COSTOS DEL PROYECTO

Anthropologist Caitlin Zaloom reminds us that “risk reaps reward” (Zaloom 2004, 365). My foreign investor informants also believe that risk should produce profit, that Indian real estate is a risky, and thus potentially profitable, investment.32 _{As EuroFund’s}

30 _{In 2006, the Reserve Bank of India prohibited Indian banks from lending to developers for the purchase of} land; it raised the collateral required on real estate loans; and it limited developers’ ability to borrow money from abroad through External Commercial Borrowings. In 2007, the banks raised interest rates for developers, from 13 to 15 percent, and climbing interest rates for home mortgages also slowed housing sales (Economic Times 2007f; Unnikrishnan 2007).

31 _{Often, when firms attract foreign private equity investment, the private equity investors help the firm list on} the Bombay Stock Exchange, using the listing as a means to exit from the firm profitably.

32 _{O’Malley notes that nineteenth century economists and contemporary management gurus share the belief} that profit stems from entrepreneurs’ creative engagement with uncertainty (O’Malley 2000, 2003; see also Knight 1921). O’Malley points out that both Knight and contemporary writers differentiate between risk (calculable, probable) and uncertainty (non-quantifiable); engagement with the later produces profit. As this section demonstrates, my informants believed that risk could produce profit. While I, and they, use the term

managing director Jeremy explains, “for the complexity and the difficulty of getting something done here [in India], you should be entitled to a somewhat greater return.” Jeremy feels that a 20 percent after-tax return was “about the minimum I think is a reasonable level given the risks and complexities of investing in India today.” Other fund managers similarly estimate that they can provide investors with returns five to ten percent higher than they might earn in a developed market.33 _{Rumors circulated of foreign investors}

expecting to earn more than thirty percent.

Investors believe this premium over other markets stems from various Indian market risks. Since investors and developers must construct assets, there is considerable

“development risk,” that is, the uncertainties of the design and construction process. Suraj, the head of real estate in India for an American investment bank, explained that in India, “you’re not buying existing assets, you’re not buying cash flow, you’re buying a significant amount of risk and land.” He explained the risks one “buys” in terms of transparency: “the market isn’t transparent, it’s not institutional, you’re dealing with owner-driven development businesses.” Like other investors, he uses the term “transparent” to identify differences between Indian real estate and how it is practiced elsewhere – Indian firms are “owner- driven,” not institutional – and he sees these differences as risks. Suraj characterized the lack of transparency in Indian real estate as a “market failure”:

[T]he market failures . . . are so dramatic that there’s a huge opportunity for people in my business here to. Because there’s just – there’s a big market failure in terms of information. . . . It’s

“risk” here, the risks in real estate development are not entirely quantifiable and might more precisely be called “uncertainties,” after Frank.

33 _{After-tax returns of nine to fifteen percent might be expected in American real estate markets, with the lower} returns for build-to-suit projects or construction in cities such as New York, where the risk of finding tenants is relatively low. For speculative buildings in suburban areas or expanding cities, returns might be as high as fifteen percent.

the lack of transparency with land and the lack of transparency with everything else is – is, is, huge. . . . So if we can solve, there’s money to be made. That’s the reason we’re here. I think that’s the reason anyone is here. Although they may or may not be able to articulate it, I’m sure . . . they instinctively recognize there’s a big opportunity here.34

Lack of information and problems with land – “market failures” – provide a “big opportunity” for profit. An international property consultancy report summarizes the inverse relationship between risk/profit and transparency:

To an investor, high transparency eases the free flow of information and capital, but also makes it harder to find undiscovered bargains or to earn a “risk premium.” Efficient markets tend to display “convergence to the mean.” Less

transparent, inefficient markets tend to have a wider dispersion of results, which favor or penalize participants in the market,

depending on which side of the trade they sit. (Jones Lang LaSalle 2006b, 3)

Like arbitrageurs who capitalize on price discrepancies, investors in Indian real estate hope to capitalize on the “failures” of transparency in the Indian market. That is, they hope to turn risk into profit.

However, risk impairs the likelihood that investors will get a return on their capital. Where investors see too many risks, they won’t invest. The moderator of a discussion on foreign investment at the Global Real Estate Institute conference in 2007 summarized “why deals aren’t getting done”:

[B]ecause investors are still learning the market; there’s not the right kind of data; there’s not the right kind of regulatory environment, so there’s nothing ensuring transparency and the kind of environment that investors want.

34 _{This informant had a habit of dropping the ends of his sentences. I have retained this quality of his speech} in my transcription of the interview. I interpret this passage to mean that he sees opportunities to profit from the “market failures” and “lack of transparency” in the Indian market. When he says, “So if we can solve. . .,” I don’t think he wants to eradicate such market failures (“solve” them in one sense) so much as learn how to work within or despite them (“solve” in another sense).

Investors want an “environment” in which they have access to information and in which regulations protect their investments, enabling them to “exit” them profitably.

“Environment” encompasses all of the institutions that enable money to flow from and return to investors: legal, financial, and cultural. Investors use the term “transparent” to identify situations in which these institutions exist, low-risk markets that they understand and feel they can navigate.

