Indian Real Estate Transparency Index 2011

Progressing towards a transparent future

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Foreword
The global financial crisis of 2008 and the quick recovery from it, affirmed the resilient character of the Indian Real Estate. As capital inflows in the sector remain robust, the sector is poised to reach the next level on its growth trajectory. The need of the hour for the real estate sector in India to continue its forward march is a proactive approach towards reforms and transparency. All the stakeholders, including the government and its statutory bodies need to put in their best foot forward as demand for realty is expected to ride on the rapid urbanization growth and Indias progress towards becoming a global economic hotspot. Confederation of Real Estate Developers Association of India (CREDAI) is a premier real estate organization of more than 6000 organized private sector developers and works closely with several Central and State Government bodies. CREDAI also supports the Government in its policies and programs. Through this whitepaper, we have brought to the fore a very important aspect of real estate scenario. We at CREDAI acknowledge the contribution of JLL towards the preparation of the transparency index and the resulting findings and recommendations. Sincerely, Lalit Kumar Jain President, CREDAI Pradeep Jain Chairman, CREDAI

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The crisis that we are seeing in the market today is a crisis of confidence.
- Duvvuri Subbarao, Governor Reserve Bank of India, September 26, 2011 As global investment markets reel under a crisis of confidence, the flight of capital flows towards quality is imminent. Rising levels of transparency have been found to be closely associated with the rise in Foreign Direct Investment (FDI). A transparent legal and regulatory framework facilitates cross-border mergers and acquisitions and provides stronger protection for property rights, a key requisite for foreign investment. Those emerging market destinations that offer higher degrees of transparency will benefit, as investors see better prospects of gaining returns with lower risk. The need for this study stems from the fact that property markets in developing nations are largely inefficient compared with those in developed nations, primarily due to the dismal levels of transparency in the real estate ecosystem. The prime reasons for higher costs in non-transparent markets are lack of information, corruption, multiplicity or ambiguity in taxation and lengthy procedures. Transparency is a requirement at all stages of the real estate value chain and thus necessitates strong contributions from all stakeholders government, developers, financing agencies and buyers. The government is responsible for providing bonafide information and a healthy development climate with a streamlined approval processes, unambiguous zoning & development regulations and improved disputeredressal mechanisms. Developers and financing agencies need to adhere to improved reporting standards to minimise information asymmetry among buyers. While certain Indian states provide a better and transparent ecosystem for the industry today and others languish, a series of ongoing and proposed reforms are likely to impact the sector positively in the longer run. The likely establishment of Real Estate Regulatory Authority will make the stakeholders more responsible towards their commitments and infuse confidence, currently lacking in the industry. It will also bring the industry at par with the other economies that compete with India in attracting global investment. Along with regulation, the need for streamlining approval procedures, together with a single window clearance structure is also imperative due to the associated costs of lengthy and cumbersome processes for construction approval that Indian developers face today. Under Jawaharlal Nehru Urban Renewal Mission (JNNURM), reformslinked assistance is being provided by the Central Government to respective State Governments wherein those states that have progressively implemented the reforms would benefit from increased funds for urban development projects. India is also witnessing a series of reforms related to the protection of property rights through strengthened land acquisition policies, improved legal and regulatory structure and repeal of archaic laws regarding rent control and land ceiling, that will ensure investors control over their assets. The study progresses by assessing the levels of transparency in the Indian real estate market through the Indian Real Estate Transparency Index (IRETI 2011). In this, 20 major geographies in India are ranked based on five core components, essential for the transparency of the real estate eco-system. In addition, we have undertaken a survey of top Indian developers, which reveals their opinion on current transparency levels in the real estate industry and on approval processes across India. It also underlines their key demands and expectations from the Government, financing agencies and buyers, demonstrating that greater transparency levels is indeed, the need of the hour.

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Indian Real Estate Transparency Index (IRETI) 2011

The IRETI 2011 provides a countrywide ranking of 20 major geographical areas in India based on five components that contribute to the transparency of a real estate eco-system: 1. Availability of Market Information 2. Reforms in Urban Local Bodies (ULBs) 3. Progressive Business Environment 4. Protection of Property Rights 5. Inclusive and Sustainable Development Better availability of market information provides confidence to stakeholders in taking decisions, and reduces search time for buyers. ULBs, which regulate real estate development at a local level, are currently inefficient thereby increasing costs of development. Reforms in ULBs are crucial towards increasing efficiency in city planning, approvals and delivery processes.

A progressive business environment, which minimizes corruption, improves business procedures and provides skilled labour pool is imperative for the industry. A well-functioning property rights regime allows for economic assets to be productive by reducing transaction costs and encouraging the creation of surplus value that can be reinvested without fear of expropriation1. Hence, protection of property rights is closely associated with economic development due to its ability to infuse dead capital into the formal economy. Being highly energy intensive, it is essential that the real estate industry emphasizes socially-responsible development through inclusive and sustainable development goals. To assess the transparency of the Indian real estate industry, 61 indicators categorised into 15 constituents covering 20 geographic areas have been ascertained and further aggregated into five major components (Figure 1).

A progressive business environment, which minimizes corruption, improves business procedures and provides skilled labour pool is imperative for the industry.

