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 with more 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). All developing and developed nations have long realized their importance and hence these are closely monitored and regulated by respective overnments and independent regulatory authorities, with of course one e!ception, the real estate markets of "ndia. #ately banking and real estate are stealing the limelight. All business news channels and tabloids are concentrating their efforts on how the $eserve Bank of "ndia ($B") and the %inance &inistry are tightening the reins on the "ndian real estate. &ost articles cover the sub'ect with a sense of criticism( however 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 eyed sector, 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 small token amount during pre+launch , launch of a pro'ect, holding stock for few months and then selling at a smart profit. -o how do the figures work out, let us assume an apartment of size ./// s0uare foot priced a $s. 1/// a s0uare foot. 2ost of the apartment works out a modest one 2rore, typical price levels e!isting in all metropolitan cities with the e!ception of &umbai where it can be multiplied by a factor of three. *he apartment is booked by paying a token amount of 1 or 3/ percent when opting for installment payment option, 1 lakhs in this case. "n the coming months hype is created and the prices escalate by anything close 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 of speculation giving a bad name to the entire industry there is one another uncertainty i.e. risk of a natural calamity like earth0uake. .3st 2entury %inance (formerly ./th 2entury %inance) went bankrupt after the Northridge earth0uake of 3887, suffering a loss of 3.3 Billion 9- :. *he memory is still fresh amongst many bankers and insurance companies. Not to forget that many other companies also with investments in real estate sector suffered similar losses in Billions. Banks also face the dilemma as to what happens to the property loans disbursed by them in case the very property mortgaged gets destroyed in an earth0uake (all buildings being designed in "ndia are aimed with protecting lives of occupants and not the 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 they pay 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 <apan (3881) there does e!ist an innovative solution. 2onsiderable research has been put into seismic response of structures and means to protect them without structural damage. *o start with =arth0uake $esistant is now classified into three separate categories depending on the anticipated structural response and the capacity of the building to absorb, accept structural damage.

=arth0uake $esistant #ife -afety > minimum level of earth0uake protection, aims at preventing total building collapse, however there will be structural damage and the building may warrant demolition and reconstruction. *he building codes are based on this minimum protection, 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 thereby ensuring safe occupancy even immediately after a ma'or earth0uake. "deally suited for highrise 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 like hospitals 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 also reduces their risk levels. "nsurance companies will also follow suit in reducing the premiums. *he direct implication 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 foot implying a 31// s0uare foot will cost $s. . to 6 lakh more. *he Aonourable -upreme 2ourt is presently hearing a B"# on safeguarding the interests of general public who are being e!ploited by some unscrupulous builders and developers. *he B"# has been filed by a N ? called -anrakshak (*he Brotector). Aopefully the court ruling would serve as a guideline and e!pedite the formulation of concrete laws by the overnment. ?n the issue of earth0uake protection, the builders, developers should clearly mention on the buyer,seller agreement that the building is protected against what magnitude earth0uake on the $ichter scale and what will be the building performance if that scale of earth0uake strikes. Cill the building sustain structural damage and to what e!tent. *aking advantage 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 scale whereas &umbai in Gone 6 can e!perience a magnitude 5.1 0uake. Aowever recent studies conducted at ""* &umbai by Brof. $avi -inha have concluded that the risk that &umbai faces is far greater than what was envisaged earlier. *he threat perception of &umbai should be upgraded to Gone 7,1. Are "ndian citizens not entitled to know what the different levels of earth0uake protection are and their building has been designed to withstand what magnitude earth0uakeI "s it not the responsibility of the overnment 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 has commenced an advertisement campaign and hopefully the same will spread actionable awareness such as what are different kinds of earth0uake resistance and how the respective buildings will perform so that people can then go in for seismic upgrade and retrofitting. www.taylordevicesindia.com

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