Fix land acqusition constraints and the tedious approval processes for effective real estate regulation
The growth of the real estate sector in India has been very rapid in the last few decades, and in a country like ours, while the primary growth driver of this sector has been the simple fact that urban land is scarce—very scarce, indeed—and hence becomes a commodity to hoard and profit from, it would not be wrong to say that the growth has also been real in as much that there has been unprecedented demand for housing and commercial real estate in the last decade or so. Much credit and recognition must also be given to the sector for the high quality of design and construction.
So, what drives the need for regulation in this sector? If one is to read the statement of objectives of the Real Estate (Regulation and Development) Bill, 2013, it is loud and clear that accountability towards consumers, reducing frauds and delays and reducing the existing high transaction costs are the main drivers. There is no disconnect at all on the very laudable objectives and there must be legislation and policy that changes opaqueness to transparency. The question, however, is whether the pill is adequate for the disease?
The single largest reason, in fact, I would venture to say that the primary reason for delays, frauds and high ticket values is the land acquisition process and the ubiquitous process of approvals to commence a project. Hence, while the Bill prescribes several onerous conditions on a developer to launch a project only after the necessary approvals are in place, real change will be seen only if the Centre and the states work in concert to streamline the approval process. It is not just the time factor here—the delays are the starting point of corruption, black money, unclear titles, and all else that plagues the sector. Housing for all and ease of doing business will remain just slogans unless the number of approvals and the processes of granting approvals are completely overhauled.
Yet, it would be unfair to conclude that the Bill has no utility. To my mind, the biggest difference will be brought about by regulating agents and by placing in escrows the money collected. Most cases where consumers have been duped are cases involving unscrupulous agents and hence, the prior registration of agents and casting responsibility on agents towards their functions is very welcome. However, where there is still room for improvement is that while Sebi regulates advisors who advise on investments in shares and securities, there is no omnibus regulation on the minimum financial and qualitative criterion that an agent must fulfil before he can act as such. After all, for the average person, the investment in his home is more than what he holds in shares and securities.
The recent amendments reduce the base threshold (which the states can further lower) of money to be parked for construction from 70% to 50%. As a consumer, a rule that provides for mandatory parking of cash makes for very strong comfort. But, unless there is clarity on how this will play along with the arrangements with banks and other lenders, there is bound to be higher cost of borrowings for developers, which will ultimately be passed on to the consumers. The recent amendments to include commercial projects within the ambit is also, at one level, at loggerheads with the larger objectives of the Bill. No doubt, there are consumers who buy commercial assets as well, but that game is materially different as are the players, and a common set of regulations is not the best bet.
There is also an urgent need for urban renewal and that can take place only if there is an economically and legally viable framework for re-development of existing apartment blocks. The Bill seeks to cover such redevelopment as well, if it involves marketing to new buyers. In my view, it will augur well if there is a separate section devoted to such redevelopment, and to lay out guidelines on roles, responsibilities, consents and costs so that the many projects that are languishing in the want of redevelopment can see the light of day. The model has worked in several other markets and there should be no reason to not replicate these models in India.
It is often said that the trouble of excessive government regulation is that it prevents two consenting adults from indulging in a transaction driven by entirely economic and capitalistic motives. The question that then arises is whether this Bill, when enacted, will come in the way or it will pave the way for growth. Our history on regulations, and more so on their implementation, leaves much to be desired. However, on balance, considering the large economic and social impact that the real estate sector has, I believe that a regulator and a framework was overdue, and I do hope that this Act becomes the antidote to the fatigue of past failures.
The author is Partner, BMR & Associates LLP. Views are personal