8/12/2019 07 Banking, Insurance and Disaster Management Concerns for Indian Real Estate

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Banking, insurance and disaster management concerns for Indian real estate

By - Sandeep Donald Shah

Banking, insurance and real estate are considered the three siblings intervened with one another withmore than one strings. Not to offend or undermine the importance of other sectors but these three can be

termed as the corner stones essential to any great economy (the forth spot left open for competition). Alldeveloping and developed nations have long realized their importance and hence these are closelymonitored and regulated by respective overnments and independent regulatory authorities, with ofcourse one e!ception, the real estate markets of "ndia.

#ately banking and real estate are stealing the limelight. All business news channels and tabloids areconcentrating their efforts on how the $eserve Bank of "ndia ($B") and the %inance &inistry aretightening the reins on the "ndian real estate. &ost articles cover the sub'ect with a sense of criticismhowever fall short of blatantly opposing the moves. None until now have dealt with the rationale behind$B"s actions. "ts not that the overnment has suddenly become the sworn enemy of the once blue eyedsector, in addition to controlling inflation $B" is most concerned about speculators having penetrated the

sector in a huge way. *he typical modus operandi being to undertake bulk bookings by paying a smalltoken amount during pre+launch launch of a pro'ect, holding stock for few months and then selling at asmart profit.

-o how do the figures work out, let us assume an apartment of size /// s0uare foot priced a $s. 1/// as0uare foot. 2ost of the apartment works out a modest one 2rore, typical price levels e!isting in allmetropolitan cities with the e!ception of &umbai where it can be multiplied by a factor of three. *heapartment is booked by paying a token amount of 1 or 3/ percent when opting for installment paymentoption, 1 lakhs in this case. "n the coming months hype is created and the prices escalate by anythingclose to 3/+/4, speculator then sells at the inflated prices. "n this case the sale price works out to$s.5/// a s0uare foot, a profit of $s. / lakhs on an investment of $s. 1 lakhs in appro!imately 6+7

months, 3//4 return annualized.

*oday the real estate sector once considered safe is being talked of as high risk. "n addition to the fear ofspeculation giving a bad name to the entire industry there is one another uncertainty i.e. risk of a naturalcalamity like earth0uake. 3st2entury %inance (formerly /th2entury %inance) went bankrupt after theNorthridge earth0uake of 3887, suffering a loss of 3.3 Billion 9- :. *he memory is still fresh amongstmany bankers and insurance companies. Not to forget that many other companies also with investmentsin real estate sector suffered similar losses in Billions. Banks also face the dilemma as to what happensto the property loans disbursed by them in case the very property mortgaged gets destroyed in anearth0uake (all buildings being designed in "ndia are aimed with protecting lives of occupants and notthe building per se implying that they would have to be demolished and re+built as there would be

considerable structural damage). -imilarly the insurance companies are worried as to how would theypay up the hundreds of thousands of claims especially in densely populated areas like &umbai.

%rom lessons learnt from Northridge earth0uake in 9- (3887) and ;obe earth0uake in

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=arth0uake $esistant #ife -afety > minimum level of earth0uake protection, aims at

preventing total building collapse, however there will be structural damage and the buildingmay warrant demolition and reconstruction. *he building codes are based on this minimumprotection, however leave the window open incase the user wants to opt for higher level of

protection. =arth0uake $esistant "mmediate ?ccupancy > ne!t higher level of earth0uake protection, in

addition to collapse prevention, aims at keeping the structural damage to a minimum therebyensuring safe occupancy even immediately after a ma'or earth0uake. "deally suited forhighrise buildings.

=arth0uake $esistant %ully ?perational > highest level of earth0uake protection ensures

safety and operation ability of non+structural components in addition to the "mmediate?ccupancy standard of the building structure. 2riteria used in important buildings likehospitals and command @ control centers.

A key advantage of adopting higher levels of earth0uake protection is that a much lower interest rate can

be negotiated with the banks for the particular pro'ect. Banks would gladly oblige as higher safety alsoreduces their risk levels. "nsurance companies will also follow suit in reducing the premiums. *he directimplication for the buyer would be that this twin advantage will offset the cost of higher protection.*ypically =arth0uake $esistant > "mmediate ?ccupancy would cost $s. 31/ to // per s0uare footimplying a 31// s0uare foot will cost $s. to 6 lakh more.

*he onourable -upreme 2ourt is presently hearing a "# on safeguarding the interests of generalpublic who are being e!ploited by some unscrupulous builders and developers. *he "# has been filedby a N? called -anrakshak (*he rotector). opefully the court ruling would serve as a guideline ande!pedite the formulation of concrete laws by the overnment. ?n the issue of earth0uake protection, thebuilders developers should clearly mention on the buyerseller agreement that the building is protected

against what magnitude earth0uake on the $ichter scale and what will be the building performance ifthat scale of earth0uake strikes. Cill the building sustain structural damage and to what e!tent. *akingadvantage of lack of awareness of the masses most builders are selling Dseismically deficientE buildings.Felhi which falls in Gone 7 can be e!pected to witness a magnitude H earth0uake on the $ichter scalewhereas &umbai in Gone 6 can e!perience a magnitude 5.1 0uake. owever recent studies conducted at""* &umbai by rof. $avi -inha have concluded that the risk that &umbai faces is far greater than whatwas envisaged earlier. *he threat perception of &umbai should be upgraded to Gone 71.

Are "ndian citizens not entitled to know what the different levels of earth0uake protection are and theirbuilding has been designed to withstand what magnitude earth0uakeI "s it not the responsibility of theovernment to increase public awareness and promote earth0uake risk mitigationI "s this problem not

serious enough to warrant a concerted media campaignI

*he present situation is not as bleak as it sounds, National Fisaster &anagement Authority hascommenced an advertisement campaign and hopefully the same will spread actionable awareness suchas what are different kinds of earth0uake resistance and how the respective buildings will perform sothat people can then go in for seismic upgrade and retrofitting.

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