International Property Rights Index 2011

Figure 1: Constituents in the Indian Real Estate Transparency Index 2011

Source Corruption in land records and registration services Corruption in electricity services Corruption in water supply services Corruption in housing services Corruption in banking services Starting a business Dealing with Construction Permits Registering property Trading across borders Resolving insolvency Employment ecosystem Labour Ecosystem Labour law environment Size of Government-Expenditures, taxes and enterprises Legal structure and security Regulation of labour and business Registering property Enforcing contracts Reform in rent control Reforms in Urban Property Rights Repeal of Urban Land Ceiling Regulation Act (ULCRA) Pressure on environment Population pressure Environmental quality Environmental Sustainability Impact on human health and ecosystem vitality Policy response Internal earmarking of funds for services to urban poor Earmarking 25% of developed land in all housing projects for EWS/LIG Reforms for Inclusive and Sustainable Development Revision of Building Bye Laws - Mandatory rainwater harvesting in all buildings Bye Laws on Reuse of Recycled Water Source: Real Estate Intelligence Service (Jones Lang LaSalle) Legal and Regulatory Framework Employability ecosystem Ease of Doing Business Corruption in Real Estate Services Websites and Secondary Research Websites and Secondary Research India Corruption Study 2008 by Transparency International India Limitations Constituents Indicators Source Limitations

Constituents

Indicators

Inclusion in Real Estate Indices

History of tracking of investment performance of major markets

Breadth of tracking of investment performance across office, retail and residential sectors

Years since first office opened in a major city of the state

Presence of International Property Consultants Websites and Secondary Research

Number of operational and planned (wherever available) offices in the state

Study focused on Below Poverty Line (BPL) households.

Number of residential properties represented in major markets

Inclusion in Real Estate Online Portals

Number of commercial properties represented in major markets

Completion of Record of Rights (RoRs)

Termination of manual issue of RoRs

Doing Business 2009 by the World Bank and International Finance Corporation

Estimated for NCR-Delhi, Chattisgarh and Goa. City-level indicators extrapolated to the state-level.

AVAILABILITY OF MARKET INFORMATION

Computerisation of Land Records (CLR)

Computerised mutation of RoRs

Digitisation of cadastral maps

PROGRESSIVE BUSINESS ENVIRONMENT

Accordance of legal sanctity to computerised RoRs

Availability of RoR data on website

Status of reforms under National Land Records Modernisation Programme as of March 31, 2011 Estimated for NCRDelhi using information on Delhi, Haryana and Uttar Pradesh

Estimated for India Labour Report Chattisgarh, 2009 by Team Uttarakhand Lease and IIJT and Jharkhand.

Transfer of functions listed in the 12th Schedule to ULBs and their incorporation in State Municipal Act

Implementation of 74th Constitutional Amendment Ease of Doing Business Property Rights

Constitution of District Plan Committee / Metropolitan Plan Committee

Transfer of city planning functions to ULBs

Revision of Building Bye-Laws - streamlining the approvals process

Simplification of legal and procedural framework for conversion of agricultural land for non-agricultural purposes

Economic Freedom of the States Estimated for of India 2009 Goa and New by Academic Delhi. Foundation

Coverage of Property Tax (85%)

Efficiency in City Planning and Approvals Process

Rationalisation of Stamp Duty to 5%

Introduction of Property Title Certification System

Introduction of computerized process of registration of land & property

Transfer of water supply and sanitation functions to ULBs

PROTECTION OF PROPERTY RIGHTS

Collection Efficiency of Property Tax (90%)

Efficiency in Delivery Functions

Cost recovery of water supply (100%)

Estimated for NCR-Delhi.

Cost recovery of solid waste (100%)

Environmental Sustainability Index for Indian States 2009, Institute for Financial Management and Research (IFMR)

REFORMS IN URBAN LOCAL BODIES (ULBs)

Set-up of e-Governance

Estimated for NCRStatus of Delhi using Jawaharlal information on Nehru National Delhi, Haryana Urban and Uttar Renewal Pradesh. Mission Certain (JNNURM) city-level reforms as of reforms are October 21, extrapolated 2011 to state-level indicators.

Shift to accrual based double entry accounting

Administrative reforms

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Enactment of Community Participation Law

Enactment of Public Disclosure Law

INCLUSIVE AND SUSTAINABLE DEVELOPMENT

Administrative and Structural Reforms

Structural reforms

Encouragement to Public Private Partnership

JNNURM as of October 21, 2011

Estimated for NCR-Delhi.

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Figure 2: The Indian Real Estate Transparency Index (IRETI) 2011 Andhra Pradesh Tamil Nadu Maharashtra Gujarat NCR Delhi Karnataka Kerala West Bengal Rajasthan Orissa Madhya Pradesh Haryana Chhattisgarh Punjab Goa Uttara Khand Assam Uttar Pradesh Bihar Jharkhand

Indian Real Estate Transparency Index 2011 Inclusive and Sustainable Development Reforms for Inclusive and Sustainable Development Environmental Sustainability

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 4 2 10 14 12 9 7 3 15 6 11 19 8 18 13 1 5 20 17 16

Protection of Property Rights 2 3 16 1 7 9 11 19 4 15 6 5 14 12 8 18 17 10 20 13 Reforms in Urban Property Rights Ease of Doing Business Property Rights Legal and Regulatory Framework Progressive Business Environment Labour Ecosystem Ease of Doing Business Corruption in Real Estate Services Reforms in Urban Local 3 2 1 4 8 5 10 6 12 13 11 17 7 14 19 18 16 9 15 20 Bodies Administrative and Structural Reforms Efficiency in Delivery Functions Efficiency in City Planning and Approvals Process Implementation of 74th Constitutional Amendment Availability of Market Information Computerisation of Land Records Inclusion in Real Estate Portals Presence of International Property Consultants Inclusion in Real Estate Indices
Source: Real Estate Intelligence Service (Jones Lang LaSalle) Note: Numbers in boxes represent ranking of various states on the respective Sub-Index or Index.