The language of transparency that investors and consultants use stems indirectly from the international discourse about “good governance” and directly from consultancy reports such as the Jones Lang LaSalle Global Real Estate Transparency Index.35 _First

published in 1999, the index rates countries on a scale of one to five, “opaque” to “highly transparent,” in order “to help real estate market participants identify opportunities around the globe” and to “evaluate market risks” (Jones Lang LaSalle 2006b, 4).

Jones Lang LaSalle defines transparency more broadly than lack of corruption: International relations experts sometimes equate “low

transparency” with “corruption.” However, we take the view that a highly transparent market is not only fairly free from corruption, it also has readily available information and operates in a fair and consistent manner. (Jones Lang LaSalle 2006b, 1)

This broad definition of transparency reflects Jones Lang LaSalle’s commitment to international investors’ demands and expectations. They state the issue of “transparency” explicitly in terms of what “the new generation of cross-border investors and occupiers typically seeks,” including

• Accurate market and financial information • Reliable performance benchmarks

35 _{The index is compiled by Jones Lang LaSalle, a real estate services and consultancy company, and its real} estate asset management arm, LaSalle Investment Mangement, Inc. The 2008 report rated 82 countries.

• Enforceable contracts and property rights

• Clarity regarding the taxation and regulation of real estate • Fair treatment in the transaction process

• Ethical standards among professionals hired to transact business (Jones Lang LaSalle 2006b, 3)

The Index measures progress towards these investor demands through five “sub- index” measures that correlate well with the concerns of the investors I spoke with in India. The Jones Lang LaSalle transparency rating identifies safe, familiar, and enforceable

environments for international capital. Not surprisingly, the “high transparency” markets include those in Europe, North America, and Australia, while the most “opaque” occupy Eastern Europe, Russia, and much of Latin America and Asia. “Transparency” merely labels markets that meet the criteria of Western investors.

The label “transparent,” like the label “normal” or other designations for identifying risk subtly delineate a vision of what ought to be. Such labels can shape aspirations to the point of self-regulation; as Ian Hacking writes, “most of us try to make ourselves normal, which in turn affects what is normal” (in Ericson and Doyle 2003, 7). Consultants such as Jones Lang LaSalle recognize the power of their labels. Jones Lang LaSalle writes in the 2008 India transparency report that as “the forces of globalization” open up “more previously unfamiliar markets,” their Real Estate Transparency Index helps to “heighten awareness of cross-border transaction challenges” and “raise awareness of government officials in a position to improve transparency” (Jones Lang LaSalle 2008, 3). The aim is not merely to identify “opaque” markets but to transform them.

Foreign investors in India use this language of transparency to describe the risks of working in an unfamiliar system in three ways. First, they complain about a lack of

projects that have been implemented, numbers of square feet that are being developed, tenants that are looking to take space. No one really has that.” Basic statistical information about completed and proposed real estate projects is entirely lacking in India. International property consultants publish monthly summary reports on prices and occupancy rates, but many of my informants thought that they either did not have detailed, useful information, or they kept it for paying customers. The head of research for one international property consultant admitted at a conference that she felt her data was only accurate to a margin of plus or minus twenty percent. Rather than rely on such questionable statistics, most of my informants practice “market research” by personally visiting sites and cities, forming their own opinion about the viability of projects based on personal experience or “gut feel.” Unfamiliar with Indian markets, lacking local contacts, and used to working with statistical indicators, foreign investors and fund managers find this type of research difficult and time consuming. Without information, they risk sinking their money into an unviable project. As Suraj explained, investors (himself included) “may discover at the end of the day . . . that the opportunity that they’re building for is very different from opportunity that truly exists.”

Second, foreign investors – especially large institutional investors like pension funds – see the cash transactions and bribes routine to the Indian real estate industry as a risk they cannot take due to international anti-bribery laws and investment regulations in their home countries. As the head of one of India’s international property consultancies succinctly explained, “Cash is a non-starter for most funds.” One investor said euphemistically, “some of what needs to be done to acquire the land involves behind the scene maneuvering, things we’re not comfortable with.” EuroFund’s controller explained to me that the “culture of corruption” in India is a major risk to his firm’s reputation: “Our reputation means

everything to us. We don’t want one mistake in one far-flung office splashed across the front page of the Wall Street Journal. That would ruin us.”

Third, land title issues are one of the largest risks in the development process; no foreign investor wants to have his equity tied up in a project that is embroiled in a legal case. Ajay, an analyst for a real estate fund explained,

The only reason why a deal would fall through even when you are sitting there with your pen on the paper to sign it, is if someone shouted out, guess what, five acres is not clean. Or 10 percent of the land is not clean. You'd probably not do it. ... [T]hat’s very very important to have to clean land titles that you can transfer. Because if you are going to sell something to someone, you had better own it.

