding on to land banks for anywhere between 8 and 15 years (of course, various Indian regulatory approvals can take years - goes the argument)

- The difference in the amount of debt that Indian and Chinese players have on their books is striking. The average gearing for listed Chinese developers, CLSA reckons, is 50-60 per cent with only a couple of them at 100 per cent. For companies back home, the average would be closer to 100 per cent with a couple of firms indulging themselves beyond that.

- In India, sales and profits of realty firms and recognised well before the entire project is completed. That just won't do in China; revenues there flow into the books only after the project has been completed and the property handed over to the buyers.

Here is another case for toning down regulations. Or even Housing Finance Companies (HFC) can also help if they choose to finance buyers in projects only when they are ready for occupancy and possession. Much better if they insist the HFC be made a (confirming) party to the transaction so that even the end-use of funds is validated.


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