Why Does Everybody Love to Hate the Indian Real Estate Sector?

Date : Nov 21, 2014

The Ugly Caricature of Indian Real Estate as an Industry Controlled by Corrupt Despots is Naïve, Hopelessly Outdated and Extremely Damaging, Says Anuj Puri, Chairman & Country Head, JLL India

Over the years, Indian real estate has been a seemingly limitless source of negative hype. Scams, controversies, rumblings about delayed projects, agitations by consumers and debates about the over-/under-regulation of the real estate sector have all provided ready cannon fodder for countless publications, internet forums and assorted activists. In fact, the real estate sector has drawn more media flak and outrage than any other industry in India.

This tempts the question - why is Indian real estate a sector that everyone loves to hate? It is a valid question, and one that many corporate heads, industrialists and big-ticket investors have asked me during my business travels abroad. The question - or variants of it - is sometimes asked in an amused and otherwise unconcerned manner, but more often with real interest tinged with worry. After all, almost everyone with a healthy investor instinct has or intends to have a piece of the massive Indian growth story, and any kind of participation in it invariably involves real estate.

There is no easy answer to this question, which is in any case a rather unfair one to begin with. Nevertheless, the generalized negativity about the Indian real estate sector that has been created in the public mind is a reality.

I usually counter the question with another question - "What have you read or heard about it that makes you think so?" My intention is not to be evasive, but to understand whether the question comes from a real understanding of the Indian real estate industry and its complexities, or whether it's just a knee-jerk reaction to yet another hyped-up media report. Very often, the questioner is genuinely informed and has been following media stories about the sector quite closely, but no longer knows what to believe.

This is understandable, and I invariably ask my questioners if they have enough time for a detailed answer. After all, this confusion is the result of a war of opinion that has been waged against the Indian real estate sector for quite a while. The controversy is made even more complex by the fact that it is being actively encouraged by people who have no interest in presenting a more realistic picture of the Indian real estate industry.

What Lies Beneath  

Real estate is something that lives and breathes at the very core of every Indian's being, not least of all because it is considered the most important manifestation of success, wealth and power. Unfortunately, the fact that real estate transmits such signals in India has made it an object of not only admiration and desire, but also of something close to fear. While fear is invariably the result of a lack of understanding, it is nonetheless a very real force on the ground.

Naturally, any environment involving fear also needs villains. It is almost axiomatic that Indian real estate developers are the designated 'bad guys' - the greedy perpetrators of crimes against the helpless common man, wielding their wealth and political clout with impunity, with the sole intention of turning a profit and furthering their own agenda. 

Such a stage-setting lends itself rather well to a protracted public drama involving the tantalizing element of good battling evil; of victims versus perpetrators. The epic battle of the Mahabharata, as it were, translated into present-day brick and mortar. Such a drama is readily absorbed by Indians almost by default, but is more damaging is the fact that it is also exotically interesting to foreign palates.

Market watchers in countries that India has or is seeking to have economic ties cannot but notice the bad press that Indian real estate is getting. This is how the unfair and wildly inaccurate blacks and whites of the Indian condition as depicted by 'Slumdog Millionaire', become superimposed on an industry which is - if fact be told - the backbone of the country's economy.

If we take a closer look at Indian real estate today, there is no escaping how important it is:

- The Indian real estate sector generated employment for over 7 million people across the country last year.

- Real estate is the most single-important consideration for any foreign company eyeing Indian shores to launch operations and create countless more jobs.

- Real estate's overall contribution to India's GDP was estimated at about 6% in 2013.

- Real estate constantly cross-fertilizes other industries like cement, steel, paint, chemicals, tiles, fixtures and fittings.

The scams that have so seriously impacted the image and credibility of Indian real estate in the past were not the result of a unified developer nexus, but the work of individual players whose crimes have now been attributed to the industry at large. Should we not also consider how some of India's biggest real estate developers took incredible risks to open up entire new cities to add to the country's growth?

The urbanization that is the focal point of India's economic growth hinges on the growth of its cities, and therefore on the products that real estate developers deliver. Wherever we see new cities rise from obscurity into prominence, there are developers restructuring skylines, building homes for population and office spaces for them to work in.

No Indian's heart can help but swell with pride as they perceive a city like Mumbai, Gurgaon or Bangalore from the air as their planes prepare to land there. What gorgeous evidence of progress is displayed in the tapestry of skyscrapers jostling each other for space, road networks spreading out to connect new areas to existing ones, and office and manufacturing complexes providing the economic nerve-centres.

This is the work of real estate developers, but their contributions towards weaving the very fabric of our cities is overshadowed by the spectre of antipathy that has been generated against the entire real estate sector. We must try to understand the basis for this antipathy before we can explain it.

