Reality check on realty

Updated: Nov 28 2006, 08:37am hrs
Not a day passes without some industry association or investment firm projecting a continuing realty boom in India. A frequently quoted study estimates the current housing shortage at 20 million units, while others like Assocham project a demand growth of 80 million units for lower and lower-middle income people. The projections may well be true. But does that justify the runaway boom in property prices Or the reckless ramping up of realty company shares to enable developers and construction companies to raise several thousand crores of public money at stratospheric premiums Note that foreign research firms and property brokers, who are hyping up the shortage, may be out of touch with Indian reality. For instance, this touted demand may vanish when prices spiral out of reach as ordinary Indians would prefer to continue in cramped joint-family set-ups. But many middle-class home-owners will still be hurt as they end up making hefty mortgage payments on depreciated property;mutual funds, which are chasing over-priced realty, and construction companies will report a big dip in returns. All this can be politically damaging. So, the government can stand by and watch, or initiate measures to rein in prices.

Scrapping the Urban Land Ceiling Act as well as restrictive rent-control regulations in Maharashtra alone will go a long way towards forcing a reality check; the Congress party can surely prod the state leadership into action. The Securities & Exchange Board of India (Sebi) also needs to initiate quick action to protect ordinary investors, as disclosures alone are inadequate. Sebis own clarifications suggest that ordinary investors wont be able to assess land holding and valuation claims in the prospectus of property firms, not to mention the damaging consequences of protracted litigationa big risk factor for Indias developers. Further, the demolition drive in Delhi shows that even large companies and accounting firms dont have the expertise to evaluate the validity of developers claims. With 80 to 100 realty firms planning to raise nearly $4 billion in the coming months, Sebi must quickly introduce IPO gradings in order to weed out dubious issues and ensure that prospectuses are fully vetted by independent experts. The efficacy of the grading process has been established by an 11-company pilot project. Although realty firms and their investment bankers will lobby against the move, Sebi must remember that investor protection is its primary mandate.