1 9 6 5 2 7 10 12 11 8 17 4 15 3 13 14 19 20 18 16

5 2 1 8 3 4 12 6 9 15 11 7 16 14 13 17 19 10 18 20

High Transparency

Low Transparency

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Availability of Market Information

The availability of seamless and complete market information is a crucial ingredient for a transparent real estate ecosystem. Easy availability of accurate information enables stakeholders to make decisions with confidence and also to ensure fair application of local property laws. Recapitalization of real estate in many countries is helped by the free flow of information. It is hoped that, in future, regulators will put greater emphasis on disclosure in order to estimate the credit worthiness of commercial real estate players and to assess their ability to carry debt. Indian cities (both Tier I and Tier II) fall into the semi-transparent category according to the Jones Lang LaSalle Global Real Estate Transparency Index (GRETI) 2010. Developed countries are seen to score better on data availability than developing countries. Across the Asia Pacific region, real estate transparency levels vary widely. The region has two of the worlds most transparent markets - Australia and New Zealand, which rank first and fourth respectively on GRETI 2010. Singapore and Hong Kong also rank relatively highly and are at par with most European countries. At the other end of the gamut, Asia Pacific also encompasses some of the worlds least transparent markets, such as the tertiary cities of China (ranked 65th) and Vietnam (ranked 76th). The most prominent improvers in terms of global rankings are China and India, which have witnessed the largest improvements on the transparency index amongst Asia Pacific countries. Notable improvements in transparency levels in

India have been mainly due to increased data availability coupled with ongoing regulatory changes. International corporate occupiers and investors are now increasingly demanding better information on market dynamics. Data availability has been improving since 2008. Data on office market dynamic is now more comprehensive even in Tier II Indian cities of Hyderabad, Chennai, Pune and Kolkata as they grow into Information Technology and manufacturing hubs. Data availability for the retail and residential sectors has improved across all tiers as a result of the rapid development of the residential sector and modern retail formats. Furthermore, in India progress has been made in areas such as availability of property records. However, title records are still incomplete and not easily available, although the situation is gradually improving. The increasing penetration of national and international real estate developers, investors and occupiers in the secondary and tertiary cities of India has acted as a catalyst in increasing transparency outside the Tier I cities. Real estate agents as well as facilities and project managers in India are increasingly adopting higher professional standards and this is reflected by the wide-spread penetration of IPCs across Indian cities, both Tier I and Tier II. However, a substantial percentage of sales transactions in the Indian tertiary cities still lack high-quality, dependable and all-inclusive pre-sale information collected by the vendor, and the bidding and negotiating process is not always considered transparent and fair outside of the mature markets. Also, there is significant room for improvement in the availability of indices relating to the investment performance of real estate assets in India.

The increasing penetration of national and international real estate developers, investors and occupiers in the secondary and tertiary cities of India has acted as a catalyst to increasing transparency outside the Tier I cities.

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Developers Initiative to Increase Transparency Regarding Availability of Information

In the CREDAI-Jones Lang LaSalle Real Estate Transparency Survey 2011, a large percentage of Indian developers favoured the intention to increase transparency in the real estate sector. An overwhelming 97% of the respondents expressed their intent to provide actual measurements for calculating saleable area and carpet area. 93% of the respondents expressed their intent to quote rates that are all inclusive of other charges such as parking, club house and maintenance etc (Figure 3). Both issues pertaining to usable carpet area and quotation of property rates have been at the forefront of non-transparent sale and marketing practices in India. The willingness of developers to address issues such as creative marketing of residential units in particular will not only benefit the buyers but will also make the industry a level playing field. The developers also agree that if a saleable area concept exists, it should be a uniform definition across the country, which would benefit cross-state transactions. Regarding disclosure on sources of funds and shareholding pattern, developers showed lesser initiative. Over a third of the respondents declined their intentions to provide land acquisition prices for their projects. Nearly half of the respondents either declined or refrained from disclosing their intent to provide information on the sources of funds and shareholding pattern of their projects. While listed players are required to provide such disclosures to their investors, it is understandable that unlisted players might not agree to such disclosures for competitive reasons.

Figure 3: Developers Response to Improve Availability of Project Information

AREA Do you agree to a uniform carpet area / saleable area definition across the country? Do you intend to provide actual measurements for calculating saleable area and carpet area? SALE AND PRICING Do you intend to quote rates (per sq ft) for residential units that are all inclusive of other charges (parking, club house, maintenance etc)? Do you intend to do a full disclosure of approvals, sale and pricing of your projects to buyers? SOURCE OF FUNDS Do you intend to make land acquisition prices public for greater transparency in pricing your products? Do you intend to disclose source of funds for the development of your projects? Do you intend to disclose the shareholding pattern in a particular real estate project? 41% 69% 83% 3% 97% 3% 93% 3% 14% 17% 14% 3%

34%

24%

55%

31%

14%

55%

17%

28%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Yes
Source: CREDAI-Jones Lang LaSalle Real Estate Transparency Survey 2011

No

Cant Say

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Reforms in Urban Local Bodies (ULBs)

