The worry the buyers or investors may have is whether the house they are planning to buy is located on a legally-approved plot of land or the developer is going to deliver the infrastructure specifications that he has promised at the time of making the down-payment. If the answer to the above questions is a â€œYesâ€? then the genuine buyer can look forward to domestic rating agencies such as CRISIL (Credit Rating Information Services of India Limited) and ICRA (Indian Credit Rating Agency) for a legally correct position and also a proper authentic past record of the developer. The two agencies have launched schemes for grading real estate projects and developers in India coming to the rescue and mental peace of the potential buyers regarding property deals which anyway cost substantial money.
Need for Rating
Till now, the individual home buyer didnâ€™t have any ways or tools to assess the legal and asset quality of the home or property that he/she wishes to buy or to validate the creditworthiness of the developer, who is constructing the project. Further, buying a home or a property still remains a risky business as the property market in the country is unorganized.
The ratings introduced by CRISIL and ICRA are voluntary for sometime to come, though there is a strong case for making them compulsory. Going forward, lenders and project financiers are likely to insist on projects and developers to be rated before granting credit to large projects. Eventually the market would strive to make the rating mandatory.
The ratings will obviously benefit buyers, as the developerâ€™s track record and project feasibility has already been vetted by the experts (i.e. the finance companies that would be extending credit to them). The ratings will strengthen the domestic realty industry, which is expected to witness exponential growth.
A rating or a grade would just be a number or a letter. But, the factors that help the rating agency determine that single character would make a lot of difference to the buyer. Getting to know what the two rating agencies are going to examine before assigning rating to housing and developers will help you.
Below mentioned is a brief summary of the various aspects that the ratings agencies will examine:
1. Legal risks
a. The most important factor is the quality of the legal title of the property. The rating agencies will closely examine if the developer has obtained all the legal approvals needed for the projectâ€™s smooth execution.
b. Clarity of title: An independent evaluation of the title report prepared by the developer is done to ensure that the title is transferable. The origins of all such title documents are also examined.
c. Restrictive permissions: To ensure both safety and marketability of the title, an examination is carried out to determine whether all the necessary permissions from competent authorities (for instance, municipal and fire authorities) have been obtained.
d. Tax clearances: Tax documents are inspected to make sure that there are no liabilities on the property.
e. Sale agreement: The sale agreements between the developers and the buyers are evaluated This substantiates the commitments relating to delivery and ensures that buyers are not forced to agree to any over-the-top demands of the developer.
f. Development agreement: The agreement between the land owner and the developer is also studied closely.
2. Construction risks
The quality of civil infrastructure and finishes are very important determinants in the assessment. Therefore, rating agencies will thoroughly examine the extent to which the developerâ€™s services are integrated; the level of after-sales services; timeliness of construction and the adherence to stipulated costs.
a. Structural quality: The ability of the developer to translate the plan into a sound civil structure is examined. This depends on the quality of labor and material; the cost and project control mechanisms in place. The track record of the architects, structural engineers and contractors is also evaluated.
b. Civil infrastructure: Rating agencies thoroughly check if the approach roads, sewerage, water and electricity systems, parking facilities and security system are designed to meet the planned standards.
c. Finishes: Often the developer does not specify, in advance, the quality of the materials used in internal and external finishes. The developerâ€™s willingness and ability to deliver better finishing is assessed.
d. Integrated facilities: A key factor is the extent to which the developer has integrated facilities. Developers, who are personally responsible for carpeting, fabrication and transport are much more accountable than those who use â€œthird partiesâ€?
e. Time and cost overruns: Using experts, agencies evaluate the developerâ€™s ability to complete and deliver the project on time within the specified budget.
f. After-sale services: The extent and type of after-sales services planned by the developer are also closely monitored on a continuing basis.
In conclusion even the most effective rating system can only help to asses the legal, credit and asset quality of the home one is planning to buy. These ratings must be prudently utilized to invest the money for the right buy.