This article has been written for www.meridharti.com by Mr.S.K.Mittal. Mr.Mittal is the President of Association of Certified Realtors of India (http://acri.in). He is also CEO & Director of Saksham Advisory services Pvt Ltd.
Real Estate is the second largest employer in India. In the last five years it has seen remarkable growth, but the last 6 months have been somewhat rough on the industry.
In the boom years (2003 -2007), some developers exploited practices like “pre-launch sales”. In addition, a booming market attracted a large number of newcomers who set themselves up as colonizers and developers, and collected large amounts of money from buyers. Since there was an unmet demand in the market, developers were easily and quickly able to sell their product to unsuspecting and often ill informed consumers. Speculators inundated the markets along with a small number of end consumers (by some estimates 60-70% of the market was speculator driven) who were all hungry for quick profits (and a few to get a roof over their heads). This rush of speculative capital often did not concern itself performing adequate levels of diligence and scrutiny before deciding on a project to invest in. The end motive was quick profits and therefore long term viability of projects was often not questioned.
To ensure long term growth and sustainability of the RE markets in India, it is important to have a regulator. From a regulatory perspective, it is important to debate and resolve issues concerning investor protection. One of the key issues being how an investor gets information whether a particular developer/colonizer has the ability and competence to execute a given project? To sell their product, developers may promise the sky to buyers, knowing very well that it will not be possible to fulfill all their promises. The concept of builder rating is just starting out in India though it is not mandatory. However, increasingly developers are turning to capital markets for raising funds, which will compel them to open their books to wider scrutiny. This will lead to higher levels of transparency and augurs well for the long term growth of the RE markets.
In India, the broking business is also free to all. There is no system in place for either registration or licensing. Wherever, some efforts are made to introduce licensing, they are not enforced. Because of an unprecedented and unanticipated growth in the RE industry over the last few years, the required regulatory framework is not in place from a policy, implementation and enforcement point of view.
Finally, moving in the right direction
About two years ago, the Ministry of Urban Development started working on a proposed legislation “The Real Estate Management (Regulation and Control) Bill”, which will lead to the appointment of a regulator.
This bill (when ready) will work as a model which all states can adopt. This includes licensing of all constituents of the industry such as builders, architects, contractors, brokers, etc. The provision for licensing will mean credentials of new builders will be evaluated (and possibly rated) before they are allowed in. The free-for-all scenario that exists today will end. Not surprisingly, the developer lobby is not supporting the idea of a regulator. However, it is a matter of time before a regulator for Real Estate industry becomes a reality.
In the present scheme of things, all regulations and controls apply only up to the stage developers get their licenses. During implementation or after completion of the project, there are no checks and there is no system for taking action in case the final product does not match up to the promised standards (except recourse to courts). The appointment of a regulator is expected to address all of these issues.
Another problem rampant within the sector today is that developers do not maintain project wise financial discipline. Sometimes they take on more projects than their financial strength would allow them to. This results in projects getting delayed. I feel that with the appointment of a regulator, disclosure standards will improve. Builders will have to make project-wise disclosures of fund flow (SEBI has made this mandatory already for industries), maintaining better financial discipline.
Rating, a tool that promotes transparency and makes the buyer’s task of choosing the right project easy, could also get a fillip with the appointment of a regulator. At present, while associations like National Real Estate Development Council (NAREDCO) are trying to promote ratings, they lack the statutory power to make it mandatory. A regulator could do so, at least for large sized projects.
The industry should realize importance of transparency and disclosures as it will take the industry to the next level with the help of large global funds. Before Securities and Exchange Board of India (SEBI) became a reality, there were apprehensions on formation of SEBI as regulator for capital markets. Just imagine whether the capital market could have gotten such large foreign capital if all policies framed by SEBI were not in place.
Presently, the Ministry of Urban Development is holding consultations with all parties and one can expect modifications to the present draft legislation. A high power committee has been formed under leadership of Mr Deepak Parekh. We can all hope to see better regulatory environment for Real Estate sector sooner rather than later.
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