The role of ULBs assumes paramount importance in a decentralized urban governance framework. It is estimated that over a seven-year period beginning 2005-06, the ULBs would require a total investments of INR 1,205 billion2. Jawaharlal Nehru National Urban Renewal Mission (JNNURM) is a national level initiative that would bring together the State Governments and enable ULBs to catalyse investment flows in the urban infrastructure sector. Under JNNURM, state governments are being provided reforms-linked assistance to introduce efficiency in the city planning and approvals process, efficiency in delivery functions and in the administrative and structural framework. Since the early 1990s the Government of India has undertaken numerous initiatives intended to decentralize urban governance. The 74th Constitution Amendment Act (CAA), 1992 is one such initiative. This initiative gave constitutional recognition to the urban local bodies as well as the constitutional right to exist. The new Twelfth Schedule to the Constitution provides a recommended list of local functions. The 74th CAA states that state governments should alter their municipal laws in order to authorize ULBs with such powers and authority as may be necessary to enable them to function as institutions of self governance. The (Model Municipal Law) MML discusses the following features related to city planning: Provision for the implementation of development plans by municipalities Easy planning approvals for small-sized buildings designed by architects Changes required in public health engineering, utility boards, TP/development authority laws Furthermore, administration of urban local self-governments is a crucial constituent in the overall realm of public administration. From the perspective of an urban citizen administration of
2 3

Urban Local Bodies impacts their lives far more than any other tier of government. Therefore, reforms in the administration of urban local bodies will have a noteworthy positive impact on the quality of governance, service delivery and overall quality of life in urban areas. The process of real estate development is particularly affected by the efficiency of ULBs, which undertake city planning, deliver utility services and regulate controls on development through approvals. Development projects in Indian cities have to undergo a lengthy approval process which results in delays in projects, eventually escalating construction costs, which are borne by the user or the buyer. India is ranked 177 out of 183 countries with respect to dealing with Construction Permits , which indicates the challenge developers face in India in development of real estate. To obtain a plan sanction for a project, the developer has to visit nearly forty departments starting from central government bodies (environment, airport authority etc), state government bodies (revenue, fire, high rise, environment etc) and local bodies (water, sewage, traffic etc). The period from entering into agreement for land purchase to the date of commencement of construction takes nearly two to three years. With banks not favouring loans against land, the developers have to depend on private borrowing at exorbitant interest rates. The direct impact due to cost of finance itself is up to 10% to 25 % of the sale price4. Indian cities should implement processes that combine the stage of approvals, thereby reducing time and associated costs.

Under JNNURM, state governments are being provided reforms-linked assistance to introduce efficiency in city planning and approvals process, efficiency in delivery functions and the administrative and structural framework. Since the early 1990s the Government of India has undertaken numerous initiatives intended to decentralize urban governance.

JNNURM Overview, Ministry of Urban Development, Government of India Doing Business 2011, World Bank and International Finance Corporation 4 Mission Transparency, CREDAI

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Figure 4: Multitude of Statutory Approvals adds 2-2.5 Years to the Pre-Construction Process

Conversion of land use 8-12 (Months) Project letter of intent and license / Intimation of disapproval (IOD) Pre-construction approvals from state level bodies* Pre-construction approvals from central bodies* Approvals for construction plan sanction Approvals for commencement of construction Construction period Inspection and approval procedure for building completion Occupancy certificate receipt from date of completion of above Approval Process after Land Acquisition Till Commencement of Construction(24-32 months) Months 0 12 24 32 60 65 4-6 6-8 5-7 5-7 2-3 24-30 2-3 2-3

Source: CREDAI-Jones Lang LaSalle Real Estate Transparency Survey 2011 Note: The stages Pre-construction approvals from state level bodies and central bodies can happen simultaneously.

Figure 5: Impact of Statutory Approvals on the Delay of Types of Real Estate Projects

LOW IMPACT Warehousing Special Economic Zone (SEZ) Residential Commercial Retail Commercial Office Hotels -1.00 -0.80 -0.60 -0.40 -0.20

MEDIUM 0.05

HIGH IMPACT

0.62 0.63 0.75 0.79 0.85 0.00 0.20 0.40 0.60 0.80 0.100

Source: CREDAI-Jones Lang LaSalle Real Estate Transparency Survey 2011

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Reasons for Delay in the Construction of Real Estate Projects

In the CREDAI-Jones Lang LaSalle Real Estate Transparency Survey 2011, developers ranked delay in statutory approvals to have the greatest impact on construction delays in real estate projects. Evidently, improvement in the efficiency of ULBs by streamlining the approval procedures will benefit the construction industry immensely through saved time and costs. The respondents have also pointed to the high cost of real estate finance born by developers, the shortage of skilled labour and the lengthy process of land acquisition as major contributing factors leading to construction delays. With banking institutions attributing a higher risk to the sector, borrowing has become expensive, and accompanied with slow sales, it is hurting the cash flows of developers. The National Rural Employment Guarantee Scheme (NREGS) has been one of the reasons in the past 2-3 years for the reverse migration of workers from metropolitan cities to rural centres creating shortage of labour in the construction industry. The process of land purchase in Indian cities is extremely lengthy and cumbersome for larger township projects, as there are often multiple landowners and the transaction process remains shrouded in non-transparency. Under the proposed bill on Land Acquisition, Rehabilitation and Resettlement (LARR), obtaining land through the acquisition route might result in higher costs due to provisions for higher benefits to be provided to displaced landowners. However, this might also result in a lesser time of acquisition, as landowners would be more willing to sell their land. Rising cost of construction materials has also hampered the pace of construction activity in some projects, particularly those under initial stages of implementation. Respondents conveyed that delays in ongoing projects are not due to the low demand for real estate or lack of suitable technology.

