New India Real Estate Law: A Wake-up Call for All Emerging Housing Markets

Published: Monday, March 14th, 2016 by Lenora

new india real estate law

Photo credit: indiatimes.com

Spending a Saturday morning reviewing legislative analyses and watching YouTube clips about the passage of India’s new real estate law doesn’t sound very exciting, does it. As it turns out, the new law and the issues it raises are so important for India, for the real estate industry, for investors in the sector and for affordable housing that they should resonate far beyond India.

What is this new law about? By way of summary, the new Real Estate (Regulation and Development) Law, which was picked up and tabled repeatedly for about five years now, is a hallmark structural reform and a critical piece of consumer protection legislation. India’s real estate sector, like many other emerging and frontier markets, is chaotic, unorganized and largely populated by small to medium-sized developers (see the sector in numbers below). This law aims at improving accountability, transparency, quality and consumer rights.

While developers rightly complain of corruption and inefficiency in permits and building regulations, home buyers have largely borne the brunt of India’s real estate mess. While there are indeed excellent developers with integrity all over the country, large, medium and small, the lack of a strong regulatory framework for guidance has allowed behavior that has made the real estate sector itself one of the major stumbling blocks to more desperately needed housing in India.

Among the ills that have been trumpeted for years but not addressed, developers often advertise higher quality finishes and amenities than they execute, sell properties based on non-comparable space metrics that include common areas, divert money from pre-payments to buying more land instead of projects, fail to finish projects, build to different and lower quality specs than promised, change plans mid-stream without notifying buyers and far worse. Those hardy consumers willing to take developers to task must do battle in civil court, another miserable costly mess.

The new law aims to fix the sector’s morass. It sets up new regulatory and tribunal bodies, requires registrations and transparency about pricing, amenities and features, institutes separate accounts for and limits on the use of pre-payment deposits, puts in place penalties for violations and much more.

The most informative short outlines of the bill’s key points are here on MP Shri Rajeev Chandrashekhar’s site, here on PM Narendra Modi’s site and here on Proptiger.com.

Why is this law important? Prime Minister Narendra Modi’s details how huge India’s real estate sector is here by the numbers (according to Minister of Housing & Urban Poverty Alleviation Shri M. Venkaiah Naidu). Given the reach and size of the sector all over India, it’s not surprising that consumers sometimes get the worst of the worst from these tens of thousands of market players.

India’s Real Estate Sector by the Numbers
Companies in the real estate sector 76,044
Real estate sector contribution to GDP 9%
New real estate project launches (2011-2015) 17,526
Total investment value of project launches (2011-2015) INR 13.7 trillion (USD 204.56 billion)
Number of cities with project launches (2011-2015) 27
Homebuyers per year (average) 1 million

It’s also important because the real estate sector in India has been feeling the pain of large unsold inventories in major cities, high leverage and weak demand. Foreign investment into the sector hasn’t been what it should be due to the sector’s reputation domestically and internationally. The hope is that this too will eventually improve as the law helps reverse India real estate’s bad rap.

Finally, protections against discrimination uphold the idea of housing for all. I was impressed that final comments among legislators even addressed discrimination against homosexual and transgendered buyers.

What the new law doesn’t do. Of course, the law has limitations and hurdles still to come. As Anuj Puri of JLL India points out here, it doesn’t address delays in approvals and permits or the long-pleaded single window clearance for projects. Land is also still one of the biggest problems – the need to free up government and underutilized private land and to improve and digitize land registration and titling, in particular.

Another challenge is the potential failure to protect the most vulnerable. Given that the vast majority of India’s housing gap is for lower income segments, it seems short-sighted that the law will not protect buyers of the smallest units (anything below about 60 sq m) or projects of less than 8 units, unless states modify the rules. Even if this covers most affordable housing units, especially in mass housing projects, the most vulnerable are uncovered. This reg also doesn’t foresee the rise of micro-apartments in city centers (as pointed out here by MP Selja Kumari, also formerly Ministers of Housing and Urban Poverty Alleviation and of Social Justice and Empowerment).

There are still challenges to come. States still have to implement the law and can loosen or tighten the rules. Developers complain that making existing projects subject to the law also will create new delays and costs for projects. DNA articles here and here voice the industry’s complaints.

This law may also concentrate the industry at either end of the spectrum, into either larger developers that can meet the regulatory costs and hurdles or very small, generally less efficient developers and builders who serve a few clients at a time.

The practice of requiring large up front pre-payments for real estate project subscriptions will not change either although this is a singular pain point for most lower and moderate income buyers. Phasing in pre-payments in over time would make more sense, especially if payments could be triggered by developer completion milestones that are duly communicated to buyers. A few developers have started to put regular photos and updates, as well as real-time videos, of projects in process on their websites to address this.

Finally, while developers have to post credentials and past, current and planned projects publicly, it’s not clear that they must be transparent about ongoing litigation or whether consumer complaints will be made more transparent. Right now, homebuyers rely heavily on social media to determine whether a developer has a history of problems delivering projects. It would be better if a developer had to report these issues in filings or other standardized, publicly accessible documents.

Why is this a wake-up call for other emerging housing markets? This law gives voice to the ills of real estate in most emerging and frontier markets, the reasons why only the biggest developers raise capital from major investors. These problems are the stuff of complaints but generally not action. More importantly, the challenges that homebuyers, consumers with few resources to lose, face in India are found everywhere in these same markets – non-transparent pricing, lack of clear title, unscrupulous developers, inefficient builders, investors suffering fraud, unavailability of legal avenues or courts for redress, etc. Land administration, building regulations and permissions likewise leave room for capture. The end results are always higher costs for homebuyers and stunted housing markets.

Because of this chaos, investors, even those with extensive emerging markets experience, have been slow to look at housing in emerging markets as opportunities. Investors generally conclude that housing, especially products that would be accessible to the vast majority of buyers, is a far riskier bet than necessary. Admittedly, that conclusion comes also from the concern about basic business challenges like materials costs and complementary infrastructure,

Innovation suffers as well. Knowing how to work political contacts and having cash to grease the wheels becomes more important than product quality, business integrity and efficiency and customer service. Real estate tends to be slow to invest in innovation, whether it’s building information systems or sustainability. As a result, upstarts and disruptors need to be extremely well-capitalized to get a foothold in a new market.

This is the vicious circle that polarizes housing markets into real estate giants, on the one hand, and the vast seas of small and medium sized developers and builders, who will develop 75-90% of what is ultimately built in housing in more emerging markets.

Who will push this past India? The politics are complicated. In order to build inclusive, dynamic places for people to live, work and play in the rapidly growing developing cities of the world, most emerging housing markets should be moving towards laws like this India’s and beyond. This law should be a wake-up call that it’s extraordinarily important to embody these protections in law.

Generally, unless large real estate companies find themselves starved for investments because of the poor reputations of their industry, it will fall to communities and citizens to agitate for this kind of legislation. Banks whose mortgage portfolios are on the line should also be pushing for more efficiency and security for their investments. Cross-stakeholder dialogues at Habitat III should support consumer protection as part of the global urban legislative agenda.

Ultimately, it’s not about being anti-business, it’s about creating better, stronger and more competitive businesses and higher quality houses for more resilient and inclusive communities. India isn’t the first nor the last to need this.