IFHE | Online MBA | Webinar | An evening with Mr Madan Narayanaswamy

An evening with Mr Madan Narayanaswamy

Introduction

On Friday, April 5, we had a fascinating session by Mr Madan Narayanaswamy, the Chief Executive Officer (CEO) of Radiance Realty, a leading residential real estate conglomerate with a turnover of 1000 crores.

About Mr Madan Narayanaswamy

Mr Madan Narayanaswamy is a distinguished Chartered Accountant, ranking 7th nationwide in the CA examination. Over a career spanning two decades, Madan has held pivotal leadership positions in prestigious organizations such as Ernst & Young, Morgan Stanley, CRISIL, and Casagrand.

Initially, he worked for global clients in crucial areas like financial assurance, equity research, and investment banking. Later, Mr Narayanaswamy gained invaluable insights into the entrepreneurial ecosystem as an Investment Manager at a domestic private equity firm.

Recognized for his financial acumen and leadership capabilities, Mr Narayanaswamy assumed the role of Group CFO of Casagrand, a well known residential real estate player. He successfully raised substantial funding and spearheaded the growth of allied businesses.

More recently, Mr Narayanaswamy has played a pivotal role in doubling Radiance Realty’s growth in just three years. Under his visionary leadership, Radiance Realty aims to further double its scale in the next two years.

Mr Narayanaswamy has a strong track record in business leadership, financial engineering, talent building, and operations management. Deeply committed to nurturing and empowering young talent, Mr Narayanaswamy fosters a culture of excellence, inspiring individuals to realize their full potential.

Beyond his professional endeavours, Mr Narayanaswamy finds joy in pursuits such as chess, movies, and music.

Housing Products

Housing products typically fall into these broad categories.

Plots
Villas
Row houses
Non high rise apartments
High rise apartments
Villaments (low rise apartments that combine the best of villas and apartments)

Key activities

The following are the key activities in the real estate business.

Land acquisition: Land is the main raw material for the real estate business. Identification and acquisition of land are key activities.
Title clearance: It is important to check that the title of the land is clear and above dispute.
Funding and acquisition: Funding is important as real estate projects may take years to complete and involve a gestation period.
Product design: The product should meet the needs of the target segment. If the product design is wrong, the project is doomed to failure. The product design is driven largely by micro factors: i.e. the needs of the immediate locality.
Approvals: All the approvals must be in place and then finally the RERA (Real Estate Regulatory Authority) approval. The rules vary across states/regions/municipalities.
Sales / collection / construction: Then the marketing of the property begins and money is collected from customers as per milestones.
Handing over and maintenance: The maintenance may be done for a period ranging from 6 months to 5 years depending on the philosophy of the builder.

Driving factors/Key risks

Four key factors drive the real estate business.

Title risk

If the title is questioned after the acquisition, there will be a big problem.

30-year title: It is important to have access to contiguous title deeds for the past 30 years. This can be a challenging exercise. Land records have been computerized only in the past 10-15 years. Moreover, there is no standard interpretation of laws across communities when it comes to partition, inheritance, etc.
Title vs marketable title: If there is litigation with respect to the title, it may be difficult to market the property.
Revenue records: Title can be verified not only from deeds of conveyance (These deeds act as the legal evidence of the transfer of title from one person to another at an agreed price) but also from the records relating to the payment of property tax, water bill, electricity bill, etc.
Litigation searches / encumbrances: Searches can provide information about the quality of the title.
Indemnities & guarantees

Approval risk

FSI eligibility - road width / setbacks: Assuming there is a road running continuously for 500 meters on either side of the plot, the FSI will be 2 for 30 feet, 2.5 for 50 feet and 3.25 for 60 feet wide roads.
Calculation of buffers - Buffers must be kept in case of a nearby nala/railway/metro rail. For example, a 30 metres distance must be maintained from the railway track.
No Objection Certificates must be obtained from multiple departments.
Acquisitions – The highway and city metro authorities and in some cases, the ASI (Archeological Survey of India) may have plans to procure the land. The developer must be aware of these plans.
Height: The height of the building is important in case of locations close to the airport.
Zoning and conversion: We should be clear whether it is a residential, industrial, or mixed zone. Conversion of agricultural land into commercial or residential use will involve approvals.
If mistakes are made, the project may not take off or the builder may have to settle for a lower FSI.

Note: The various real-estate approvals necessary can be summarized into three broad categories: Pre-Construction, Construction and Post-Construction approvals.

