Real Estate Rating System in India
CRISIL, CARE and ICRA provides developer grading and project star grading in the real estate sector. Many realty developers and builders have benefited from the ratings provided by these institutions. Consumers and investors also use these ratings as a criteria to invest or buy a property. These institutions use different rating criteria for rating of the particular project or builder. This rating not only helps the consumers in choosing the right property to invest but also helps the developers to know the factors in which they are lagging. The rating also provide efficient barrier between inefficient developers and the consumer. The major criteria which they consider for rating are:
1. Developer performance and quality over the years
2. Construction quality
3. Financial quality
4. Legal quality
There are sub-criteria in each of the major criteria. These differ in each institution’s procedure of rating which in turn effects the whole rating of a particular project.
The criteria considered for the rating process for different rating agencies is given below:
|
CRISIL |
CARE |
ICRA |
|
Project Sponsor Quality · Construction and legal track record · Organisation strength, systems & processes · Financial strength of developers (s) |
Project Developer quality · Track record of developer · Financial strength · Organizational structure and systems |
Development Quality & Track Record · Market Position · Management Quality · Past projects track record · dispute & litigation track record · customer satisfaction and redressal mechanisms |
|
Project Construction Quality · Structural quality · Infrastructure & Integrated Facilities · Finishes · After-Sales Services · Likelihood of Time and Cost Overruns |
Project Construction quality · Construction technology and quality control processes · Quality of architect, structural engineer and contractors · Time and Cost over-runs |
Project Attractiveness and Market Risk · Location · Infrastructure · Project specifications and facilities · Price competitiveness · sales strategy marketing channels |
|
Project Financial Quality · Accounting Quality · Project Economics or Viability |
Project Financial quality · Financial viability and break-even point · Marketing & Pricing strategy Funding strategy |
Project Financials · Profitability · Leverage · Adequacy and ring fencing of cash flows · Overall discipline & financial flexibility of developer |
|
Project Legal Quality · Clarity of Title · Restrictive Covenants · Encumbrances · Sale Agreement · Development Agreement |
Project Legal quality · Clarity of land title Status of statutory approvals from authorities |
Regulatory & Legal Exposure · regulatory risk and permit status · Land title and transfer of ownership · Contractual arrangement · Composition & transparency of buyer’s agreement |
|
Project Innovation Quality Innovation in the areas of Land acquisition/ Construction technology/ Building design/ Project funding |
Execution Risk · Project management systems · quality assurance systems · credentials of executing agencies · availability of raw materials |
CRISIL:
The CRISIL rating includes all the major criteria which are to be considered for a project or developer. CRISIL does not consider customer satisfaction as a factor in rating. Feedback provided by the end-user gives very useful information in considering the likelihood of the project. In the developer quality (or sponsor quality) the rating mostly considers the legal track record, organization strength and financial strength. CRISIL is the only rating agency which considers the innovation in construction, land acquisition and design of the project. Funding through banks and NBFCs is an important factor which every investor considers before buying a property.
CARE:
CARE ratings use the four major criteria in rating process. The project construction qualityin CARE ratings include quality of the construction, quality architect and engineer of the project. Also presence of Innovative concepts like green building, solar paneling, rain water harvesting will be considered for the rating. While rating in the terms of legal quality, considering the composition and transparency of agreement is crucial. CARE ratings consider the statutory approvals of the project while rating in terms of legal quality.
ICRA:
ICRA ratings consider almost all the criteria of the developers including the litigations and disputes the developer was involved with and also customer satisfaction and redressal mechanism. They do not consider the innovation like in CRISIL ratings but project attractiveness and market risk is considered along with the construction and infrastructure quality.
Alll the rating agencies mentioned above use 7-star rating system. These rating agencies with different criteria in rating the project, helps investors, stakeholders, end-users, funding institutes, real estate ventures and also developers and builders. As an end-user, one of the important and crucial factor one needs to know is about the affordability of the project. There is huge demand for low-income middle-income housing because all the projects are being developed and sold in the profitability point of view because of which the need of low-income and middle-income group housing. If the affordability as a factor is included in these rating systems, the rating will be more useful for the consumer or end-user point of view also.
