Calls revive for a sector regulator to stabilise the troubled realty business

Shukti Sarma 31 March 2011

Industry experts underline need for good governance by real estate firms; propose that REITs could ensure regulatory compliance and alleviate funding strains

With the real estate sector suffering from a multitude of problems, once again industry intermediaries are talking about the need for a sector regulator. With bloated prices, low off-take, funding difficulty and corporate governance issues, the real estate sector is attracting much negative publicity. Experts are proposing that the companies shift to a new model that will be transparent and cautious.

According to Apurva Muthalia, chief executive officer, IL&FS Milestone Core-Plus III, it’s time that the sector responds to allegations about a lack of transparency. A report by Motilal Oswal quotes Mr Muthalia as saying that a sector regulator would be a welcome move.

Despite improved corporate governance, the industry suffers from a lack of transparency with regard to land procurement, government approvals and end-buyer transaction. Reports of realty firms involved in scams have also led to an erosion of public confidence. “Given the shape, its size and scale, having an industry regulator for real estate will be beneficial,” the report says.

It may be recalled that Ratan Tata, the Tata group boss, spoke about the need for a real estate regulator a few months back.

A report by Ideas 1^st Research states that firms and companies that have a commendable record in corporate governance are likely to attract investments. “There have been a few Mumbai specific instances where companies to get undue financial gains, went overboard and added extra layers of FSI, by milking the generous parking lot, hospitality and rental housing schemes,” the report says. “While these can have a lasting impact on a few companies, we believe that other developers have been unduly penalized by across the board panic selling of the sector.”

The report states that the ideal companies are those which do not have corporate governance issues, have not misused FSI norms, have resilient business models and low debt-to-equity. Ideas 1^st Research says such untainted companies will gain appreciably in the next 1-3 years, when the disconnect between their fair value and the market price will exacerbate and become more visible.

Institutional and equity funding has emerged as a serious matter during the slowdown. Long gestation projects that used to attract most funds, have not shown significant returns and a number of investments were prematurely liquidated during the downturn. As a result, investors are now looking at safer and hassle-free smaller projects like residential projects and income-generating commercial assets with relatively moderate internal rates of return, characteristic of low-risk ventures.

Mr Muthalia has an optimistic long-term view of the sector, despite the recent slowdown. He feels that the stringent attitude by banks is a temporary issue, and that in the long run the sector will see considerable scaling up. FDI has gone up in recent years and post the downturn, most developers and firms are treading cautiously to avoid any further pitfalls.

The IL&FS Milestone Core CEO feels that a real estate investment trust (REIT) will prove to be a game changer, and that it would ensure both sector regulation and better returns for stake holders. A REIT provides a similar investment structure for real estate as in mutual funds for stocks.

Mr Muthalia says that this structure would ensure good exit options for real estate funds and provide office space developers with attractive financing options. REITs will also be beneficial for smaller investors and tenants. Moreover, it would ensure a strong degree of regulatory compliance for real estate projects.

But he agrees that India would have to wait a few years for REITs. “Indian industry is in a nascent stage for REIT and requires another 2-3 years to attain the critical mass. In the last few years the available commercial stock has also grown sharply, which bodes positively for successful introduction of the REIT model going forward.”

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