Bottom Line: There will be property revaluation in India post the regulatory regime where supply will also be constrained in the short term.
Immediately after the Rajya Sabha passed the Real Estate Regulator Bill and the stocks of most of the leading developers started showing instant upward movement, Akshat Soni, a retired bank employee, was smiling. For nearly four years he lived with the pain of this realization that he wasted his lifetime savings in the real estate stocks. He finally had his reasons to smile now. There would be many like him who would have sighed a relief that now with a regulator there would be some revaluation, leading to better returns over either with the property or the real estate stocks.
The homebuyers had their own query as to whether the home would be cheaper if there is a level playing field that checks the artificial price hike. There were more questions than answers vis-à-vis the probability of the realty stocks paying the investors back for having been invested with reputed builders. Soni nevertheless has a query – will the revaluation of real estate stocks post the regulatory regime be realistic and not temporary hype?
“As I understand as a layman we are entering into a regulatory regime where the serious players will be differentiated from the non-serious builders. It simply means that there should be revaluation of the stock portfolios of listed real estate developers. Already the stock movement immediately after the Bill was passed shows what the trust factor alone can do. It was the same lack of trust that was the primary cause of these stocks nose diving,” Soni maintains.
Akanksha Sharma, another homebuyer in Mumbai, has an altogether different query. She wants to know that to what extent this revaluation will be confined to stocks and to what extent the reputed developers will gain or lose with brand premium since a level playing field is being created. In other words, will the regulator create a level playing field to the extent that the revaluation would bring every developer at par? Will there be no biggies and no pushovers in the business?
“We pay a very high premium to the reputed developers only because they deliver on time and commitments are fulfilled. If the regulator ensures that every one maintains transparency and fair trade practices and delivers on time, then I think brand premium should not be high with the bigger players. At the end of it, cost of their transparency and fair practices is borne by common homebuyers like us,” she observes.
Quick bytes
- Apprehension in the market about real estate revaluation
- Realty stocks may gain in revaluation
- Revaluation because it will be easy to identify clean and clear projects
- Property prices may go up with revaluation in the secondary market
Developers’ take
Devang Trivedi, Managing Director, Progressive Group agrees that there are significant changes on the cards and revaluation is inevitable. But he maintains that the stock market movement has nothing to do with the revaluation. Eventually the regulator will work good for organized players in the market and vice versa against the non-organized ones.
“In the final analysis, there will be good for customers as there will be more transparency and justice for them. As far as revaluation is concerned, I feel the prices will increase in short term but it will work better for all parties concerned in the long term prospects,” says Trivedi.
JC Sharma, Vice Chairman & Managing Director of Sobha Limited believes the companies having good financial capabilities, good delivery track record and greater level of transparency will gain brand premium vis-à-vis those who do not have these positive attributes. According to him, the investors will be able to differentiate the stocks based on these attributes. Needless to stress that the provisions of RERA will force realty players to come out clean on their act. It will prove good for the overall health of the sector and will help infuse the much needed trust and respectability into it.
“I tend to look at the positives. In the backdrop of the Bill, I do agree that with increased disclosures, higher transparencies, the companies having corporate structures and better disclosure norms in place will definitely attract more attention from buyers. Such companies are already placed beneficially in comparison to those real estate players with lesser level of competencies,” says Sharma.
Cost & benefit
Devina Ghildial, Managing Director of RICS South Asia, believes that in near term, despite some stocks rallying on the announcement of the bill being passed, there may not be a significant impact. Developers will have to set aside funds; comply with registrations before sale; pay penalties on account of delays; provide project disclosures and adhere to strict delivery schedules, which will result in a higher regulatory cost for them initially. Sound corporate governance in realty businesses is more than just simple compliance with ‘universal standards’. Businesses that implement and advocate good business practice will continue to enjoy stronger brand equity, as they do even today.
“Regulation will mean more businesses following high levels of disclosure. This will boost investor confidence and enhance credibility of the developers, leading to lower capital costs and increased investment. This will impact not just stock performance but overall business across all categories of developers. Therefore, the more established developers might have to fight just a little bit harder than before in order to continue to remain front runners. At the end of the day, it is those developers who are able to draw on the strength of their brand positioning and attract customers, on the premise that ‘quality’ is never a compromise that will perform better,” says Devina.
Analysts agree with the fact that revaluation is on the cards since the sector for the first time in the history is entering into organized phase of development. The revaluation, or its impact, may not be immediate but there are certain mid to long term implications of the regulator where the property prices as well as the realty stocks maybe witness to upward bias.
What is more important is that while there will be higher revaluation of properties with clear titles and clean track record of the developers, in some of the markets and with some of the developers it might work the other way round and they may be left with lesser revaluation. Certainly, there is a premium for right property in the right market and at the right price point.
In conclusion
The revaluation of properties will be more significantly visible in the secondary market in the immediate future because the supply might be constrained for the time being. There might be lesser new launches till the time clarity comes in the market about the disclosure norms and mandatory compliances.
They nevertheless do not agree that the revaluation would lead to losing the brand premium. There is a general feeling that the regulator will only ensure the fair practices, exit fly-by-night operators and adjudicate the conflict between the builder and the buyer.
However, beyond the timelines and the promises that are forced to fulfill, there are many other areas like design, aesthetics, amenities, construction quality and users’ experience that form the basis of brand premium. Even today, among the developers who are maintaining the transparency and fair trade practices, the brand premium is different depending upon their level of aspiration in the eyes of the homebuyers.
But property revaluation as an industry trend is definitely on the cards in the short to medium term. And so will be the realty stocks that will gain quite a bit after having lost the sheen in the last few years.
By: Ravi Sinha
