India’s jump on WB’s Doing Business 2018 Index: A real estate analysis

[ecis2016.org] With India jumping 30 places in a year, from 130 to 100, in the World Bank’s ‘ease of doing business’ ranking, we examine whether there has been any corresponding positive shift in the real estate sector

For all the right reasons, the World Bank’s Doing Business 2018 report was the toast of the country and the markets reacted with positivity. As a country, we should analyse the WB report, not only from the ranking perspective but also the DTF (distance from the frontier) scoring point of view, with scores ranging from 0-100 (where 100 is the strongest or front-runner economy). Also, to gauge the ruling government’s performance since election, it is appropriate to compare the rankings of 2018 and 2014. These three indicators reveal a lot more than what has been discussed so far. The government’s goal is to attain a ranking under 50 for ease of doing business. However, from the point of view of serious investors and analysts, it is important to try and figure out how soon India will reach the top 50 and how other countries are faring.

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The chart above identifies areas where India has made good progress vis-à-vis areas that still need improvements, on the journey of going from the 100th to the 50th ranking nation. From the perspective of real estate, the five indicators in red highlight areas which have a high impact on the sector – registering a property, dealing with construction permits, enforcing contracts and resolving insolvency.

How the World Bank measures high-impact real estate indicators

Dealing with construction permits

This includes all procedures that are needed, for a business in the construction industry, to construct a building, factoring in the time and cost to complete each procedure, as well as the quality of building regulations, quality control and safety mechanisms, liability and insurance regimes and professional certification requirements.

While maturing real estate sectors, such as residential, office and retail, have been doing well, it is time we look at new sunrise opportunities in sectors such as warehousing. With GST paving the way for cross-border movement of goods across India, the World Bank data on time and cost involved in constructing a warehouse is not encouraging enough. The e-commerce sector is growing rapidly in India and very soon, there will be opportunities for constructing large modern warehouses, equipped with state-of-the-art automation.

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Registering a property

This includes all the procedures that are necessary for a business (buyer), to buy a property from another business (seller) and transfer the title of the property to the buyer’s name, so that the new owner can use the property for expanding its business, or as collateral for taking loans or sell the property to another business.

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Before the Real Estate (Regulation and Development) Act (RERA) became a reality in 2017, information on projects, land title clearance deeds and developer liability, existed somewhere on paper (if existed at all) and buyers had no access to it. Nevertheless, verifying land title clearances and other aspects of due diligence were the responsibility of the buyer, who would have needed to engage a consultant for such verification.

The full impact of RERA is still not visible in the ranking for property registrations. This will only happen, when all states have adopted RERA, without tampering with the central guidelines by next year. Also, initiatives such as single-window clearances and online registration facilities should be strengthened, in order to make these procedures less time-consuming and cost-intensive.

Online records of titles, title insurance and title search and certification will be the real game-changers, which could take India into the World Bank’s top 50 almost immediately. Work has commenced on digital registration, digital records and online search and certification, but adequate controls also need to be added at every stage.

Enforcing contracts

This includes the time and cost involved in resolving a commercial dispute through a local first-instance court, the quality of judicial processes index and evaluating the economy on how well it has adopted practices that promote quality and efficiency in the judicial system.

The World Bank’s Doing Business report, says that after establishing debt recovery tribunals in India, non-performing loans have reduced by 28 per cent, thereby, resulting in a decrease in overall interest rates. RERA, as a body that resolves disputes between developers and buyers, is a progressive initiative, which, however, must be implemented in all markets without dilution. Progress on this will be captured in next year’s report and reflect in India’s ranking on this parameter. The processes involved in resolving disputes between businesses, land owners, developers and the government, need to be speeded up.

Resolving insolvency

This includes the time, cost and outcome of insolvency proceedings involving domestic entities, as well as the efficiency of the legal framework for judicial liquidation and reorganisation proceedings.

India’s track record, vis-à-vis insolvency has been very poor, resulting in investors’ reluctance to involve themselves financially. There is a large concentration of stress in the land-rich textiles and metal manufacturing industries and it remains to be seen whether the new Insolvency and Bankruptcy Code, will help unlock land parcels in Indian cities.

Positive measures taken and challenges towards improving ease of doing business in real estate

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This does not mean that the Indian government has done nothing. These ranks are merely relative performances, as seen from a strong correlation between ranks and DTF scores. It does mean that other countries in Asia and Africa are possibly doing far better, in terms of reforming their real estate and manufacturing competitiveness when compared to India.

The report has acknowledged India’s efforts in terms of:

1. Single window approval system for building plans.
2. Streamlining business incorporation processes.
3. Easing tax compliance procedures (via online filing, consolidation through GST, etc.).
4. Bankruptcy and insolvency.
5. Easing export-import border compliance procedures.

It also confirms that after establishing debt recovery tribunals in India, non-performing loans have reduced by 28 per cent, leading to a reduction in overall interest rates.

However, it has also highlighted a few persisting challenges – for instance, the World Bank sees inefficient licensing and size restrictions (in FDI, etc.) as continuing to hamper India’s total factor productivity (TFP). There could be a whopping 40-60 per cent improvement in TFP, if India overcomes these challenges. The outcomes from the recently modified IBC code will be closely monitored, having a strong bearing on doing business rank and DTF score next year.

There is a need to focus more on reforms or initiatives such as ‘Make in India’, ‘Housing for All’, land acquisition, insolvency and contract enforcement, to overcome the remaining challenges. The good news is that India is the shining star among the ‘major investible markets’ this year, exhibiting remarkable progress in its DTF scores.

While India’s massive improvement on the World Bank’s EODB index is a creditable achievement, a lot needs to be done in the future to improve further on it.

(Note: Graphs and tables from World Bank’s report are reproduced as published.)

(The writer is managing director – strategic consulting, infrastructure and smart cities, JLL India)

Source: https://ecis2016.org/.
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Source: https://ecis2016.org
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