Scam Hit Indian Real Estate Sector in Acute Need of Regulation

The year 2010 will probably go down in India’s history as the year of scams. As always, the authorities swing into action after the event. Regulations and compliances notwithstanding, scamsters continue to devise and leverage the loopholes. Unregulated sectors, such as real estate, which is in acute need of regulation, probably demonstrate best the investors’ predicament. The real estate sector probably has the highest rate and volume of investments and the largest number of investors. Contrasted with the various SEBI regulations which aim to protect the capital market investors, real estate development regulation has been sadly neglected, though there is a draft Bill on the anvil.

Currently, the Indian promoter-developer buys the land from villagers and “obtains” clearances from the competent authorities for the building and layout plans. The predevelopment clearances required range from non-agricultural orders by way of Government permissions for the proper use, as for example conversion of land earmarked for agricultural purposes only. Building and Floor plans are approved by local municipal or state urban development authorities, depending on location. In addition, a no-objection certificates are to be obtained notably from the state pollution boards, water supply and sewerage authorities, properties and respective state and central authorities such as the Archaeological and Airport bodies in order to rule out attendant risks the development may pose to the existing structures and operations.

In practice, these approvals are taken at a much later point of time. Because of the tight demand and supply situation, booking and collection of a large chunk of consideration from prospective buyers are concluded well before these clearances are obtained. The buyers have no choice but to sign on the standard contract formats, without the right to negotiate, leaving customers and investors to the mercy of unscrupulous promoters and subjected to various unfair trade practices, with cavalier disregard for compliances. The contracts which the buyer is induced to execute have clauses which are onerous and one-sided, with loopholes for the developer to get away with delays, random cost escalations, exorbitant penal interest, to name a few. The Developers ensure that they are fully insulated from all future liabilities, which are passed on to the buyers at a later point of time, when they become aware that their rights to ownership, super areas, common areas and facilities are very different from what was represented.

The buyers’ recourse so far has been to the Consumer Courts. The National Commission in 2007 dismissed DLF”s appeal from the complaint filed by one Kamal Sood to hold that the builders’ practice of collecting money from prospective buyers without obtaining the required permissions amounted to an unfair trade practice, and the builder is dutybound to obtain the requisite permissions in the first instance, and thereafter, recover from the buyer. It further held that if there is any express promise that the premises would be delivered within a stipulated time-frame, the builder has to bear the escalation costs. Even then the developer’s deep pockets, and rounds of appeals are often a deterent for mostinvestors.

Real estate sector in India is witnessing tremendous boom

Real estate sector in India is witnessing tremendous boom. Real estate industry in India is presently worth $12 billion and is growing at the rate of 30 per cent per annum. The importance of real estate sector in India can be gauged from the fact that it is the second largest employer next only to agriculture. The real estate industry has significant linkages with several other sectors of the economy and over 250 associated industries. According to a study One Rupee invested in real estate sector results in 78 paise being added to the GDP of the country.

Eighty percent share of the real estate market is garnered by residential sector and the rest is comprised of offices, shopping malls, hotels and hospitals. The sustained demand from the Information Technology (IT) sector has fuelled the growth of real estate sector. It has been estimated that the demand for IT space would be 66 million square feet over the next five years. Several multinational companies are shifting their operations to India to take advantage of the relatively low costs. With human resources being the key element in this industry, hiring people and housing them assume great importance. The need to create space for people to work and live triggers the development of other related infrastructure.

Traditionally, the government's support to housing had been centralized and directed through the State Housing Boards and development authorities. In 1970, the Government of India set up the Housing and Urban Development Corporation (HUDCO) to finance housing and urban infrastructure activities. In 2002, the government permitted 100 per cent foreign direct investment (FDI) in housing through integrated township development. However, FDI rules at the moment are quite stringent. For FDI in real estate prior approval of the Foreign Investment Promotion Board is required, which, can be rather tedious and there is a lock-in period for repatriation of the original capital invested for a period of three years. On the top of it the rules stipulate a minimum land holding of 100 acres. Getting 100 acres of free land in an urban area is almost impossible. Hence the permission of FDI in real estate hasn't had the desired effect.

The boom in retail industry has also spurred the growth in real estate sector. India at the moment is witnessing a spurt in extremely large retail spaces. Shopping malls with over 1 million sq ft of space have become the order of the day. As the competition in the market intensifies, builders are going out of their way to be different. Specialized malls, designer brands and multi-movie options are the order of the day. With the big players like Reliance, Big Bazaar, and Bharti entering retail market, real estate sector would be the big beneficiary.

Real Estate sector is booming in india

With property boom spreading in all directions, real estate in India is touching new heights. However, the growth also depends on the policies adopted by the government to facilitate investments mainly in the economic and industrial sector. The new stand adopted by Indian government regarding foreign direct investment (FDI) policies has encouraged an increasing number of countries to invest in Indian Properties.

India has displaced US as the second-most favored destination for FDI in the world. As the investment scenario in India changes, India which has attracted more than three times foreign investment at US$ 7.96 billion during the first half of 2005-06 fiscal, as against US$ 2.38 billion during the corresponding period of 2004-05, making India amongst the "dominant host countries" for FDI in Asia and the Pacific (APAC).

The positive outlook of Indian government is the key factor behind the sudden rise of the Indian Real Estate sector - the second largest employer after agriculture in India. This budding sector is today witnessing development in all area such as - residential, retail and commercial in metros of India such as Mumbai, Delhi & NCR, Kolkata and Chennai. Easier access to bank loans and higher earnings are some of the pivotal reasons behind the sudden jump in Indian real estate.

Why Invest In Indian Real Estate?
Flying high on the wings of booming real estate, property in India has become a dream for every potential investor looking forward to dig profits. All are eyeing Indian property market for a wide variety of reasons:

* It’s ever growing economy which is on a continuous rise with 8.1 percent increase witnessed in the last financial year. The boom in economy increases purchasing power of its people and creates demand for real estate sector.

* India is going to produce an estimated 2 million new graduates from various Indian universities during this year, creating demand for 100 million square feet of office and industrial space.

* Presence of a large number of Fortune 500 and other reputed companies will attract more companies to initiate their operational bases in India thus creating more demand for corporate space.

* Real estate investments in India yield huge dividends. 70 percent of foreign investors in India are making profits and another 12 percent are breaking even.

* Apart from IT, ITES and Business Process Outsourcing (BPO) India has shown its expertise in sectors like auto-components, chemicals, apparels, pharmaceuticals and jewellery where it can match the best in the world. These positive attributes of India is definitely going to attract more foreign investors in the near future.