Figure 6: Impact on Construction Delays (last 24 months) in Real Estate Projects

LOW IMPACT Low demand for real estate Lack of suitable technology Property under litigation High cost of real estate finance to buyers Lack of public infrastructure (such as water and power) Rising cost of construction materials Lengthy process of land acquisition Shortage of skilled labour High cost of real estate finance to developers Delay in statutory approvals -1.60
Source: CREDAI-Jones Lang LaSalle Real Estate Transparency Survey 2011

MEDIUM -0.24 0.17 0.48 0.48 0.64 0.72

HIGH IMPACT

0.79 0.86 0.97 1.38 -1.20 -0.80 -0.40 0.00 0.40 0.80 1.20 1.60

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Regulation with Single Window Clearance

The regulation of activities of property developers and builders in India is a state subject and comes under the purview of the respective state governments, ULBs and development authorities, under the provisions of State Town and Country Planning or City Development Authority Acts. This has led to inconsistency regarding rules and regulations governing the construction, purchase, transferring and leasing of properties across the country. The proposed Real Estate (Regulation and Development) Bill aims to establish a regulatory authority and appellate tribunal to regulate, control and promote real estate construction, keeping in view the interest of the buyer and enable smooth and speedy construction. The proposed bill, if enacted, would pave the way for the setting up of the Real Estate Regulatory Authority, an industry watchdog and all properties being developed on land parcels with area greater than 4,000 sqm shall be registered with the regulatory authority. The details regarding the property shall be maintained on a website and the promoter of the project shall be responsible for recording and entering the project details within a stipulated timeframe. The draft obligates the developer to provide built units as per agreed & approved plans and project specifications. The buyer needs to make necessary payments and other charges as per the agreement along with payment of interest in case of any delay. In the CREDAI-Jones Lang LaSalle Real Estate Transparency Survey 2011, 68% of the respondents felt that a regulatory model having only state-level regulators with single window clearance would help in increasing efficiency and transparency in the sector. 43% of respondents felt that no regulation is preferred, but there should be single window clearance for approvals. Nearly a third of the respondents viewed the structure under the proposed bill with a central real estate regulator and individual state regulators to be helpful in increasing efficiency, however, with single window clearance (which is not a part of the proposed legislation). 89% of the respondents felt that provisions of single window clearance would benefit the sector leading to efficient processes and reduced project costs.

Figure 7: Demand for a Regulatory Structure with Single Window Clearance

Only state regulators with single window clearance No regulator, but single window clearance Central real estate regulator and individual state regulators with single window clearances Central regulator with single window clearance A single central regulator Central real estate regulator and individual state regulators 0% 7% 14% 29% 43%

68%

4% 10% 20% 30% 40% 50% 60% 70% 80%

Source: CREDAI-Jones Lang LaSalle Real Estate Transparency Survey 2011 Note: The survey permitted respondents to select multiple choices in this question.

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Progressive Business Environment

A progressive business environment levels the playing field and lowers the barriers to entry for new entrants. The parameters for estimating the progressiveness of a business environment are: the ease of doing business, the labour ecosystem and the corruption in real estate services. These parameters help in investigating what enhances business activity and what constrains it. For establishing the ease of doing business in a particular geography, a set of regulations pertaining to the seven stages of a business cycle are measured. These include - starting a business, dealing with construction permits, registering property, paying taxes, trading across borders, enforcing contracts and resolving insolvency5. As per Doing Business 2011, India is ranked 134 out of 183 economies, in terms of ease of doing business. Hence, at a global level, India continues to have lengthy legal procedures, which increase the time, costs and efforts of running a business. The Indian government has eased the starting of a business by setting up an online VAT registration system and replacing physical stamp with an online version. It has also abridged the administrative saddle of paying taxes by putting an end to the fringe benefit tax and upgrading electronic payment systems. Singapore is the top ranked economy in the Ease of Doing Business. The employment ecosystem, the employability ecosystem and the labour law environment index together gauge the workings of the labour ecosystem of an economy. Indias population is forecast to reach 1.4 billion in 2026, of which 83% would be in the age bracket of 15-59 age group and the country would house 25% of the worlds total workforce. However, it is imperative that productivity of the young demographics is improved, which would require drastic reforms in our labour market ecosystem. According to India Labour Report 2009 by Teamlease, much of Indias demographic dividend

(productive part of the population) will occur in states with backward labour market ecosystems. Between 2010 and 2020, the states of Uttar Pradesh, Bihar and Madhya Pradesh will account for 40% of the increase in 15-59 year olds but only 10% of the increase in income. During the same period, Maharashtra, Gujarat, Tamil Nadu and Andhra Pradesh will account for 45% of the increase in GDP but less than 20% of the addition to the total workforce. The extent of corruption in real estate services has been estimated through measures of corruption in - land records and registration services, electricity services, water supply services, housing services and banking services. Households pay bribes to the registration department for reasons ranging from obtaining land records, to land surveys, income surveys and even purchase of stamp paper. Increased levels of corruption shake the confidence of the citizens in the presence of sound implementation and enforcement of property rights. Corruption also reflects the degree of informality in the economy, which hinders the expansion of respect for legal private property.

The employment ecosystem, the employability ecosystem and the labour law environment index together gauge the workings of the labour ecosystem of an economy. Indias population would reach 1.4 billion in 2026, of which 83% will be in the age bracket of 15-59 age group and the country will house 25% of the worlds total workforce.

Establishment of Property Rights

Frail property rights are most commonly seen in developing countries such as ours. Citizens of developing countries have the greatest need for economic growth and it is critical that their physical property be given strong protection. Underlying fundamentals for economic growth such as economic expansion and job creation depend on securing property rights. Property rights allow the citizens of a nation the opportunity to make use of and flourish from their investments and as such provide empowerment through ownership. Economic growth can only occur when property is duly protected. The 2011 International Property Rights Index (IPRI) highlights the obvious connection between countries with the strongest protections of property rights and those with the greatest economic

In IRETI 2011, the information on Registering a property and Enforcing Contracts have been segregated to another core component - Protection of Property Rights, for the purpose of analysis.

