In boom time the number of projects and developers go up; but when the market goes bust, bankruptcies are the order of the day and developers become the proverbial fly-by-night operators.


In India, anybody with deep pockets can easily become a developer, with or without any expertise in the domain. Virtually anyone having access to land can develop a project, the only variation being the specific location of a project and the class of development.


Compare it with western or even Southeast Asian countries and there are some lessons to be drawn. According to Nicholas Mak, real estate expert of Singapore, "In Singapore, there are some government requirements; the developer must have a licence and they must apply to the Controller of Housing (the government) for certain permits. In case, the new developer has no property development experience, it must get at least a person with much experience in property development on its board."


In addition, foreign companies or people cannot buy private land (freehold or 99 year leasehold) in Singapore. They must get a permit from the government first. A foreign company, however, can buy land that has a 99-year leasehold or shorter from the government. But this land comes with certain conditions - the buyer must develop and sell the property to individual buyers within a certain number of years (from 3 to 6 years).


What is encouraging in these rules is that they are well framed and implemented as well. Mak says, "There is a very strict procedure once a developer starts selling houses to homebuyers. The law requires them to put all the money collected from the homebuyers into a project account and the money can only be used for the development of that project. In the past 15 years, the Singapore property market experienced 3 property cycles. Very few property developers went bankrupt even during the market downturns."


By and large, the real estate law in Singapore is both practical and comprehensive in its implementation. The banks are also quite prudent in real estate loans. The law governing developers in Singapore is that they must have at least someone senior on their board who has sufficient experience in real estate development.


The law also prevents foreign companies from landhoarding in land-scarce Singapore.


Compare it with India and see what it takes to be a real estate developer. Anand H Mugad, assistant vice-president of Axis Bank, says: "In India, there are no basic or minimum criterion that need to be fulfilled for being a real estate developer, like no specification with respect to the minimum area of land for undertaking development, no requirement of minimum financial strength for a developer to start a project, no rules or regulations for minimum area that need to be constructed in the development; and, hence, even the owners of very small pieces of land can become developers. Appointment of technical experts (like architects, construction contractors, interior designers) and right consultants (to obtain various approvals) is essential." He adds that for anybody who has a piece of land and who can appoint technical experts and consultants, the only thing that remains is to make a choice of the financing; the project can be developed by part-funding from banks or from customers' advances.


For most first-time developers, there is a comfort that a major part of their investment is going into an asset class which, over a long time, is only likely to appreciate in value. Hence quite a few people with surplus money are willing to become developers, irrespective of the risk or hassles.


Many banks tread cautiously when it comes to the real estate sector resulting in stringent RBI and internal policies for funding, and much detailed and critical appraisal and credit analyses for real estate proposals. Owing to the not-so-good past experience with various clients, limited growth appetite for real estate asset book, and higher capital cost and provisioning requirement, there is much higher cost of finance for the borrowers in the real estate sector. The business is considered relatively less transparent and governance standards are also seen as below average. Thus, it can be reasonably concluded that here (in India) people with cash and with or without relevant skills and expertise, can more easily become developers. But real estate developers argue that it may be a simplistic assumption that people with high net worth can look forward to become a developer. They feel that while capital is an essential element in this business, it is not just capital but many more requirements of this business for success. Access to capital may facilitate entry, but sustainability and success will be driven by many other factors which are no different from any other industry or profession.


Getamber Anand, managing director of ATS Group and vice-president of Credai, says that it is true that there is no statutory requirement of qualifying as a real estate developer. However, given the nature and dynamics of this industry, we can predict the recipe for a successful developer. Customer focus, ability to take risks given the large capital outlay required, financial acumen, passion for excellence in every sphere of activity and planning skills make for a successful developer. So, while there is no legal requirement, success in this industry cannot be attained without these qualities, making it one of the toughest industries to sustain oneself in. There is no minimum criterion requirement (from regulatory perspective) for a real estate developer to avail bank funding. As per the extant regulations, a real estate developer needs to have all approvals in place, in order to avail the disbursement. This would imply that the developer has to be in possession of land before availing bank credit. Thus, automatically, a bank's funding for purchase of land is curtailed.


Dubai, which witnessed a real estate downturn, has a similar tale, although in India demand continues to be there at all times. Noor Amin, a property consultant of Spring Rose Real Estate, says: "In Dubai, anyone who had some money on them, launched big towers and got into the construction industry... but during the downturn, they ran away or stopped projects; some are even in jail. Due to non-payments to suppliers and siphoning off of the buyers' money, the projects are yet to even take off while the developers charged homebuyers 40% to 50% instalments on sale prices."


QUICK BITES


IN SINGAPORE, THE LAW REQUIRES DEVELOPERS TO PUT ALL THE MONEY COLLECTED FROM THE HOMEBUYERS INTO A PROJECT ACCOUNT AND THE MONEY CAN ONLY BE USED FOR THE DEVELOPMENT OF THAT PROJECT


IN THE PAST 15 YEARS, THE SINGAPORE PROPERTY MARKET EXPERIENCED 3 PROPERTY CYCLES. VERY FEW PROPERTY DEVELOPERS WENT BANKRUPT EVEN DURING THE MARKET DOWNTURNS.

-The Economic Times

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