India's Real Estate Industry Dangerously Unregulated

India has an estimated housing demand of over 25 million units. India is home to three of the top 15 most populous cities in the world. The real estate industry now attracts large volumes of direct foreign investment, and contributes over 5% to the nation’s GDP. All these figures point to a state of affairs where the housing industry would be a key focus of economic and social policy. 

Yet, in India the housing industry exists as an untamed paradise for developers, with little accountability and no moral watchdog. The lack of a central regulator for this industry, as is present in most other important sectors (finance and telecom for example) is astounding. And the move to introduce one looks like it is being delayed yet again. India desperately needs a central watchdog for real estate, not only to protect end users from unscrupulous developers, but also to ensure that malpractices in this integral industry do not threaten the wider economy. 

For the ordinary homebuyer, house hunting has never been so tricky. Prices have returned to pre-recession highs, with the severe supply-demand mismatch allowing developers to hold on to astronomical prices, confident that inventory will still clear. The greatest challenge, however, is not affordability but actually figuring out what the product being bought really is. A flat in a suburb of Mumbai that is advertised as being 1400 square feet in size, and is sold at a price per square foot multiple of this, will most likely have a carpet area (usable space, i.e. that can be covered by a carpet) of less than 1000 square feet. That beautiful flower garden with the water fountain in the centre that looks so enticing in the brochures could easily turn out to be a parking lot. Worse, the developer’s promise of delivering a ready flat within three years from the start of construction might as well read ‘will start constructing in three years.’ Such are the delays most projects experience.

However, the most frightening aspect by far is the fact that the developer may not quite own the land on which he is constructing (i.e. the title of the land may be disputed or unclear), in which case the ready flat would not get an Occupation Certificate. Without any regulator in place to hold the developer accountable for his promises, and to ensure that all relevant information is disclosed to the buyer, end users will continue to be beset by problems such as these.

On the macro front, a real estate regulator is necessary to ensure the stability of an economic web that has real estate near its core. Over the course of the last decade, bank lending and private capital participation in real estate projects has increased manifold. As a result, it is in the interest of the wider economy to see that land parcels, which form the underlying assets for billions of dollars worth of commercial loans and convertible debt/preference stock, are fairly valued and correctly risk-weighted. Any dramatic fluctuation in land values could be cataclysmic for the entire banking system.

This risk is not exclusive to India. While North-South (read: developed-developing world) trade linkages may weaken as India develops domestic manufacturing and consumer bases, financial linkages have increased to such an extent that India’s finance sector plays an important role in the world’s capital flows. A regulator is required to ensure that the world’s financial system is not threatened again by misunderstood real estate-related risks. Many sites now offer comprehensive commerical office listings.

While the reasons for a regulator are clear enough, what is not apparent is why there has been such a delay in creating one. A possible reason is that land is a state subject in India (i.e. regulations pertaining to land are decided at state level) and creating a central body is complicated. Yet, allowing a body just the basic functions of ensuring honesty and full disclosure should be palatable for even the most bureaucratic of Indian states. A more likely reason is the rumored politician-builder nexus — less rumor and more an open secret. This would explain the apparent lethargy in the various ministries to pass the required legislation. Whatever the cause of the delay, a regulator is needed urgently. At the heart of India’s promising story of a billion plus willing consumers is a tale of penthouses without water supply and luxury condos built on forest reserve land. 

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