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The need for a real estate regulator

India, the biggest democracy in the world is often recalled by the rest of the world as a densely populated country packed with slums and odd concrete jungles, thanks to the unprecedented reach of the movie 'The Slumdog millionaire'.

Despite incessant boasting about its infrastructure and housing, it is still the grim picture of the slums that gushes into the minds of many foreigners. Well in line with this picture, Indians are unquestionably migrating to the era of ultra modern residential slums propagated by poor real estate regulatory policies, overpopulation and migration.

I use the word slums not to mean the unhygienic residential conditions, but substandard and unsustainable residential housing clusters propagated by the unbridled real estate developers. The southern states have already witnessed viral growth of real estate mafias who annex agricultural lands and ecologically sensitive zones for high prices, thereby feeding property inflation in these regions.

The spurt in demand for modern housing from the emerging middle class has further facilitated and shrouded the engineering of inflation in the sector. All attempts to constitute a regulatory body were thwarted by the central legislature until ahead of the recent parliamentary polls.

A real estate regulatory bill was presented before the parliament in December, 2013, but uncertainty still lurks over whether the bill will lead to creation of a much needed regulator or whether it would remain shelved forever post elections. The uncertainty over the change of guard at the centre has thinned the money flow into the sector.

The Indian real estate sector received just one percent of the total flows into the sector in Asian economies in 2013. The housing projects targeting upper middle class, rich and ultra rich customer segments have been left unmonitored for decades. Boom is restricted to constructions for upper middle class and rich consumer segments and these consumer segments themselves are witnessing an organic growth in demand over the years, thanks to the industrial and service based professional sectors.

A bust is least expected. It is true that since the past eight quarters, the construction demand has dipped by about 43 percent owing to adverse macro economic conditions. But there are always takers for completed projects, thanks to fat pay cheques in the service sector and the competitive lending policies of commercial banks.

The problem however is not the fear of a bust, but the spiraling of real estate prices beyond the payable capacity of the common man. Apartments in emerging business hubs such as Ghaziabad and Noida are sold for crores and the developers themselves are aware that the rise in prices cannot go on forever.  

The developers are aware that the long term business potential lies in the affordable housing category, despite the low profit margins. Entry into this segment is delayed by developers and it is kept aside as a ripening fruit. Hopes that prices spiral would easily percolate into the ‘affordable’ housing category as well make this delay a sweeter one for developers. It is then that one feels the real need of a regulatory body.

The emerging middle class segments are facing the brunt of soaring real estate prices and with high land prices, residential apartments are considered the only viable option for most. That the industrial and service sector development is mostly concentrated in metros and major cities cause the new generation working professionals to forgo ancestral property to cash into the residential apartment boom in workplace cities.

The prices in the not so prime residential localities have risen steadily and are only affordable for propertied and wealthy consumer segments. The need for a real estate regulator will be most felt in the upcoming years when the sector finds itself unable to find takers from commercial and industrial segments at the whopping prices.

Soaring real estate prices are already affecting the competitive profit margins of many BPO industries in the country which are facing stiff competition from other Asian rivals such as Philippines and Thailand. Many BPO industries are planning to quit hubs such as Bangalore and Hyderabad to cheaper centres such as Ahmedabad and Trivandrum.

Clearly the sector cannot remain unbridled for long because of its underlying influence on profitability of other business segments. Residential housing projects will suffer an instant pinch if the credit flow into the economy is interrupted even mildly. The rising real estate prices inevitably create a class of middle class and upper middle class debtors who struggle to repay their loans. The perpetuity of the price rise scares off potential customers.

The proposed real estate regulatory bill covers only residential real estate projects of over 1000 square metres. This partial regulatory approach itself is a major flaw. The high degree of correlation between industrial and residential real estate prices is evident in the development pattern of most metros and industrial hubs of the country. Hence the regulation of residential real estate projects cannot be done sensibly and viably without regulating industrial real estate projects. It would also be too presumptuous to think that industrial real estate sector would self regulate, given the steady availability of industrial credit.

Non regulation of industrial real estate segment will only leave the real estate regulator weaponless over time. The need for a regulator in the affordable housing segment will also be felt in the long run and the decision to restrict regulation to projects over 1000 square feet would not be appropriate then.

It is important that the regulator focuses on bridling and restricting the real estate price rise from seeping down into the lower income category to keep the growth of the real estate sector healthy, affordable and sustainable.

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