Inside Unreal Estate book review: Realty check

INSIDE UNREAL Estate is a very timely book, written on a subject that has always been an enigma, as we all have our own pre-conceived notions of the sector without commensurate…

Inside Unreal Estate
Sushil Kumar Sayal
Pp 212

INSIDE UNREAL Estate is a very timely book, written on a subject that has always been an enigma, as we all have our own pre-conceived notions of the sector without commensurate knowledge of the ‘why’ of these underlying beliefs. Author Sushil Kumar Sayal writes from experience, having worked in the real estate sector, and presents a balanced picture in this book.

Sayal has made the book partly autobiographical, as he takes the reader through his experiences in different organisations. In India, real estate, gold and stocks are the three most fascinating investment options, with each one having its own share of scepticism, as the full story is rarely known. By taking us through the labyrinth of the real estate sector, Sayal lays before us the machinations that characterise its operations, making some very interesting revelations.

First, while real estate is definitely the most valuable asset for anyone, it has several pitfalls that buyers realise once they are into a transaction. Hence, there are precautions to be taken, as this sector does not operate in a transparent manner. For instance, bureaucrats play a major role in fostering corruption by delaying clearances. Further, as most sales are based on cash, the same malaise trickles into the sale of housing property, which portrays the builders in a poor light.

Second, related to the first, is the issue of black money. We have to pay partly in cash because the builder has done the same to acquire the land, which includes some bit of transitivity in reasoning, as everyone in the chain is indulging in such acts. Hence, when we hear of scams, the plot thickens and we can see the links between various parties that invariably involve government and bureaucracy.

The writer also explains how the infamous Campa Cola housing case was one where the developers, municipal authorities and bureaucrats were all involved. But ultimately, with the courts intervening, the buyers had to take the rap, as the demolitions proceeded and no punitive action was taken against any officials.

Third, the pricing issues are well elucidated here. The author explains the present situation where there is excess supply of flats that cannot be sold. In 2014, unsold stocks in Mumbai would have taken seven years to exhaust. The same for Delhi or Chennai would be around four years. Surprisingly, when supply overshoots demand, prices do not come down to the same extent that they had increased to when the projects were conceived.

The genesis of this mismatch can be traced to the financial crisis, even though we were not affected directly. In this period, as funds moved out of the stock market, money flowed to real estate, which caused major appreciation in property prices. But when interest rates were increased and salary income stagnated, demand fell. While cases of default were few, demand slack led to the build-up of a large inventory, which, in turn, led to higher cost financing that affected the solvency of the real estate companies.

The existence of this excess supply has other implications, as it has hit the industry quite hard and led to bank defaults or rollover of loans from banks to NBFCs to keep the account in order where higher rates are paid.
Four, Sayal warns us of the pitfalls when buying a house. The fine print is important and one should be careful of the size of the unit, as builders do deceive with different concepts like carpet area, built-up area, etc.

Fifth concerns the issue of delays, which is a common complaint, as customers face delays in procuring possession of their units. Delays are endemic and cannot be helped, as it takes time to get permissions and clearances from the state authorities even after paying bribes.

Interestingly, this is the starting point for malfeasance. Often, the builder buys at a high cost, and then collects money from the buyers. This way, they are able to match their purchase with sale to the customer. The problem comes on the buyer’s side, with the delays hurting them, as they have borrowed funds. When the builders are unable to match their purchase costs, they tend to flout rules and go for higher-than-permitted construction limits. Or they sell basement parking to offices or create space for shops in violation of rules, as was the case with the infamous Uphaar tragedy in New Delhi.

Sixth, all is not dark here and the author is positive about two aspects. The first is that when corporates are involved, business is more structured and clean. Here, he presents his own experiences in GE Shipping, where the company never compromised on bribes. The same holds for Godrej properties or Tata Housing. This has changed the perception of buyers who are now veering towards these names.

The second is that on the regulatory front, the real estate Bill, which has now been passed, will provide enough safeguards to the buyer. Also, the concept of REITs provides enough clean funding opportunities for companies, and the combination could help to make this business less murky.

His advice is to look at the background of the builder, the contract content in detail and check if the construction is smart. His preference is for corporate real estate projects, as they would tend to be more transparent. But in this opaque business, one still has to be doubly careful.

Madan Sabnavis is chief economist, CARE Ratings

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