India Needs More Foreign Real Estate Developers
The residents of Trump Tower in Mumbai will soon have private jet services. The Mumbai International Airport will have a counter for residents of Trump Tower who wish to travel in a private jet to Trump Towers, which was built in partnership with the Lodha Group. Though domestic developers have been strategising to attract potential home buyers, no Indian real estate developer has offered anything like this before.
It is important to remember that the Chairman of The Trump Organization Donald Trump tried to enter the Indian real estate industry in 2010, but regulatory norms did not allow him to. Even when Trump later entered the Indian real estate industry, he merely allowed Indian developers to use his brand name and specifications for an undisclosed sum without investing or holding any equity in these projects.
It is well-known that productivity per person vary widely within countries. For example, developed countries like the United States are far more productive than developing countries like India. Productivity varies widely within firms, too. Multinational companies like Microsoft are usually far more productive per person than similar, small firms. If this is true, India needs more foreign real estate developers like Trump. Why? The Indian real estate industry is known for being unstructured. Informal transactions are far more common than in developed countries. But this would change if there is greater foreign investment.
Foreign multinationals are well-managed throughout the world. Indian real estate developers are often criticised by the media, and the criticism is usually directed at their practices. This is interesting, because economists usually attribute low productivity and low personal incomes in developing countries to the level of capital investment. For example, when capital investment is high, real estate developers would be able to buy better machinery, and adopt other forms of technological innovation. As the construction sector is one of the largest employers in India, this matters a lot. Wages of construction workers will rise significantly when the capital invested in Indian real estate rises. But this does not seem to be the only reason.
Even when firms in developing countries invest the same amount of capital or adapt to modern technology, there are still huge differences in productivity. For example, even if Indian real estate developers invest as much as developers in the United States do, and use the same machinery, there will still be differences in productivity levels. There will, for instance, still be huge variations in management practices.
Family-run firms with family chief executive officers (CEOs) , founder-run firms and government-run firms, for example, are the least productive firms throughout the world, though there are many honorable exceptions. In developed economies, only 20-30 per cent of the firms fall into this category. But, in India, nearly 75 per cent of the firms fall into this category. Even though there is no reliable data on real estate firms, this could true of real estate firms, too. There are, of course, many reasons. Financial markets are not well-developed in India. The court and police system does not inspire sufficient trust. For example, firms hesitate to hire external CEOs because the law need not protect them if managers misuse their privileges. For real estate firms to become more mature, they need more than informal rules.
But, according to a study of Nicholas Bloom and John Van Reenen, multinational companies in India are nearly as well-managed as in the West. When foreign real estate developers with publicly quoted share prices enter Indian real estate markets, this would be true of such firms, too. Similarly, firms owned by private equity firms in India are well-managed, too. Trump will be partnering with private equity firm IREO in its first commercial real estate project in Gurgaon. This also suggests that private equity investments in Indian real estate in the recent past is a good sign.
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