A developer must firstly obtain a Non-agricultural order (NA Order) that ascertains that the land is intended for commercial use. This is then followed with a detailed survey map of the land, with a clear demarcation of various survey numbers.

The architect then prepares a Master Plan or Layout Approval of the project. This is then submitted by the developer to the development authority for approval.

The developer then prepares detailed building plans of the structures to be built on the site and submits them for regulatory approvals. Finally, a commencement certificate (CC) is issued to the developer permitting the start of construction work once other relevant approvals such as from the Pollution Control Board and various NOCs from the water, fire, sewage, and electricity departments are in place.

Construction stage approvals are mostly related to compliance with approved plans. In the event of any changes, the developer must re-submit all the plans for further ratification by the authority.

Once a project is completed, the authorities conduct a final inspection and certify the project’s completion in accordance with the granted approvals. At this stage, developers usually cross-reference the various NOCs issued during the pre-construction stage. They are then granted a Completion certificate. This certifies that the project has been executed in accordance with the approved plans. Then an Occupancy certificate is issued by the development authority that signals that the project is fit and safe for human occupation.

Note: RERA Approval

Mr Naryanaswamy explained during the Q&A that without RERA approval, marketing of the property cannot start. RERA approval is given only after all the necessary approvals are in place. RERA also does not allow one sided clauses that go against the interests of customers.

Product risk

Sizing: If the target segment prefers 2 bedroom (BR) apartments, then a 3 BR project will not sell and vice versa.

Suppose there is a locality where the preference is for 2 BR apartments with a budget of say Rs 80 lakhs, an indicative break up could be: 25 % 2 BR 750 sq feet, 10% 2 BR 850 sq feet, 15% 2.5 BR 1000 sq feet, 10% 3 BR 1200 sq feet and so on.

Car parks: May be open or closed with 1 or 1.5 or 2 parking spaces per apartment.

Floor plan - views, wastages, ratios, segment: West facing view is generally not preferred by customers. The balcony should have a width of more than 3 feet. Bedroom dimensions should be at least 10 feet. Bathrooms should be more than 8 ft x5 ft and kitchens should be more than 60 square feet. For premium apartments, say 4 BR, costing Rs 5 crores, a maid’s room is usually needed with a separate entrance from the lobby.

Amenities & specifications: These include tiles, main door, other doors, paint, clubhouse, landscape, etc.

Vastu / ventilation / privacy

Cash flow management risks

Cash flow must always be protected. Any default by the builder on loan servicing commitments will have serious repercussions and may lead to loan recalls by other banks. Here are some typical funding arrangements:

Joint Development vs outright

Land stage funding

Construction funding

Receivable / LAP funding: Loans given against receivables or property.

Q&A

Mr Narayanaswamy’s career decisions have been driven by a desire to be closer to the action. Rather than being an analyst or a commentator he has wanted to make things happen on the ground. In the real estate sector, he has enjoyed a combination of freedom, action, and impact.

Demand for organized residential housing in India is strong. Incomes of Indian families are going up. Housing loans are easy to get. Only 5 % of the housing needs are provided by the organized sector.

In any given area, the home prices are determined by the market. So, the key to success is managing the supply side: purchase of land, approvals, title risk and construction. The developer must be good at managing the various approvals needed and in negotiating land purchases. The main raw material land is traded in an opaque market.

More transparency can enable the growth of the sector. For example, in the US, there is the concept of title insurance. Digitization can help. For example, encumbrance certificates have come online.

The most important trend in recent years is the preference for organized housing. People want to live in a gated facility with all amenities. Rather than buying land and constructing their own house, they want to live in a community. They are willing to travel longer distances if required. The house should suit the needs of the entire family and should be relevant for at least 15 years. Even people living in bungalows are shifting to gated communities. 15-20 years down the line, we may see Indians living only in gated communities like people do in Singapore or Dubai.

In real estate, leaders can succeed only if the projects are executed well. For successful execution, there are many risks to be managed. So being humble, careful, diligent, and grounded is important. Nothing is available on a plate. Things are often not clear. So the focus should be on ensuring that everything is working in synchrony. Details orientation is extremely important.

Compliance requirements have increased significantly in recent years. Various checks and balances are in place to minimize the damage done to nature on account of construction. Here are a few examples.

For all projects with construction exceeding 200,000 square feet, environmental impact assessment is needed.

When trees are cut down, they must be planted elsewhere.

