|
|
|
|
Sachin Sandhir, MD & Country Head, RICS India, stresses on the significance of setting up and upholding the highest standards of excellence and integrity in the real estate and construction industry in India
Before talking about the need for standards in the real estate and construction industry, let’s try and understand how the US subprime crisis, which triggered off the global economic crisis, originated.
It started with a customer applying for a house loan through a mortgage broker and receiving approval in spite of being ineligible for the mortgage. The customer lacked the initial money required for down payment and was unsure of keeping up with regular EMIs.
The broker assured him that as house prices always go up, there was no need for a down payment. He was offered an adjustable rate mortgage with very low interest rate upfront without any income check or verifications.
The customer was happy and so was the broker as the latter didn’t really care about the customer’ ability to pay back the loan.
All he was concerned about was earning his brokerage.
While bankers extended credit with many such house loans, they realised these were bad loans which needed to be sold and relieved from the balance sheet.
They reached out to the investment bankers who created a security with these mortgages as collateral, called CDO (Collateralised Debt Obligations).
A number of these bad loans were pooled together (assuming that all loans would not default at the same time) and sold to investors who bought these on the presumption that they would get their returns as the mortgages get paid.
Story continues below 
Going by the market sentiment that housing prices always go up, the investors like insurance companies and banks felt no need to worry.
In reality no one truly understood the underlying collateral and worked on the assumption that someone else had done the job. Investors relied on the credit ratings of the rating agency which interestingly is paid by the investment banks.
And then reality struck. Customers who couldn’t afford to pay the EMIs actually did not pay up. This resulted in huge bad debts and losses which affected everyone in the financial services sector. People realised that the assumption ‘housing prices always go up’ was a bad one. The banks learnt it the hard way.
Clearly, everyone in the mortgage industry had their own agenda. In their quest to become the biggest bank and gather higher returns, a nexus of entities created a financial mess, which shook the global financial system and plunged economies into recession.
Are there any learning’s for the Indian real estate and construction industry here?
While India has been somewhat insulated from the aftermath and our economy is still expected to grow at 6.5%, the booming Indian real estate industry, long known for unscrupulous practices, has started to feel the consequences of unsustainable practices of a few industry players.
In their hunger for capturing a higher market share, the developers, much like the US brokers and bankers, turned and twisted industry practices in their favour, assisted by the laxities in the existing regulatory framework and other challenges such as lack of transparency and reporting.
Bring in clarity
As most of us are aware, the real estate market in India is unorganised, fragmented and governed by archaic laws.
Some developers have also often been known to deal with large amounts of unaccounted money, obviating transparency and using unscrupulous means to acquire a variety of regulatory approvals.
| Articles | |
 |
Site Map
 |
 |
 |
 |
|  |
COMMENT
Comment on this article