Khosla ka Ghosla was a humorous film, but the underlying plot was anything but funny. It’s a story about the travails of a salaried person, who spends a large sum to buy a plot, but is cheated of it.
Real estate investments can indeed be nightmarish experiences. There has been an enduring concern with the quality of project execution and the recent boom has led to the mushrooming of new developers. This has brought about concerns owing to the industry’s characteristics. On the demand side, purchases tend to constitute a major amount of a family’s wealth, while on the supply side, there are three separate participants—builders, agents and the government. The industry dynamic is further complicated by the significant amount of cash floating in the system. The result is countless consumers who are unhappy with their purchase experience in terms of quality, time and the ability to get suitable compensation.
One school of thought believes that a laissez-faire treatment will be more effective in the long run. Prices are determined by demand and supply factors, and builders and agents who do not deliver will ultimately be weeded out. Overall, this view appears valid, but is it feasible to sit back and wait for economic forces to work the system, even as more consumers’ dreams are destroyed? This route has proved ineffective so far and there is no guarantee of its success in the future.
Perhaps what is needed is regulatory changes and a regulator with enough muscle to protect consumers. Ensuring adequate consumer protection in real estate involves creating an effective safety net. Currently, in case of real estate fraud, the consumer has recourse to either the consumer court or the civil court —which often ends up becoming a futile exercise considering the mammoth backlog in cases.
Lack of transparency has been a problem for real estate consumers for many years now. Real estate transactions are governed by the Transfer of Property Act, 1882, which is outdated. Moreover, land registration is currently tied to payment of stamp duty and numerous “no objection” certificates. High stamp duty rates discourage timely registration of land and encourage misrepresentation of property values. Lack of proper land records often leads to unclear ownership, magnifying the opaqueness of records. Digitization of land records is a step in the right direction and will help gain clarity on actual ownership. However, there is a long way to go before all land records would be digitized across the country.
This leads to a case for a real estate regulator. Discussions on regulation requirements often draw on the Securities and Exchange Board of India and the Telecom Regulatory Authority of India as examples. Certainly both these regulators have proved to be effective, but one must appreciate the nature of the environment that real estate operates in. Land falls under state law and, therefore, each state will require its own regulator. Adding to this complexity is the heavy involvement of municipalities within the states. Real estate development requires water, electricity, sewage disposal, etc., activities that fall under different cells. While the task of effectively pooling these resources under one body is challenging, both from a technical and a political perspective, this appears to be the most effective way to protect consumer interest. One can envision each state having its own regulator, governed by a national body that would help promote best practices and serve as a watchdog over the state bodies.
The government plans to introduce a new Bill called the Real Estate Management Regulation Bill that will go a long way in protecting the consumer. There is a provision for setting up a regulator in the Bill, whereby a real estate regulator would be first set up in New Delhi and other states will?need to decide on this matter.
Other provisions in the Bill include ensuring that all apartments are sold on a carpet area basis (not super built-up area), providing a cap on penalties relating to payment defaults as interest on defaulted payment is often felt to be overly aggressive.
The ministry of urban development has also proposed amendments in the Transfer of Property Act, the Indian Stamp Act and the Indian Registration Act. Till that time, consumers could be at the mercy of real estate brokers who decide to flaunt outdated laws.
In countries such as the US, there are strict registration and licensing laws for real estate developers, brokers, home inspectors, appraisers, etc. Each of these professionals are governed by an advisory board or by a state department that is responsible for establishing standards of practice, as well as educational and administrative requirements. They are also required to take a board or department-approved examination. Services of such professionals increase the cost of transaction, but also ensure a smooth, hassle-free experience.
In other countries such as Canada, the government has created a land titles assurance fund that compensates people for certain financial losses related to real estate. We believe that the most efficient mechanism for protecting consumer rights is to create a powerful regulatory body with teeth and resources. The telecom and aviation sectors enjoy the thrust of reforms; it’s time that real estate also gets to see some light.
Keshav Misra and Arjun Saigal head real estate investments at Baring Private Equity Partners India Ltd. Comments are welcome at email@example.com