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strength. IPRI shows a progression in property rights protection around the world. It also mentions that in spite of an overall advancement in property rights protection, property rights continue to face challenges everywhere. The report also throws light on the fact that property rights are a crucial ingredient for escalating economic growth. A holistic property rights establishment aims at facilitating economic assets to be productive by reducing transaction costs. A reduction in transaction costs encourages the formation of excess value that can potentially be ploughed back, devoid of any fear of expropriation. The legal and regulatory framework prevalent in the economy plays a crucial role in ensuring that a strong property rights system is in place. This encompasses constituents such as size of the government, legal structure & security and regulation of labour and business. Legal structure and security measures the efficiency of the government in protecting property. The quality of the justice mechanism is measured on the basis of the availability of judges, the completion rate of cases by courts and investigations by the police. The level of safety is measured by the recovery rate of stolen property as well as the rate of violent crimes. The ease of registering property and the enforceability of contracts also helps in the protection of property rights. Property acts as collateral for loans. But unregistered property that is informal or poorly administered has little chance of being used as a guarantee. Such assets are called dead capital. If the property registration process is too costly or complicated, property markets will not function effectively as regulations will keep investments from being channeled to its most productive use. Furthermore, reforms in property rights such as the reform in rent control and repeal of ULCRA also aid in strengthening the property rights regime and boosting transparency in the real estate eco-system. India has a world Rank of 55 and regional rank of 10 on the International Property Rights Index 2011 (IPRI 2011).

Inclusive and Sustainable Development Legal structure and security

Inclusive and sustainable development also helps lend greater transparency to an economy. Inclusive and sustainable development is dependent on environmental sustainability as well as urban reforms. The parameters determining are detailed below: Population Pressure - Sustainability improves with a lowering of population pressure which is the key driver for growth of human activities that extract from and pollute the ecosystem. Ecosystems have limited carrying capacity and as such higher population pressure means speedy rate of resource use and subsequent degradation. Pressures on Environment - States that can keep the pressure on environment within acceptable levels are likely to remain sustainable in the long run. However, if the pressure is high enough, even states with good starting conditions can degrade fast. Environmental Quality - Sustainability is presumed to be higher for states that have a superior ecosystem. Such ecosystems should be able to replenish resources and absorb pollution to the extent the environment doesnt degrade fast. Impact on human health and ecosystem vitality - The magnitude to which a state can lessen negative environmental impacts on basic human life as well as provide protection from threats caused by environmental turbulences demonstrates the states sustainability. Policy response - Governments can play their part by passing regulations that prevent, lessen or adapt to changes to the environment. The state must proactively respond to environmental issues through suitable policies, resources and institutions. The Environmental Sustainability Index (ESI) is a comparative analysis of environmental achievements and the challenges faced by the Indian states. The index combines quantitative data on the trajectory of a states initial endowment and use of resources, scale of pollution as well as its impact on human health and ecosystem vitality along with data on policy and societal rejoinders to improve present environmental conditions.

measures the efficiency of the government in protecting property. The quality of the justice mechanism is measured on the basis of the availability of judges, the completion rate of cases by courts and investigations by the police.

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Andhra Pradesh
Andhra Pradesh ranks among the top 5 states on the 5 core components of IRETI 2011. Starting a business takes less time, costs less and has fewer procedures in Andhra Pradesh according to the World Bank. Getting construction permits, registering property, enforcing contracts and resolution of insolvency are also relatively easier in this state. However, real estate services related to Land Records & Registration are perceived as being highly corrupt in Andhra Pradesh. Moreover, the state government is yet to repeal the Rent Control Act, which keeps rents artificially low in old buildings due to which landlords refuse to renovate their properties and rental housing languishes. Although population density in Andhra Pradesh is lower than other among big states in India, as per Environmental Sustainability Index by IFMR, it still rates poorly in Pressure on Environment and Impact on Human Health and Ecosystem Vitality rating.
Market Information

Sustainabity

Urban Reforms

Property Rights

Business Environment

Above Average
Leading in Ease of Doing Business Labour Ecosystem Protection of Property Rights

Below Average
Lagging in Corruption in Real Estate Services Reforms in Urban Property Rights Environmental Sustainability

Tamil Nadu
Tamil Nadu rates highly on market information, urban reforms and property rights. In the report, Economic Freedom of States of India published by Academic Foundation, the state ranked high on Legal Structure and Security as well as Regulation of Labour and Business, due to its good governance. Real estate services related to Land Records & Registration and Water Supply Services are perceived as being corrupt in Tamil Nadu, as per the India Corruption Study 2008 by Transparency International India. World Bank, registration of property is a cumbersome task in the state. However, these problems are likely to be alleviated in the long run as all the reforms related to computerisation of land records have been initiated and are in progress. Although Tamil Nadu has maintained its environmental conditions so far despite high intensity of economic activity, it continues to face demographic Pressure on Environment which if not addressed can severely affect quality of life in the long run.
Market Information

Sustainabity

Urban Reforms

Property Rights

Average

Business Environment

Above Average
Leading in Computerisation of Land Records Efficiency in Delivery Functions Legal & Regulatory Framework

Below Average
Lagging in Corruption in Real Estate Services Registering Property Reforms for Inclusive and Sustainable Development

16 Advance - Indian Real Estate Transparency Index 2011

Maharashtra
Maharashtra rates highly on market information and urban reforms, yet lags behind in property rights. Not only are IPCs present in Maharashtra but information on Mumbai and Pune real estate easily available through real estate portals, financial statements of listed developers and real estate indices. Maharashtra ranks high on the Labour Law Ecosystem particularly due to superior labour relations and higher average wages compared to other states. Reforms under JNNURM pertaining to Efficiency in City Planning and Approvals Process have been achieved. Land Records and Registration Services in Maharashtra are perceived as being corrupt. Enforcement of contracts is difficult. Repealment of Rent Control Act is still pending. Poor air quality and air pollution continue to be a concern.
Market Information

