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Sachin Sandhir, MD & country head, Royal Institution of Chartered Surveyors (RICS) India discusses the need for ethics and standardisation in the real estate sector
The value of commerce connected to the real estate industry is staggering. In the recent times, many companies viewed the global real estate market as a source for significant revenue potential.
A lot of them who entered did not even have the interests of the real estate developer or the consumer in mind. This meant that it was a free for all market without being morally bounded by any code of conduct or ethics.
How it started
It became a vicious circle, a resultant of non existence of any ethics or standardisation in this sector.
What we are witnessing today would not have happened with this magnitude and scale had this industry followed some ethics and standards.
While India has been somewhat insulated from the aftermath and our economy is still expected to grow at 6%, the booming Indian real estate industry, which has long been known for unscrupulous practices, has started to feel the aftermath of unsustainable practices by some industry players.
In the hunger for capturing a higher market share, the developers, much like the US brokers and bankers, have turned and twisted industry practices in their favour, assisted by the laxities in existing regulatory framework and other challenges such as lack of transparency as well as reporting.
As most of us are aware, the real estate market in India remains unorganised, fragmented and governed by archaic laws.
A certain section of developers have often been identified dealing with large amounts of unaccounted money, lacking transparency and would use unscrupulous means to acquire a variety of regulatory approvals.
Common areas where there is a lack of clarity include the number and size of projects being executed, the end use of customer advances and the nature of consolidated indebtedness and fund flows within the property group. Mushrooming of property players without a track record has exacerbated these issues.
Story continues below 
The absence of an industry regulatory body, lack of transparency in land bank titles, absence of proven and established standards for valuation and accounting of land and property have given rise to challenges pertaining to valuation of real estate companies and market value of land banks.
Under such an environment, developers had taken advantage to tweak project valuations in their favour in the past. As an example, let’s consider the following trend in valuation whereby the promoters of the project completely de-risk the business at net present value (NPV).
A group of companies raises money at the project conceptualisation stage and value it at NPV of the completed project to raise money to start land acquisition and the complete the project. Such practices have been harboured based on assumption that property prices will continue to increase.
It is believed that in this case the promoters transfer majority of the risk to a new set of investors by diluting a small minority stake, while retaining majority of the upside.
An example was companies showing the new land acquisitions in their land bank and raising money at the time when they just signed agreement for buying land having just paid the token money.
At this point, in absence of any check, the discounting rates used for calculation of the NPV widely vary to suit individual interests while they need to be very aggressive, as substantial portion of project risks remain.
In light of this example among many others, there is a crying need for standard techniques and procedures for property evaluation in India, that developers or real estate agents need to adopt to derive the current market value of a property.
Although some corrective measures have been initiated at various quarters, a lot still needs to be done.
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COMMENT
Excellent article on the present health of valuation system in our country. I am really looking forward to RICS launchin