10% of the area must be kept as open space (public park) to increase the supply of fresh air.

5% of the area must be reserved for civic amenities.

Rs 50 per square feet must be contributed to the EIAA.

Common area lighting must be provided only through solar power.

Various certifications are given for environmental friendliness. This could take the shape of green buildings with designs that allow the use of natural air, use of recyclable materials, etc.

Thanks to the use of technology, there has been a 15% improvement in transparency. But more can be done to increase both transparency and speed of approvals. A single window clearance would be ideal.

Some approvals have gone online. For example, in Tamil Nadu, drawings can be submitted online.

Today, technology is used mostly for workflow monitoring. The use of technology can be expanded more. Blockchain can help the sector.

Of course, construction technology has progressed a lot. If FSI is increased, we will see more high-rise buildings. That will enable the use of Mivan as in Singapore and Dubai.

Note: Mivan, short for 'Aluminium Formwork System,' involves the use of aluminium alloy formworks for casting concrete. The traditional RCC method relies on timber and plywood. Mivan employs lightweight, high-strength aluminium panels that are easy to handle and reusable. This method enables the swift assembly of formwork. It facilitates the construction of walls, slabs, columns, and other structural elements with speed and precision.

There are different skills required in this sector and they are somewhat mutually exclusive: Land acquisition, Legal, Approval, Product, Sales and marketing, Customer service, Construction, Finance and Support functions.

The career growth is linked to the size of the organization. Opportunities to grow come only when the business grows.

Those aspiring to be in the management cadre, must become very good at one skill and have a good appreciation of a few other skills.

Here are some examples of the big players in the Indian real estate sector.

South India: Prestige, Brigade, Shobha

Chennai: Appaswamy, Bhashyam

National: Lodhas

Office space: Ascendas

There are specialized organizations in warehousing. And when it comes to large construction projects, L&T is the clear leader.

There is nothing special about real state. There are many checks and balances in the sector. It is not possible to succeed in this business only with political clout. Various competencies and skills are required. Success depends on delivering promises and commitments to customers. Execution excellence is key.

The sector must work towards making homes more affordable. Various innovations are needed to bring the costs down. The delivery time must be cut from 36 to 24 months. Sustainability will also be a key requirement. Various engineering innovations are needed.

Use of prefab construction can help. But this may not create a favourable impression among customers. It is ok to use prefab for say clubhouses but not for the houses. If FSI is increased, taller buildings can be constructed with Mivan construction.

We should first check the title. If it is already approved by a bank, it is a good sign. This is denoted as APF or ‘Approved Project Financial’.

Note: APF number is assigned to a developer’s property by a licensed lender, housing finance corporation (HFC), or a bank. When a housing project has an APF number, it indicates the lender’s confidence in the particular undertaking. It means that important official documentation of the project has been approved. Funding institutions confirm a project’s legality through intense scrutiny. With an APF number, the home loan application process becomes much more streamlined. This protects borrowers from time-consuming paperwork.

The plan should be approved by the concerned authority such as Metropolitan Development Authority , Panchayat, Municipality, etc.

Last but not the least, the track record of the builder should be good. In the past, have they delivered on time?

Other considerations could be specs delivered vs specs promised.

REIT stands for Real Estate Investment Trust. It is essentially a company that owns, operates, or finances income-generating real estate properties. REITs pool money from investors, like a mutual fund. These investors don't directly own any physical properties but hold shares in the REIT. The REIT uses the pooled funds to acquire and manage income-producing real estate assets.

In case of an REIT, 90% of the income should be predictable. So usually, the underlying assets are commercial reality or warehousing. REITs are popular in places like the US, the UK, and Singapore. Most of the listing happens there. Mostly large pension funds subscribe and are happy with a 5-6% rate of return. For Indian retail investors, REITs may not make sense.

Price is already determined in the area. Holding inventory and waiting for the prices to go up may not be a good idea for the developer. Demand is not price elastic. A discount will not necessarily help sell a 3 BR flat if the buyer is looking for a 2 BR apartment. Price by itself is not a critical factor.

The water table may deplete in future. So, it is difficult for the builder to make promises to customers about the future.

There have been discussions about waiving off GST for the real estate sector to make housing more affordable for the common man. GST does drive up the cost of a home. But GST is applicable across sectors. More than GST, what we need is the rationalization of the registration fees which affect only real estate. Such a rationalization of stamp duty can help bring the costs down.