Now that the Ministry of Housing and Urban Poverty Alleviation (MHUPA) has released its Model Real Estate Act, it looks like there will be some semblance of normalcy and authority in this sector.

Why is this Act so important ?

Building / Buying a house / apartment is even today the single most important objective of most Indians. Families spend upto 5 times their gross annual income in purchasing an apartment / house of their choice. It is indeed hugely surprising that such a major piece of  both, the Indian household as well as the Indian Economy is still largely unregulated.

The lack of regulation has helped create many vested interests and has resulted in huge Information Asymmetry as far as the entire Real Estate sector is concerned. Perhaps this is the single most important reason for poor ownership of dwelling units in India.

A Regulatory Wish List – Just 5 items

a. Standardised Terminology : It can be carpet area, built–up area or super built-up area, whatever. But let there be consistency in both measurement as well as in representation. Like SEBI has mandated how Mutual Funds should represent performance and dividends, the Real Estate Regulator needs to ensure consistency in all terminology.

b. Advertising : This has to be strictly regulated. You cannot have a township that is 30 kms from CP being mentioned as being just 30 minutes from Delhi’s CBD.  Residents don’t commute by helicopter, do they? Nor should you depict a landscape from Switzerland as the view from your bedroom. And prices should clearly include all extras. Or at least a mention of all exclusions should be made. (And of course, ads must be released only after ALL sanctions are obtained. Remember the DLF fiasco in Bangalore).

c. Transparency : The Model Act has made it mandatory that all documents pertaining to approvals and sanctions be made available for inspection. The Regulator can go one step further and insist that the Sale Deed prominently display a clause that says the client has personally inspected all documents. While on the subject of transparency, transparency in pricing is also very important. Real Estate will hugely benefit from a Mark–to–Market price discovery mechanism. This will remove the information asymmetry that exists to the great disadvantage of the buyer.

d. KYC : KYC needs to be made extremely stringent so as to weed out benami transactions. Every single purchase or sale gets logged into an AIR that automatically triggers an Income Tax flag. It must be remembered that society as a whole pays a huge price for benami and cash transactions in Real Estate. This one single regulation can lower the cost of transactions for legitimate and long term buyers, while weeding out speculators. (Madhu Koda wanted to buy a SEZ near Delhi. KYC anyone?)

e. Real Estate Agents : Today almost anyone can become a Real Estate Agent. As a result the entire middleman fraternity is murky. The Regulations should stress on certification that lays emphasis not only on procedural and business knowledge, but also on ethics and best practices. Real Estate promoters themselves probably realize that they could do with more professionals in their field. With the market moving towards affordable housing and larges scales of operations, distribution becomes necessary.

In my honest opinion, even a 25% improvement in each of the above mentioned points will be a huge kicker for the Real Estate Sector.

The icing on the cake : Floating of the first Real Estate Mutual Fund (REMF) which will then make Real Estate an integral part of financial planning and asset allocation.

Rahul Dravid, on learning that he had been dropped from the Indian squad to face the lads from Oz decided to head for his favourite Kabini Wildlife resort. And just whom did he meet there. The Great Indian Bull / Bison. Known as Gaur in the Indian forest, but as Jakesh Rhunjhunwala in India’s only ISO-9001 certified habitat for bulls, stags, dogs and bears – Dalal Street.

Being great admirers of each other, they decided to skip the evening safari and instead sip a large (Coorg Coffee, of course) at the viceroy lodge. Jakesh, not known to mince words, instantly said that the greatest fund manager in waiting was Cheeka from Chennai. Read more…

According to a recent survey commissioned by Cartoon Network, Indian kids received an average of Rs. 258 as monthly pocket money in 2009, a sharp increase from Rs. 193 the kids received in 2008.

The Kid’s Lifestyle Research throws up interesting facts. Kids in Ludhiana receive Rs. 419 on an average and kids in Delhi receive Rs. 295 and in third place are kids in Bangalore with Rs. 290.