Sustainabity

Urban Reforms

Property Rights

Business Environment

Above Average
Leading in Availability of Market Information Efficiency in City Planning & Approvals Process Labor Ecosystem

Below Average
Lagging in Corruption in Real Estate Services Protection of Property Rights Reforms in Urban Property Rights

Gujarat
Gujarat rates highly on property rights and urban reforms. All the Administrative and Structural Reforms suggested under JNNURM have been undertaken by the government. Notable ones are e-governance initiatives and encouragement of Public private partnership (such as Delhi Mumbai Industrial Corridor). Quality of water as well as availability of potable water is particularly bad in Gujarat. Moreover, forest cover and biodiversity are low. This is quite disturbing since the state faces increased Pressure on Environment given the manufacturing and industrial boom it is currently witnessing. Fortunately, the Gujarat government has passed legislations promoting sustainable development such as earmarking of funds/land for the poor and revision of laws related to rainwater harvesting and reuse of recycled water. Although, International Property Consultants have low presence in Gujarat, they have started opening their offices counting on the promise of a brighter economic future. This should increase availability of market information in the state.
Market Information

Sustainabity

Urban Reforms

Property Rights

Business Environment

Above Average
Leading in Efficiency in City Planning and Approvals Process Administrative and Structural Reforms Urban Reforms for Inclusive & Sustainable Development

Below Average
Lagging in Availability of Market Information Implementation of 74th Constitutional Amendment Environmental Sustainability

Advance - Indian Real Estate Transparency Index 2011 17

NCR Delhi
Delhi ranks favorably on the ease of starting a business as well as getting construction permits. Doing business is further made easy by clarity concering tax calculations as well as payment through online portals. Given the population of Delhi, NCR-Delhi faces population driven Pressure on Environment which is leading to deterioration of Environmental Quality that is having an Impact on Human Health and Ecosystem Vitality. However, the Delhi Government has been highly proactive in its response as seen in the CNG drive and infrastructure projects such as the mass transit metrorail. Thus, it comes as no surprise that Delhi ranks highly on employment generation. Gurgaon rates poorly on Efficiency in City Planning and Approvals Process. While Noida had simplified the legal and procedural framework for conversion of agricultural land for nonagricultural purposes, the recent controversies point to the fact that this reform was not carried out properly.
Market Information

Sustainabity

Urban Reforms

Property Rights

Business Environment

Above Average
Leading in Availability of Market Information Ease of Doing Business Labour Ecosystem

Below Average
Lagging in Computerisation of Land Records Efficiency in City Planning and Approvals Process Environmental Sustainability

Karnataka
Similar to NCR-Delhi and Maharashtra, Karnataka real estate market information is readily available, led by Bangalore which has a number of listed and foreign developers. The state tops Employability Ecosystem given its huge educational infrastructure which has further improved over the last decade. Land Records and Registration and Housing Services in Karnataka are wrought with corruption. This is quite surprising since Karnataka is among the few states in India to initiate all the reforms related to computerisation of land records. The state lacks economic freedom on account of Size of Government Expenditures, Taxes and Enterprises, as the government plays a large role as a producer and provider of services and goods in the state. However, regulation of labour and business has improved in Karnataka as measured through increase in average wages and reduction in strikes and lockouts. For inclusive development, Karnataka government should undertake reforms to improve economically weaker sections access to housing projects.
Market Information

Sustainabity

Urban Reforms

Property Rights

Business Environment

Above Average
Leading in Computerisation of Land Records Labour Ecosystem Reforms in Urban Property Rights

Below Average
Lagging in Corruption in Real Estate Services Legal and Regulatory Framework Reforms for Inclusive and Sustainable Development

18 Advance - Indian Real Estate Transparency Index 2011

Progressing Towards a Transparent Future

People always overestimate how much will change in the next three years, and they underestimate how much will change in the next ten years. Bill Gates, remarking on whether digital technology will eventually reverse global urbanisation India has witnessed a decade of unprecedented transformation in real estate industry, with rapid strides in the scale, architecture, technology and building solutions being offered in the country. With large scale real estate developments in pipeline, the possibilities are immense in this decade as well. While the previous leap was fuelled by rapid growth of demand for real estate equaled by construction of quality developments, increase in transparency would be the catalyst for the push in the coming decade. The pace of reforms and regulation in the sector would be critical in enthusing confidence among investors and buyers.

Developers have gained from experience and are aiming for global best practices, in terms of construction and design. However, disclosure of correct information, adherence to commitments and prevention of unfair practices remain a challenge. The Government has to balance its role as a regulator as well as facilitator for the industry through effective regulation along with streamlined approvals and taxation procedures. An effective grievance and dispute redressal mechanism is also required to protect property rights. Financing agencies need to improve on due diligence and report credibility through transparent assessment of projects. A lower cost of funding is critical for the industry to meet the shortfalls due to massive urbanization. Buyers and Investors also have an important role in increasing transparency and efficiency by undertaking purchases through accounted means and reporting correct income and taxes from real estate.

Figure 8: Role of Stakeholders in a Transparent Ecosystem

Products Proper representation of product quality, area, amenities, location, efficiency and other project characteristics that influence buying decision. Services Provide information regarding project progress, approvals, registration and transfer processes and maintenance. Performance Reporting Report correct performance of the project in terms of sales and construction. Approvals and Taxation Streamlined and transparent approval process to reduce project costs. Formulate effective simple taxation rules to avoid double taxation. Redressal Mechanisms Setup an effective grievance redressal mechanism for all interested stakeholders. Transaction Records Make transaction records available for a transparent information flow to buyers and investors. Development Plans Ensure civil participation in development plans to address concerns and requirements of citizens.

