The credit ratings agency CRISIL recently launched real estate ratings in India, which would help common buyers make informed purchases. It is expected to bring in more transparency in real estate sector and will work on a project-specific basis. Rating will be assigned on a scale of one to seven stars after comparing it with other alternatives available in the same city.
Explaining the mechanism CRISIL’s Managing Director and Chief Executive Officer, Roopa Kudva said: “A developer commissions the agency and gives us access to various details needed for assessment. We take into account our parameters and rate the project. Once the developer accepts the rating, we go public with the rating and project analysis which will be given to common buyers for free.” The parameters include the past record of the developer, the infrastructure he is erecting, finishing, timely completion, cost overruns, aftersales service, legal issues like title and project innovations such as green buildings.
The rating will be given midway through the project and will be under surveillance till project completion, during which it can be revised. In fact many rating agencies are coming up with real estate rating systems. On the international level Fitch has been rating real estate projects for quite some years.
Speaking about the need for such ratings and their viability, Samujjwal Ghosh, Senior General Manager, Marketing, Lodha Developers says, “I believe that an all-round assessment of real estate projects will help buyers benchmark and identify quality projects within a city. Such ratings should ideally provide a comprehensive evaluation of all project specific risks which could impact the quality of the project. Such ratings, if done with thoroughness, definitely bring greater transparency in the system enabling the consumer to take a more informed decision. It also works in favour of the developers who focus on quality and gives them an opportunity to be seen in a differentiated light. At an independent level, consumers face paucity of adequate information when acquiring property and such objective ratings does definitely make life easier for the consumer.”
Ashok Kumar, MD and Principal Partner, Cresa Partners, an international property consultant company also thinks it is a very good idea and a positive move towards bringing professionalism in real estate. “In fact I remember CRISIL starting this almost ten years back. But it was not as successful then as I guess the industry was not mature enough to actually aspire for professionalism and global recognition. Now things are different and developers are going abroad and picking up projects elsewhere in the world too. In that case they would actually welcome it,” he says, adding, “All over the world we do have a third party rating system and many years back Citi Bank had developed an elaborate rating system, which was very comprehensive. The government too is to come up with a regulatory body and all these would be good for the health of the industry.”
However, Kaizad Hateria, GM-Sales and Customer Relations, Rustomjee, is a little doubtful about the viability of such a product. “Most reputed developers have their strict and very stringent system of quality checks. Today they are conscious of their reputation. At Rustomjee we are stringent about our quality checks that we have developed scientifically, the land titles, the legal issues and everything that can affect the customer. I don’t think a third party rating system can match that,” he says, as he asks, “Do they have the expertise in real estate? How scientifically evolved are their systems, what kind of research are they doing? It needs a whole department of experts, are they employing them? How authentic are their methods? How are they going to assess the risk factors? How are they going to keep track of the projects? How will they foresee the shortage of cement, steel and other material?”
Gulam Zia, National Director, Research & Advisory Services, Knight Frank India, also expresses his doubt as he feels that rating a product in a white goods category like a car or a financial instruments, is easier, as there are some standard parameters and the expectations are more or less uniform. “Product development is done in factories that must have certain standard, and the expectations are uniform. The same goes with a financial instrument which must fulfill certain SEBI guidelines and can be rated on certain standardised formula. However in the case of real estate, every project is unique and no two products can fall into a single category. So to rate a project the categories must be dynamic and can’t remain constant,” he says. Zia adds, “The rating system is concentrating on project rating and there is one column where they talk about the track record of the developer. Now for each product sometimes developers form different companies. So how do you keep track of his record? Coming to product rating, let us look at the legal quality; it is difficult to arrive at a formula as the legal aspects are still mired in vagueness. The same goes with construction quality, which differs from day to day in the same project, when most of the material is hand mixed on the site.” It is difficult to keep track of all these and they have to depend on the papers submitted. This would colour the objectivity aspect.”
Playing a devil’s advocate, one would wonder if these ratings could be fudged using muscle power. Some developers have expressed their fear in this regard.However Kudva dismisses these fears saying, “CRISIL has a strong track record as an independent and credible agency. The evaluation process is rigorous and intensive incorporating detailed information on a number of project-related issues. The key parameters taken into account for the ratings are the quality of the sponsor, construction quality, legal background, financial strength, and innovation. The final ratings are arrived on the basis of stringent construction quality and execution norms prescribed by being met. Each star rated project will be under surveillance till the occupancy certificate is granted.”
Of course the product being new in India, it is yet to be fully understood by people and its development would need constant improvisation. Moreover since it is not mandatory and the government has not put any framework a developer would go for it only if it adds value to it, thinks Zia as he says, “That will happen only if the rating agency’s brand value is bigger than the developer himself. In another case a developer may go for it in case he has too many foreign investors who want the project rated. Since most rating agencies are now global agencies, there must be reasons for the investors to insist on ratings done by them. Hence whether these ratings would eventually bring in transparency requires huge amount of deliberations and some wait and watch.” The agencies should develop foolproof systems and there must be acceptability of the agency by the buyers, feels the industry. But most agree that this may a good starting point in the effort to bring in transparency.
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