At the end of the day, real estate is a business like any other, and no industry can claim to be free of flaws and anomalies. Almost every day, we hear about delayed projects, deviations from project quality and configurations, and additional payments being charged for changes in apartment areas. We read about how real estate is the first port of call for politicians looking to off-load their unaccounted funds, about developers who have launched projects on land which has not been cleared for development, and how others have been pulled up for flouting FSI and environmental norms.

Such things do occur, and the developers who practice business in such a manner must be held responsible and brought to book. However, these developers do not represent the industry as a whole - they are anomalies that must be eradicated, not symptoms of an industry-spanning pandemic of manipulation and wrongdoing.

A Closer Look at Project Delays  

Most of the extensively-reported incidents of delayed project completion are often not the result of malpractice, but of a flawed regulatory environment. It is true that some unscrupulous smaller developers intentionally undertake a slower pace of construction if sales in the project are sluggish or a larger part of the project is unsold. However, in most of the cases being touted as evidence of a corrupt industry, delays have happened because the authorities have not granted timely approvals, and the morass of bureaucratic red tape that developers have to navigate for every project.

Before a project is officially launched on the market and offered to buyers, there are myriad permissions that a developer needs to obtain from the state and central agencies and ministries. This not only leads to delays, but also cost escalations.

Like in any other business, the longer raw material is held, the higher is the holding cost - which, in addition to interest costs in case of borrowed funds, causes an increase in the overall price of the finished product. In real estate, land is the basic raw material for development, with construction materials being the variable costs. The longer a developer has to hold his land without getting any receipts through the sale of proposed apartments, the higher his project costs escalate.

The time consumed in obtaining all approvals adds to the total time expended in completing and delivering the project as per the promised times. Obtaining the 57-odd permissions to begin construction of a project can take as much as two years. During this time, the cost of acquisition or even just holding the land for a project rises. Builders already have to cover external and internal development charges, license costs and often charges for change of land use from various departments, which have also risen. Cost of construction has gone up by more than 35%, as well.

Again, if we consider changes in the apartment area or unexpected price increases after consumers have purchased properties from a developer, these too often occur because changes in project plans were required by the authorities before they issue an approval. There are many examples of how abrupt changes in regulations governing real estate development have worked against both developers and real estate buyers.

To cite just one - a couple of years ago, there were revisions made in the DCR regulations for the Mumbai Metropolitan Region, which simultaneously road-blocked innumerable projects and added to overall development costs by about 15%, including the fungible premium builders had to pay for the additional 35% FSI option. The fact that this resulted in a cumulative 20% hike in construction cost and led to price increases across most projects in MMR is just one aspect of the story.

The other fallout was that developers had to re-work the specifications of their upcoming as well as on-going unapproved projects, which led to significant project delays. Apart from an exacerbated cash-crunch, developers also had to contend with the ire of their buyers.

Likewise, while certain instances of faulty land acquisition or title disputes are endemic to fly-by-night operators, it is also true that cases such as in the Noida Extension, land acquisition issues have been legally established to be the fault of the involved authorities. But as always, the blame has been conveniently laid at the feet of a vaguely-defined builder nexus.

The Indian Real Estate Sector is Changing  

The ugly caricature of Indian real estate as an industry controlled by corrupt despots is naïve, hopelessly outdated and extremely damaging to the country's global image as a thriving economic dynamo. The fly-by-night players who were responsible for this image are still around, but their ranks are rapidly decreasing. In the meantime, it makes absolutely no sense to paint every real estate developer with the same brush. Most large listed real estate developers in India today have wholeheartedly embraced the mantra of complete transparency.

They are selling their products on the basis of declared carpet area, firmly refuse any hint of black money as part of their sales transactions, and do everything in their power to deliver their products on time. They are also fighting hard to correct the structural deficiencies of the overall regulatory system - not only because their businesses are suffering on account of conflicting rules and regulations, but because they are being held accountable for factors which are beyond their control. They take their roles as industry stakeholders very seriously, and are among the loudest voices in the outcry for positive change at a policy and regulatory level.

Common to all these players is a vision of Indian real estate as a level playing field in which the business of real estate development and consumption can be carried out in a rational, transparent and uniformly beneficial manner. 

This is a long and detailed counter-argument to offer to a simple question - why does everyone love to hate Indian real estate? And for this reason, I only answer it if the question comes from someone who is willing to accept a balanced response, no matter how long it takes to give.

About JLL India  

JLL is India's premier and largest professional services firm specializing in real estate. With an extensive geographic footprint across 11 cities (Ahmedabad, Delhi, Mumbai, Bangalore, Pune, Chennai, Hyderabad, Kolkata, Kochi, Chandigarh and Coimbatore) and a staff strength of over 7000, the firm provides investors, developers, local corporates and multinational companies with a comprehensive range of services including research, analytics, consultancy, transactions, project and development services, integrated facility management, property and asset management, sustainability, industrial, capital markets, residential, hotels, health care, senior living, education and retail advisory. The firm was named the Best Property Consultancy in India at the International Property Awards Asia Pacific 2014-15. For further information,

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