GO

PE

RS

VE

LO

RN

VE

ME

DE

NT

REAL ESTATE TRANSPARENCY

Services Provide an objective and unbiased service to buyers and developers.

Cost of Funding Maintain the right cost of funding to buyers and developers to ensure smooth completion of real estate projects.

Credibility Reporting Report credibility ratings of developers and buyers to reduce transaction risks
Source: Real Estate Intelligence Service (Jones Lang LaSalle)

Reporting Report income and taxes on properties accurately, following laws and regulations

BU

YE RS EN CI ES

Accounted Purchases Should purchase real estate through accounted means

FI NA NC IN G AG

Information Seeking and Distribution Seek information through multiple sources and relay right information to other interested parties

Advance - Indian Real Estate Transparency Index 2011 19

Authors
Himadri Mayank Assistant Vice President, Research & REIS himadri.mayank@ap.jll.com +91 22 3307 1509 Himadri Mayank manages the operations of Jones Lang LaSalles research offering - Real Estate Intelligence Service (REIS), and is responsible for the teams outputs, including research reports such as topical whitepapers. Since joining the firm in 2008, he has delivered several bespoke research projects in the office, retail and residential sectors based on specific client requirements. Himadri holds a bachelors degree from Indian Institute of Technology (IIT), Kharagpur and has over four years of experience in the field of real estate. He is pursuing the Chartered Financial Analyst (CFA) program offered by CFA Institute, Charlottesville and has passed the 2011 Level III CFA exam. He is the life member of Association for Promotion of Creative Learning, a not-for-profit organisation which aims to promote education for underprivileged through creativity and creative learning in society. Ankita Satnaliwala Senior Analyst, Research & REIS ankita.satnaliwala@ap.jll.com +91 33 2227 3293 Ankita Satnaliwala contributes to bespoke research assignments, topical whitepapers and research deliverables on commercial, retail and residential real estate markets in India. She is also responsible for the Real Estate Intelligence Service (REIS) analytics and publications on the Kolkata market. Ankita holds a Bachelors degree in International Business (Economics) from Lancaster University, UK and a masters degree in Real Estate Finance from the University of Cambridge. Ankit Bansal Senior Analyst, Research & REIS ankit.bansal@ap.jll.com +91 22 3307 1513 Ankit Bansal has been involved in enhancing and expanding the Real Estate Intelligence Service (REIS) by designing new research and analytics offerings. Based out of Mumbai, he also manages bespoke research assignments and contributes towards client reports that aid investment and portfolio management decisions. Prior to joining Jones Lang LaSalle, he was involved in market research, business analysis and consulting across diverse sectors including consumer goods, digital media and financial services. Ankit holds an undergraduate degree in Business Studies from Delhi University and a Masters degree in Knowledge Management from Nanyang Technological University, Singapore. Ashutosh Limaye Head - Research and REIS ashutosh.limaye@ap.jll.com +91 22 3307 1512 Ashutosh Limaye is responsible for overseeing research and REIS business of Jones Lang LaSalle. He is also responsible for effective business development, selection, grooming and growth of professionals in the research division. He has 14 years of experience, including one and half years of post graduation in planning with specialization in Urban Planning. His contributions include real estate market intelligence and forecasting, formulations of economic and physical plans, assessments of policies, legislations and regulatory mechanisms for delivery of infrastructure services, study of urban governance initiatives for urban management programmes, identification of appropriate modes of private sector participation in infrastructure delivery for large-scale infrastructure and township projects in the urban context, financial cost-benefit analyses, project formulation and appraisals, and urban land management. Acknowledgements We would like to acknowledge the invaluable guidance at each step from members of CREDAI towards the content for this whitepaper. Rohan Sharma and Hariharan Ganesan from Research also contributed significantly to this project.

About Jones Lang LaSalle India

Jones Lang LaSalle is Indias premier and largest professional services firm specializing in real estate. With an extensive geographic footprint across eleven cities (Ahmedabad, Delhi, Mumbai, Bangalore, Pune, Chennai, Hyderabad, Kolkata, Kochi, Chandigarh and Coimbatore) and a staff strength of over 4400, the firm provide investors, developers, local corporates and multinational companies with a comprehensive range of service including research, analytics, consultancy, transactions, project and development services, integrated facility management, property and asset management, sustainability, warehousing and logistics, capital markets, residential, hotels, health care, senior living, education and retail advisory. For further information, please visit www.joneslanglasalle.co.in

About CREDAI

The Confederation of Real Estate Developers Associations of India (CREDAI), an apex Real Estate Developers body, has congregated over 6,000 Developers all across India under a single umbrella and has linked them with government and customers through relentless initiatives and activities. The major objectives of CREDAI are To perpetuate an ethical code of conduct, which is self - imposed & mandatory for all the member developers / builders of CREDAI to maintain integrity & transparency in the profession of Real Estate Development. To represent the developers/builders across India by communicating & representing with the government authorities for the formulation of proactive policies for this profession. To encourage & support the developments/builders to increase their efficiency in the development /construction activities by introducing the latest technologies. To disseminate the data, statistics & other related information in this profession of real estate development. To promote the interest of construction workers & to educate them on the best practices. To encourage research in the profession of construction & real estate development. To facilitate easy housing finance availability to the property purchases by working in close coordination with the leading house finance institutions & banks. CREDAI helps the Developer community to Facilitate, Promote, Build, Serve and Prosper.

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