Real estate services firm Cushman and Wakefield has completed 17 years in the country. Its Asia Pacific CEO, Sanjay Verma, joined the company 16 years ago and is betting big on the Indian operations. With a headcount of 2,400, India is the biggest set up for the company in Asia. In a conversation with Ajay Modi, Verma talks about issues surrounding the real estate sector, and how for Cushman & Wakefield, scale is not the objective. Their focus instead, is on dominance in the area and market they choose.
Q- It looks like the consumer is getting empowered with the changes in real estate regulation. Can this bring gains to the consumer and increase transparency in the system?
A- The short answer is yes, but that would be a myopic way to look at it. Every market has an evolution process. Depending on the economy it operates, a market is more predictable and transparent. As long as you are moving in that direction you do not see who is gaining. The moment you focus on gains, the focus on maturity goes away. In an ideal market, gains and losses should be based on timing. But if a market is matured, it helps everyone. Clarity and transparency will help the developer, as he can plan better and reduce risks. India is moving in that direction.
Q- I understand the consumers will not get a raw deal, as they have in the past. Can you comment?
A- No they should not. But a consumer getting a better deal should not mean the developer gets a raw deal. Regulation should reduce risk and bring transparency and help everyone. Uncertainty is the single biggest risk in business. In a non-institutionalised market, the consumer ends up getting a raw deal.
Q- In what way will the government's focus on weeding black money impact real estate?
A- The new regulation applies for new launches in the primary market. There are problems in the secondary market. People don't want to disclose transactions because of the high stamp duty. The primary market has largely moved to white money. There may be some transactions in primary. I have met developers who are happy to deal only with white money. It's a hassle now to deal with black money. You can no longer hide it in suitcases in bedrooms.
Q- Considering the surplus we have along with high interest rates, will real estate remain an attractive investment proposition?
A- Residential returns are very unattractive. If you buy and lease an apartment, there is no correlation between the capital value and rentals. On the commercial side, things are better. You can get a return of 6-10 per cent here compared to 3 per cent in residential properties. Our residential rental market is not institutionalised. A lot of speculative investment goes into the residential market. It is based on assumption that investment is being made for appreciation and not yields. Real estate will remain an attractive asset to invest, provided you have a channel to invest and the right information to make a decision. Real Estate Investment Trust (REIT) is a very good step in that direction.
Today one ends up buying a house only with a hope that someday, it will sell at a higher price. There is no other avenue in real estate. If I want to buy commercial, it has to be a large ticket size with huge investment. The good quality asset is beyond reach. REITs will make it possible and ensure fair yield even on a small investment. If REITs take off in India you will find rental income on residential investment coming down. A lower capital will chase residential.
Q- What would be the challenges for REITs?
A- REITs are successful in Singapore, Japan and Australia. The only way it can succeed is through clarity on taxes. There is no clarity in India on dividend distribution tax. If you own a building you will have unit holders. The asset management company passes on 90 per cent rental income to unit holders. You can sell and buy units. If you have a tax issue, it reduces yield. We also need clarity on other applicable taxes.
Another challenge is scale. Do you have reasonably good size stock of REIT-able asset? Suppose there are five buildings and four buyers. Here, prices go up and yields go down. Investors may not find it attractive. In mature markets, the asset owner keeps on accumulating assets and put it in a REIT. They don't sell. In India, the good development is that Blackstone and DLF are building assets. REIT needs to see a churn. An asset manager needs to buy and sell assets. It is a transparent mechanism and very few developers understand the challenges on disclosure governance. It is many times more than getting listed.
Q- What can REITs do for developers?
A- REITs can solve a number of things once we achieve scale. They create an investment opportunity for retail investors. For developers, it is an avenue to raise capital. Today, a developer can go for an IPO but it is not advisable based on the legacy of some of the IPOs. He can raise debt at high rates because the balance sheet is not healthy. He can go for private equity but that is also expensive. REITs will probably be the most economical capital.
Q- What is in store for investors of REITs?
A- In REITs, you don't want a crazy return; you want a stable return. Nobody invests in REITs to make 20 per cent. REITs are government-controlled to give people an opportunity to get returns but it is the least risky. A REIT is very similar to a mutual fund. In mutual funds, you trust a fund manager. Here too, you trust the asset manager. Investors in both the categories have an access to information.
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