PapBardhanBaruaRealEstate5.docx

PapBardhanBaruaRealEstate5.docx

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PapBardhanBaruaRealEstate5

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RealEstateIndustry:

CreatingValuethroughPublic-PrivatePartnership

AshokDeoBardhan&SamirK.Barua

INTRODUCTION

Therealestateindustrycluster,broadlydefined,consistsofacollectionofindustrialandservicessectorsoftheeconomy,suchasconstruction（housingconstruction,aswellasconstructionofcommercialoffices,retailandindustrialbuildings,andinfrastructureprojectssuchasdams,roadsandbridges）,brokerageservices,realestatefinanceservices（mortgagebanking,realestateinvestment）,realestateoperations,propertymanagement,architectureanddesign.Anumberofothersectorsoftheeconomyarealsointricatelylinkedtotherealestatecluster.Theseincludethecementmanufacturingindustry,thepowersector,thefurnitureandappliancesindustry,thefinanceclusteraswellasarangeofotherdownstreamandupstreamsectors.Theclusteristhereforecriticalforthehealthofthenationasitsimpactisfeltthroughouttheeconomy.

Realestateasawhole,andhousinginparticular,isthesinglelargestassetclassandwealthholdingofindividualsandhouseholdsglobally.Thedevelopmentofthehousingsectorisanintegralpartofeconomicdevelopment.Inadditiontoitssizeintheeconomy,itsimportancealsoarisesfromthepositiveexternalitiesandspillovereffects,andtheirimpactonthesocialandpoliticalclimate.Inmostcountries,andparticularlyindevelopingcountries,housingisaverylargeproportionofahousehold’sexpenditureandtakesupasubstantialpartoflifetimeincome.Thebackwardandforwardlinkagestolandmarkets,durablegoodsmanufacturingandthecontributiontothedevelopmentoflabormarketswithdepthandmobilityfurtherunderscoresthesignificanceofthissector,particularlyintheprocessofeconomicreformandtransition.

HousingandRealEstateMarketsareLarge

ThetotalmarketvalueofhousingintheUS,forexample,isapproximately$12trillion.ThisislargerthanthemarketcapitalizationoftheUSstockmarketaswellasbeinglargerthantheUSGDP.Similarly,inotherOECDcountries,thetotalstockofhousingisworth100%to150%ofGDP.Eveninaneraoffinancialmaturityandenthusiasmforinvestmentsinstocksandotherfinancialchannels,theprimaryresidenceremainstheprincipalformofwealthheldbyahouseholdintheUS,andconstitutesover50%ofitsnetworth.Moreover,theclaimsrepresentedinfinancialassets,bothstocksandbonds,alsopertaininparttotherealestateheldbyfirmsandthegovernment.

RealEstateinChina

TheroleplayedbytherealestateindustryineconomicgrowthisunderscoredbyChina’sexample.Incomparisontothewell-knowncontributiontoeconomicgrowthofChina’sspecialeconomiczones,theimpactofforeigndirectinvestment,andtheimpetusprovidedbytownandvillageenterprisesinthehinterland,thestoryoftherealestateclusteranditsimpactontheeconomyisrelativelyunknown.Majorconstructionprojectsintheofficeandresidentialrealestatesectors,industrialconstructionandmassiveinfrastructureprojectshavebeeninstrumentalinprovidingthenecessaryconditionsforothersectorstoflourish,andinandofthemselveshavehadasignificantdirectandindirectimpactontheoverallgrowthrates.Commercialrealestategrowthhasbeenexceeding25%perannuminrecentyears,withthefirsthalfof2003alonewitnessingcompletionofapproximately80millionsq.m.ofofficespace.China'soverallrealestateinvestment（includinghousing）grewby33.5percentyear-on-yearto198billionyuan（US$24.9billion）duringthefirstfourmonthsofthisyear,accordingtoChina’sNationalBureauofStatistics.Therehavebeenmajorspillovereffectsintheeconomywithsectorssuchasfurniture,appliancesandotherhomefurnishingsgrowingatratesinexcessof25%andtheStateCouncilInformationOffice,whichoverseestheofficialgovernmentinformationportal,estimatesthattherealestateindustrycontributes1.5to2%totheoverallgrowthrateofGDP.

Whilethecommercialrealestatesectormaybeamanifestationofderiveddemand,dependentonhowwelltheindustrialandservicessectorsaredoingorareexpectedtodointhefuture,thehousingsectorisdrivenbyanumberofextra-economicanddemographicfactors,inadditiontotheeconomiconessuchasincomeandtheinterestrateenvironment.Thisattributeofthehousingsectorcoupledwithitssizeanditsmultipliereffectontheeconomygivesittheroleofaleadingindicatoroftheimminentstateofhealthoftheeconomyatlarge.