The slowdown has not impacted kids in anyway. In fact, parents were willing to cut back on holidays, but not on kid’s pocket money.

The whole exercise had me thinking on how just a typical kid would handle the issue of pocket money.

a. The Hedonistic Kid :

Blows up the entire pocket money on malls / small treats with friends / toys / other goodies. Runs out his Rs. 258 midway and takes a line of credit from his mom and gradually builds up an impressive outstanding balance. Mom and son / daughter soon have to sit down and negotiate the kid’s balance sheet and CDR (Child Debt Restructuring) gets underway.

b. The Making Ends Meet Kid :

Just about manages to hang on to her Rs. 258. Usually course corrects midway or balances books with help of friends. Such kids know the value of money, but also want to have a good time.

c. The Balanced Kid :

Has the equivalent of a household budget. Prioritises spending and is keen to save a sizeable kitty at the end of every month. Such kids know the power of savings. The act of saving and accumulating a corpus gives them a positive sense of accomplishment. Such kids are every mother’s dream and will grow up as balanced individuals who can delay gratification if the situation so demands.

d. The Financial Planning Kid :

Now, this is a mythical kid that I would like to see emerge. This kid goes up to her dad and has the following dialogue :

Daughter : Dad, thanks for the pocket money of Rs. 250/-. But I need to discuss something important with you.

Dad : Go ahead.

Daughter : I would like you to index it to something relevant, like your salary for example. Give me 0.5% of your salary at all times. Or increase my pocket money by a factor of 10% pa.

Dad : Hmm, sounds interesting. Let me think about it.

Daughter : I have one interesting win-win deal for you.

Dad : Now, what can this be?

Daughter : Of the Rs. 250 you give me, I will invest Rs. 200 every month in an equity scheme. It’s a risk, but its worth it if you give a matching contribution of Rs. 200/- . This amount is independent of the investment plans that you have for me, which I don’t agree with anyway.

Dad : What is wrong with that?

Daughter : The choice of investment for starters. You have invested in an Insurance scheme so that it takes the guilt out of you. I think you were impressed with the celebrity endorser as well as the clever name.

Dad : Nah…It combines Insurance with Investment. And once I invest, I will have complete peace of mind.

Daughter : OMG…you are saying exactly the same thing the advisor uncle said…Honestly, isn’t your term insurance enough. And the money you save on charges and fees may as well be given to me as enhanced pocket money.

Dad : But it is all for your sake, sweetheart.

Daughter : Thanks Dad, keep that dialogue with mom…I am cutting to the chase : Your company group insurance plus some term insurance will do just fine…just re-direct the savings into my bank account. I am in a hurry to accumulate wealth. I want to build my own Antilla.

Dad : Yes madam…what ever you say.

I know all of this is in the realm of fantasy. But one day, some kid may miraculously mutate into one helluva high integrity financial advisor.

The entire Advisory community is now viewing the year 2011 with a mixture of fear, skepticism, disbelief and indifference. I would view it as one that is inevitable.

To cut to the chase : The Consultation Paper circulated by the Committee on Investor Awareness and Protection is the MOST radical written word on financial advice. And for good reason. The paper authored by a committee consisting of representatives from MoF, SEBI, IRDA, MoCA and RBI and headed by Mr. D. Swarup, Chairman of PFRDA, has taken a hard look at the way financial advice needs to be dispensed. While the diagnosis is spot on (and most advisors agree), it is the prescription that is causing pain. Read more…

image from Indobase

Winds of change are blowing at hurricane speed in the Mutual Fund industry.

From Aug 1, 2009, investors would not have to pay any entry load in any Mutual Fund Scheme. SEBI has recommended that instead, they – the investor - would have to compensate their financial advisor a suitable amount for advisory services. This means that for every Rs. 1000 given to a MF scheme, the entire Rs. 1000 is available for investment.

(Do a simple exercise, look at all your investments, Mutual funds, Insurance, Debentures etc, and see which one has snipped the biggest hole as initial charges. Some may have collected Rs. 1000, but invested just Rs. 600). Read more…