News & Views on Indian Real Estate

Thursday, July 24, 2008

Shobhana Subramanian: Indian builders need Chinese rules

It's now quite evident that real estate companies are in for some difficult times. CRISIL not only foresees a delay in many planned and ongoing projects, it believes several players are over-leveraged and that the combination of sluggish demand and rising costs will lead to a shakeout. In particular, residential complexes, funded largely by customer advances, have been severely hit by the slowdown in bookings, which means it will be a while before the projects are completed. So it's going to be a long and painful wait for buyers who have paid up. Much of this pain could perhaps have been avoided if the government kept an eye on builders and subjected them to more scrutiny. Indian laws, it would appear, are far too lenient. In China, for instance, developers can pre-sell a residential property only when one-third or two-thirds of the construction is complete, depending on which province they're in. It's a far easier world out here where builders are free to pre-sell property even before they've started digging. Those who want to own a home of their own, and who doesn't, often have little choice but to play along. Buyers also have very little idea about how their hard-earned money is being utilized by the developer. In China, we're told, mortgage payments have to be utilized for a specific project. Maybe that's the way it should be done here too; builders would then not be able to divert customer advances for other purposes. Conditions in the real estate space in China today are pretty similar to those in India. Property markets there too have weakened and buyers are biding their time. A big difference, however, is that property prices in China are still considered affordable whereas back home even a modest home remains out of reach. That's the main reason why there have been so few transactions. It's time we changed some of the rules, home buyers deserve better.