Without real estate reform, REITs may turn out to be like amnesty for black money

We, as a nation, arefond of doing the easiest when the most difficult is demanding. Who says we fail to pluck the low hanging fruit? We play cricket throughout the year to the applause of the benighted nation which does not ask the obvious question - why do we excel in a game boycotted for a variety of reasons by the major sporting powers and largely come a cropper in Olympic level games? We embraced the services sector with alacrity - it now accounts for 55 percent of our GDP - instead of putting a sound agrarian and manufacturing bases.

Now we have the Sebi announcing Real Estate Investment Trusts (REIT) regulations ahead of passing the Real Estate Bill in the Parliament. The real estate sector in the country stinks and reeks of corruption. Builders mulct the unsuspecting public in a variety of ways.

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Deadlines are missed and area specifications are followed more in breach than compliance. Black money plays a huge role in the sector with ill-gotten wealth finding an easy parking space there. Cost escalates dangerously for the buyers with builders laughing all their way to banks.

Under the circumstances one thought the new NDA government in office would make the Real Estate Bill its priority. Its lynchpin would be an authority at state and national levels that would combine to tame the rapacity of the builders by mandating disclosures of their projects with cost, size, deadlines and other relevant details transparently on their websites at the pain of penalty for breach of these commitments. Indeed, it is one sector that has been left unregulated despite its size and impact on the middle class much to the merriment of builders and the chagrin of buyers.

But we are for strange reasons keener on REIT perhaps in keeping with our trait of plucking the low hanging fruit first. REITs, it is averred, would bring foreign capital into the Indian real estate sector. Pray how? To be sure, foreign pension funds and insurance companies are indeed deep pocketed but they are a mighty finicky and cautious lot. Would they invest in REIT units despite knowing that their underlying assets (real estate) belong to the category of high risk investments in India? May be the government feels that there would be an encore of what Foreign Institutional Investors (FIIs) did to our corporate governance standards.

The entry of FIIs, it is said, made our corporates pull up their socks lest the fastidious investors did not invest in their companies. Perhaps the government believes that foreign investors in REITs would put pressure on our real estate sector to behave.

Curiously, FDI is allowed 100 percent through the automatic route in this sector but foreigners haven’t come in droves. If anything, their response is lukewarm. Why? Because they know the sector cries for reforms and they could well be in league with or in competition against unscrupulous builders who have no compunctions in mulcting our nave buyers.

Come to think of it, there is some uncanny and eerie similarities between FIIs and throwing open REITs to foreigners. FIIs were allowed entry into the country but our country became inured to hot money. FIIs were allowed entry and our own people lapped it up to launder their black money through the round-tripping process.

History could repeat itself this time round on the real estate front. Dubious money could pour into REITS but we could go into raptures and pat ourselves on the back. Or is it that REITs would be a sort of semi or quasi-amnesty scheme for black money abroad?

You must make the batter before you make dosas. Likewise you must have real estate reforms before ushering in REITs which is nothing but a variant of mutual fund investments meant more for those who want to participate in the upside of real estate investments through diversification and with small investments.

Direct investments could be fraught. Even REITs with their resources would find it difficult to wade through the minefields unless the sector is reformed.