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http://www.moneycontrol.com/news/real-estate/real-estate-firms-should-not-be-listed-ingovern39s-shriram_769045.html#toptag 

Mon, Oct 15, 2012 at 13:56

Real estate firms should not be listed: InGovern`s Shriram

Shriram Subramanian InGovern Research

The ongoing DLF - Vadra controversy has brought to light the blatant transgressions that real estate

companies - listed and un-listed - adopt in India. Real estate companies have never been known to be high on

transparency and corporate governance. This is just a reflection of the deeper morass in the real estate sector,which is by far the largest and most valuable asset class in India. It is not the marketplace that decides the

fortunes of real estate companies, but the builder-politician nexus that picks out the winners in this sector.

Realty sector shouldn’t be listed as the companies don’t need shareholder funds, nor will they ever make anymoney for investors. This is because:

(a) The sector depends a lot on black money.

(b) There is little transparency in land values or construction costs.

(c) Politicians and bureaucrats have lot of discretionary power in deciding winners and losers.

(d) Companies need to pay speed money to get all approvals for all stages of project development.

Minority investors are at the very end of the food chain for returns. Not many listed real estate company has

given decent returns to shareholders post listing. Aggrieved minority shareholders have little recourse, given

the usually high promoter shareholding levels in listed real estate companies.

Organized retailing and the huge housing demand, supported by the liquidity boom from 2003 to 2008, led to

huge increase in land prices and real estate values and most real estate companies had a great run. Banksincreased their lending limits to the sector. Private equity investors and other institutional investors also rode

on the boom with huge investment in real estate IPOs. Retail investors joined the bandwagon expecting

similar returns. Valuations were done purely on land bank valuations, a measure hugely prone to conjectures.The 2008 crash led to a dramatic relook and reversal of returns for shareholders of real estate companies.

The post 2008 period made institutional investors and banks more cautious while taking positions in the sector

Instead of directly funding the companies, banks boxed their funds into specific projects where loans aregiven to special purpose vehicles (SPVs) of individual projects. Even private equity and real estate funds

invested in these SPVs in form of convertible debts or convertible equity instruments with IRRs in excess of 

20-25%. The funding of these SPVs is based on assessment of individual project risks, and the cash inflowsand outflows from the SPV are closely monitored. So, returns to minority investors in the listed companies

would accrue only after the banks and investors at project level have taken their share. Also, the maze of 

unlisted subsidiaries makes it easy for promoters to extract value through other means.

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Other stakeholders consumers and employees don’t have a high opinion of real estate companies. The casesfiled in the Competition Commission of India (CCI) by consumers of DLF are just a tip of the iceberg. The

service record of most real estate companies is also disappointing. Without any specific regulator or industry

ombudsmen to regulate industry practices, real estate companies routinely break both the spirit and letter of contracts with home buyers, as these contracts are heavily loaded in favor of the companies. Employees are

usually subcontractors and the labour practices at construction sites are highly questionable.

Given that funding is happening at project level and real estate companies do not rank high on accountability

and transparency, there is no case for real estate companies to be listed. There is a need for dramatic change inthe entire real estate sector if minority shareholders need to be rewarded.

(a) Land records and transactions should be digitized and values should be made publicly available.

(b) Discretionary powers of politicians and bureaucrats on allocation and de-allocation of land need to be

taken away.

(c) Land disputes and property deals should be speedily disposed in courts.

(d) A real estate regulator who monitors and regulates builders needs to be set up.

But then, wouldn’t that be utopia!

The writer is Founder and Managing Director, InGovern Research Services, a company that advises

institutional investors on corporate governance matters.