Improving the realty class

Overcoming regulatory shortcomings and inherent flaws in the realty sector can make this asset class more popular among retail investors.

Pranab Datta        Print Edition: August 2010

Despite forming the largest group of investors in any asset class, retail participants remain the most vulnerable. There is little protection of their rights due to discrepancies in the regulatory framework. This makes many asset classes unpopular in India, and real estate is one such category. The sector does not have a dedicated regulator and government involvement is minimal. While Sebi regulates the capital markets, Irda the insurance market and the RBI the banking sector, the real estate sector has no regulator to protect the interests of stakeholders. This not only hurts the investor, but also retards the industry's growth.

Retail investors are attracted to any asset class due to four main reasons. These are capital appreciation, yield, liquidity and regulatory environment. Though real estate investment is attractive in India, it is hurt by liquidity and regulatory constraints (including tax impact). These act as hurdles in the development of the sector as an attractive asset class for retail investors. In addition to this, the ticket size of such investments is an issue, especially due to the absence of a mature real estate investment trust (REIT) market. A regulator in the housing sector can be the first step towards resolving this issue.

Liquidity constraints, owing to tradeability and size of units, is a challenge for the development of real estate as a popular asset class. While investment structures, such as REIT and REMFs (real estate mutual funds), have addressed this issue in most developed markets, these have not taken off in India due to low feasibility. High stamp duties, double taxation, outdated regulations, lock-in period and fair or comparable valuation issues have hampered the growth of a liquid REIT and REMF market in India.

Investments in REITs or REMFs should be treated at par with those in listed equities or mutual funds and should enjoy benefits, such as exemption on capital gains after a holding period of one year and removal of dividend distribution tax. This would facilitate the development of a liquid real estate investment market. A liquid and vibrant REIT and REMF market will not only overcome liquidity constraints but will also reduce the ticket size for investments in the sector.

This will make the market more accessible to retail investors who have small capital. Another challenge faced by real estate retail investors is the non-availability of authentic industry data. Unlike other asset classes, real estate is heterogeneous and is affected by variables such as location, quality of construction and reputation of builder-all of which can have a direct impact on the investment decision. Currently, there are limited resources available in the public domain to compare similar properties in a given location.

Unlike in developed markets, where dedicated government agencies publish various indices to compare properties in terms of price, such information is not available to retail investors in India. While the government has initiated a robust housing index through the National Housing Bank (NHB) along the lines of the one present in developed markets, its acceptance in the market as a benchmark remains minimal. Nevertheless, a central authority should be put in place to collect and collate such data across the country and publish it on a regular basis.

This would be similar to the work done by the RBI and Association of Mutual Funds in India (Amfi) for banks and mutual funds, respectively. The limited industry data available on the sector and valuation of real estate has discouraged investors, particularly retail, and is keeping them away. Policymakers have ignored the real estate market in India for long.

In order to achieve sustained and inclusive participation in the sector, the government will have to come up with an articulate long-term policy. Retail investors can provide the much-needed liquidity in this sector, but unless the changes mentioned above are implemented soon, it will remain an unpopular investment for them.

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