Dispelling land title risk involves a lot of legwork with village patwaris, local courts, police offices, and sub-registry offices of the Stamps and Registration Department – an

investigative process industry members call “due diligence” – as well as brute force and other unsavory tactics.36 _{While there are a few foreign firms willing to take on the risks of land}

purchasing in order to maximize profits,most turn to intermediaries: Indian real estate developers who have already amassed “clean” landholdings.37

36 _{In much of North India, the patwari is the village-level land record official, the officer of the Revenue} Department responsible for keeping and updating land titles (records of rights). These land titles often include information about mortgages or encumbrances on the land. The tehsildar is the revenue official for a tehsil, a sub-sub district administrative unit that includes several villages. In addition, the Stamps and Registration Department maintains data on land transactions through the registrations of mortgages and sales. Sub- registries in this department provide encumbrance certificates that trace the transactions of a particular parcel over a period of years. For a description of these systems see World Bank 2007, 8-21; for an excellent treatment of their effects on women’s rights to land, see Agarwal 1994.

37 _{Investors knew that the closer they got to the role of the Indian developer – the fewer intermediaries they} used and more risk they took on – the more profit they could make. Few, however, had the cultural competence and freedom of action to do this. One fund manager I met was the exception that proved the rule. Kaushal grew up in Delhi and went to college in the United States. He earned a lot of money investing in low-income housing in Florida and was now looking to find some deals in India with his own investment fund. As a relatively small-time player, he was looking for small but profitable projects. A lot of Indian developers, however, told him that if they saw the kind of opportunity he was looking for, they would develop it

themselves. They were only looking for financing on large projects. Instead of working with developers, then, Kaushal told me he had hired brokers directly to find landowners willing to sell their land. Once he had a deal

As Jones Lang LaSalle recommends, “knowledgeable, trustworthy advisors or local partners are especially important to help cross-border market participants navigate markets with lower transparency” (Jones Lang LaSalle 2006b, 3). Indian real estate developers mitigate land title risks; they also provide market information, and, by doing the “dirty work” of bribing local bureaucrats, enable foreign investors to bypass anti-bribery regulations. As intermediaries, they enable Indian land to become part of international capital circuits; Indian real estate developers constitute a vital link in an emerging chain of capital accumulation.

However, foreign investors see Indian real estate developers themselves as a risky – though critical – link in that chain. Their necessarily “non-transparent” ways of working taint them as “investment risks” as well. An Indian securities firm, Edelweiss, summarized “developer risks” in a recent report:

• Developer’s track record • Brand name

• Litigation, court cases - against the developer by government/semi-govt/public sector agencies/ general public

• Quality of construction, historically • Service record

• Conformity with financial regulations and fair trade practices • Management quality

• Execution capability/skill

• Proper accounting of money transactions

in place with some landowners, he would hire an Indian developer, basically as a builder, and would look for secondary funding from larger private equity investors. I told him that he was basically acting just like an Indian developer, and he said, “Yes!” He told me, “there’s a wall of capital coming once you’ve taken out the risk. If you take land and make a project, there are thousands willing to invest.” Though I do not know how he managed the actual land purchase and permitting, I assume that Kaushal was able to “take out the risk” through his close contacts in Indian real estate (his uncle was involved in land dealing in Delhi). At the same time, he claimed that because he was not directly connected with any of the established local real estate players, farmers trusted him not to use thugs to muscle him out of their land. He found them quite willing to deal with him. He claimed that his approach was very different from the big funds, which substitute legwork for “throwing money at projects.” While Kaushal felt that his returns would be higher, he was playing with less money overall than the big funds which have raised billions to invest in Indian real estate.

• Liquidity risk - undercapitalised developers and projects, access to short term loans for acquisition and construction.

• Financial leverage – D/E, debt servicing ratios

• Margin contraction – As land cost rise, higher margins enjoyed earlier will no longer hold.

(Sharma and Pathak 206, 39)

With this list, Edelweiss suggests a number of questions: Is the developer likely to default? Can he build the project as he claims? In short, is the developer himself a “bankable” asset? A developer’s history and reputation can be a liability. Ajay explained, “you don’t want to partner with someone who has been blacklisted by a bank or by a regulatory authority” because that jeopardizes the partnership’s ability to obtain approvals or debt (an important aspect of project financing even with equity). Perhaps more importantly, if the developer is untrustworthy, investors may not be able to get their capital back.

Industry members assess Indian developers’ bankability using terms like “clean” and “transparent.” An independent consultant explained that “clean” partners are hard to find:

Indian developers are financially unsophisticated in terms of formal accounting systems. So you do the due diligence and all these grey areas crop up, that in the Indian context are not significant. But to the foreign investor, they’re huge red flags. So transactions fail because of that. They [foreign investors] expect everything to be squeaky clean. But it’s never squeaky clean. The transparency is not there.

By “formal accounting systems,” the consultant means those of potential foreign investors: Indian developers do not engage in the same procedures as foreign investors.38 _Foreign

funds remain accountable to investment committees in New York, London, and Hong Kong

38 _{While Indian developers today might be “unsophisticated” accountants by foreign standards, certain groups} of Indian businessmen have a long history of financial sophistication. Historically, Indian merchants from various communities have used bills of exchange (hundis) to finance far-flung trading activities and futures