Weexaminethemulti-facetedvaluethattherealestateclusteriscapableofdeliveringtotheeconomyandsociety.Welookatthespillovereffectsthatitgenerates,reviewsomeofthetheoreticalandconceptualissuesinvolved,andmakeanassessmentofthenewinstitutionalandmarketinnovationsrequired,aswellasthereformsthatareneededinIndiatoenhancetheroleoftheindustryasanengineofgrowthfortheeconomyandasatooloflong-termwealthcreation.BasedonthestatisticsthrownupbytherecentlyconcludedsurveybytheCensusofIndia,wearguethatthesectoroffersimmensepotentialforcreationofvaluethroughpublicprivatepartnership.SeeBox1:

ValueCreationbyHousingandRealEstate.

LEGALREFORMS

ByanumberofcriteriaIndiaseemspoisedtojumpontoahighergrowthpath.Itisourcontentionthatthegamutofindustriescomprisingtherealestateclustercannotonlyplayacriticalroleinthiseconomictransformation,butcanalsoserveasanengineoffuturegrowth.Anumberofreformshowever,needtobecarriedoutandbottlenecksimpedingthenaturalgrowthoftheindustryremovedbeforetheinherentpotentialcanberealized.

PropertyRightsDeficiencies

ThelegalstructureinIndiahasnotkeptpacewithsomeofthefar-reachingreformsnowtakingplaceintheIndianeconomy.Thisisalsotrueofthelawsandregulationsgoverningrealestatedevelopmentandinvestment.Developmentofapropertransparentprocessoftitleregistration,forexample,iscriticaltothegrowthoftheindustry.Theneedforevidenceofagoodtitle,indicatingthatthepropertyisfreefrompastresidualandfutureclaimsandencumbrancesisthebedrockofsecurepropertytransfersandsales.Duetothevagariesofhistory,convolutedlegislationandaplethoraofsystems,whatwehavetodayinIndiaismostlytransactionregistrationratherthantitleregistration.Itisimportantthatpotentialbuyersfeelsecureinthesanctityofthetitlethattheyacquire,regardlessofthepursuitbackintotherecordbooks,anddonotfeelrequiredtohirelawyersorinvestigatorstodigintotitlerecordsgoingbackalongtime.Titleandtitleguaranteecompaniesprovidingtitleinsuranceandescrowservicesmaythendeveloptogetherwiththemarket.

LandAcquisition:

AProblem

Theexerciseofthedoctrineofeminentdomainforlandacquisitionbythegovernmenthasbeencarriedoutwidelyinothercountries.Giventheneedsofdevelopmentandthepenchantofthestateforquasi-coerciveacquisition,itisvitalthatsomeindependentbodylooksintothecriteriaforexercisingthisultimatepowerofthestate.IntheIndiancontext,thispowershouldbeexercisedonlywiththetransparentlystatedobjectiveofappropriate,imminentuseinthepublicinterest,withaparticularregardforenvironmentalsustainabilityandwithfairandjustcompensation/resettlement.

ForeclosureProceedings

Apropersystemforforeclosureproceedingsincaseofmortgagedefaultthatalsoshortensthetimeforrepossessionofthecollateralisimportanttoallaytheapprehensionsofmortgagelenders.Also,variouskindsofliens,suchasthemechanicslien,whichisaclaimagainstpropertyonwhichcontractorshaveexpendedlabourcanprotecttheinterestsofvariousrealestaterelatedcreditors.IntheIndiancontext,areformoflawsgoverninglandlord-tenantrelationshipsalsoneedstotakeintoaccounttheissueofbalancebetweenaffordabilityandlandlordrightsinawaythatmarketdistortionsareminimizedandtheneedsofequityserved.Thisiseasiersaidthandone.However,itshouldbenotedthateventhemostmarket-orientedcountrieshavetenantprotectionandrentcontrolsystemsinplace.

ZoningandFSIs

Withmajorrealestatedevelopmentcomestheneedforproperzoningandland-usecontrolsforeconomicandaestheticreasons,aswellasforlargersocialobjectives.Zoninginitsbroadestsensewouldinvolvedeterminingandplanningthekindofrealestate（residential,office,retailormixeduse）,designnormsandneighbourhoodlandscapinginadditiontothefloorspaceindexorfloorarearatios.Unbridledmarketdevelopmentcanleadtoeyesoresandcanalsodistortthemarketinfavorofpowerfulplayers.Interventioninthemarketprocessisalsoneededinordertochoosebetweenalternativestrategiesofdensityversussprawlinrealestatedevelopment.Restrictiveandlowfloorspaceindicescanartificiallyrationland-use,drivepricesup,leadtospeculativebehaviourandmaynotbetheoptimalusageofscarceland.Citieswithinadequatetransportationinfrastructureareservedbetterbyliberalizationoffloorarearatios,whichleadtomoreefficientandintenseexploitationofland,albeitatthecostofachievinghigherdensity.

INSTITUTIONALANDMARKETREFORM

MortgageMarkets

Forthehousingsectortofunctionwelloveralongperiodoftime,itisnecessarytohaveavigorousmarket-orientedsystemforfinancingtheconstructionandpurchasesofnewandexistinghousing.Well-functioningmortgagemarkets,inadditiontotheirpositiveeffectsonthedevelopmentoftherealestatemarketmayalsohaveacriticalimpactonthefunctioni