Ratings can enhance credibility

Ravi Sinha

Realty ratings are at a nascent stage in India but in a sector that is striving hard to weather the challenges of poor perception and projection along with the increasing competitiveness, it has the potential to be a game changer in the housing market. After all, the present eco system fails to differentiate between the serious developers and the fly-by-night operators. Though at present it is debatable as to how objective such ratings are, the practitioners maintain that the developers’ willingness to get a voluntary third party audit itself is an indication of the changing face of the Indian real estate.

From the buyers’ point of view also it helps in comparative assessment in the absence of credible independent research in the sector. In any given micro market across the country the projects of various developers in the same price band have more or less the same specifications. The claims are the same, offers the same and most of the time it seems that the marketing brochure of one company is no different from that of the other. All the buyers are not well connected to even get a cross check of the developer’s past track record.

Moreover, while word-of-mouth publicity is often glorified by the developers, fact remains that high investment like property in India is normally kept a secret. This calls for a credible third-party audit of the developer and his project portfolio which could serve as a source of due diligence for the buyers.  

After all, the sector is characterised by the presence of a large number of unorganised players, low level of institutional funding, labour and raw material shortage, and lack of adequate and timely operational information. These inherent characteristics expose the stakeholders to a very high degree of risk of delivery.

Usually the most important information is either not made available to the buyers, or is too technical for them to decipher. This has led to the sector being viewed with suspicion by all stakeholders. 

Advantage of realty ratings

Ratings thus, can play a critical role in giving property buyers an objective perspective of projects on all critical parameters, and helping them take an informed decision. Analysts maintain there are several facets that constitute a brand, with credibility and transparency being the critical ones. When a developer gets his projects rated by a credible third-party firm, it sends positive signals to the market and key stakeholders such as bankers, financers, customers and suppliers, thereby enhancing his reputation and brand.

Anurag Jhanwar, former Director, CRISIL Real Estate Star Ratings, asserts that irrespective of whether the project gets a high or low rating, any developer who goes in for real estate ratings should be lauded for taking the initiative to be more transparent. This indicates greater professionalism on the part of the developer. According to him, a higher project rating does indicate adherence to high standards of systems and processes across all the important parameters, which if followed consistently, lead to improved brand value for the project and the sponsor as well. 

“Any project which is rated goes through a stringent evaluation on critical parameters such as the developer’s background, legal approvals received, the developer and project’s financial strength and construction quality, as well as the innovative attributes of the project. A rating also forms an effective tool for buyers to complement their own due diligence. Not only that, the rating agency monitors the project till completion, and hence provides updates on all important parameters; thus fulfilling the much-required need of providing information in a transparent manner to the buyers,” says Jhanwar.

Question of objectivity

Critics of ratings maintain that the methodology is not-so-objective and hence fails to serve the purpose. However, the practitioners maintain that any robust evaluation exercise has objectivity at its core.  Ratings, in particular, bring transparency and reduce information asymmetry, which is critical especially for a sector like real estate.

Some of the developers also agree that getting a rating done from a rating agency indicates the willingness of the developer to share information on the project being rated, thereby reducing the information asymmetry that plagues the sector.

Revati Kasture, CGM-CARE Ratings says rating is, in fact, an objective assessment of various project related parameters. A robust due diligence process, strong methodology and rating/grading expertise of rating agencies are key enablers to the rating exercise. With the product being evolved recently and the sample size being small in comparison to numerous projects that are under construction pan-India, it is a long journey. With more projects being rated across cities, comparisons will be meaningful across projects.

“The rating agencies are trying to create awareness about the rating process, methodology and benefits to various stakeholders of the sector viz, developers, lenders, regulators and customers. Ratings across projects enable comparison and provide a value-added decision making tool to the purchaser of the property. Increasing acceptance of ratings among the developer community and lenders will improve the transparency levels for the sector as a whole and is expected to aid in access to the much needed institutional funding to the sector,” adds Revati.

More teeth expected

A committee set-up by the Finance Ministry had earlier recommended rating-based mechanism for lending. It basically says that a developer who has a certain level of rating can afford capital at a lower rate of interest as against those who don’t have higher rating. That may not be ideal and CREDAI is not happy with it, some of the analysts maintain that in terms of the direction it is good overall.

Sachin Sandhir, Global Managing Director – Emerging Business, RICS,  says that linking capital and disbursal of capital with a certain standard is something that should be appreciated. 

“Industry status will happen when it will happen and as of now it is not happening. So, what is important now is track record of the developer, delivery track record, location of the project and I don’t know whether rating is the best mechanism to do it, whether banks’ internal credit mechanism system should be trusted to differentiate between the two; I think this is the call they have to take. Even for rating based mechanism for disbursal of capital, I think will drive the sector in the right direction,” says Sandhir.

Others believe it should not be made mandatory and those who take it will be benefitted and it will encourage others also to adopt it. Once the highly rated developers start getting the capital at a lesser rate and there is advantage of doing the right things, the developers where possible will do it and that may be the beginning of change.

Critical differentiator

While the real estate sector has witnessed significant growth over the past several years, it has remained unorganised and unregulated leading to various issues because of information asymmetry and lack of transparency. This has also had impact on the ability of various stakeholders in their assessment of the risks involved while lending, investing and purchase transactions. The most impacted are real estate retail buyers who have to deal quite often with incomplete information on the project. Due to this, there is an urgent need for a third-party evaluation.

Ratings on four crucial parameters viz developer, legal, construction and financial quality is important as it improves transparency in the sector, enables buyers to make an informed decision and another due diligence tool for lenders. The rating provides a level-playing field based on quality and self-imposed discipline among the developers. The final outcome of rating is on various input parameters and rating agencies assessment of the developer and the project. A higher rating (Scale is 1 star to 7 star — 7 being highest) indicates that project will be completed within the scheduled time and will have all the agreed specifications. The developer can use the rating for marketing, branding and loan request process. The rating does enhance the credibility of the developer among various stake holders.

The real estate rating, if done with well-defined and transparent methodology can lead to brand enhancement of the projects and increase trustworthiness of developers. As more and more developers adopt ratings and start disseminating critical information through a credible third party to all stakeholders, the sector will gain greater credibility.

 — The writer is CEO, Track2Realty