Modi to Rein in India’s Home Builders Who Can’t Keep Their Word

Updated on
Indian Prime Minister Narendra Modi
Narendra Modi, prime minister of India. Photographer: Graham Crouch/Bloomberg

Niloy Das was due to receive the keys for his new three-bedroom apartment outside New Delhi in May 2013. Two years later, the place still isn’t finished even though he’s paying a mortgage on it, plus rent on his current home.

Das isn’t alone. More than 40 percent of all housing projects in India are delayed more than 12 months beyond their scheduled completion, often because developers sell buildings before they have all the necessary approvals.

A bill revived by Prime Minister Narendra Modi after a two-year delay proposes an end to such false promises. It would require more disclosure from developers and penalize them for failing to do so or attempting to change the terms of contracts that have been agreed on. India’s parliament may start debating the legislation as early as next week even as some members expressed skepticism it will help buyers.

“Under the current law, many of us find it difficult to effectively stand-up against those developers who keep breaking the promises they make,” said Das, a 40-year-old food and beverage company professional. “With a real estate regulator in place, apartment buyers like me won’t be left in a lurch like this,” he said.

Better Credibility

The law would protect the interests of consumers and also boost the growth of property developers through better credibility, said Mumbai-based Pankaj Kapoor, founder of Liases Foras, a real estate consulting and research firm. Out of about 1.8 billion square feet of residential supply, 40 percent of the homes were delayed beyond a year, with the most in Mumbai and the National Capital Region, the area around New Delhi, Kapoor said.

“The bill is needed for the economic efficiency of the country,” said Kapoor. “The delays in construction costs the economy about 1.3 percent of gross domestic product,” based on data collated from residential projects in the top eight cities in India, he said.

The bill would impose penalties of as much as 10 percent of a project’s cost for failing to register it with relevant regulators and additional penalties of 10 percent or a three-year prison term in case of continued non-compliance. Incorrect or incomplete disclosures will attract a penalty of 5 percent of the cost, and projects may be canceled for continued non-compliance.

Track Record

Beneficiaries of the law are likely to be developers with a track record of executing projects on time, such as Prestige Estates Projects Ltd., Godrej Properties Ltd., Sobha Ltd. and Oberoi Realty Ltd, according to an April 8 research note from JPMorgan Chase & Co. analysts led by Saurabh Kumar.

Shares of Godrej Properties jumped 3.4 percent to 244 rupees in Mumbai as of 10.53 a.m. Oberoi Realty gained 1.3 percent and Sobha added 0.3 percent, while the 13-member S&P BSE India Realty Index was little changed.

“This will instill more confidence among global investors, thus providing better access to structured capital for this sector,” said Anuj Puri, the country head for India at broker Jones Lang LaSalle Inc. in Mumbai.

India currently is in the middle of the JLL Transparency Index of 90 countries that ranks nations on the clarity of their commercial real-estate practices.

Passage of the bill is likely to move the country higher in the table, Puri said. In turn, that will help attract foreign investment, he said.

India’s real estate sector, which opened to foreign capital in 2005, has received inflows of about $10.5 billion, about 5 percent of total foreign direct investment in the country, according to KPMG. That’s low for an industry that makes up 6 percent of India’s $1.88 trillion economy and is projected to grow fivefold to $676 billion by 2025 and account for 13 percent of GDP by 2028, according to KPMG.

Cash Flows

Implementation of the law may initially slow development, though, said Adhidev Chattopadhyay, a Mumbai-based analyst at Elara Capital. Developers currently pre-sell homes at lower prices to buyers before obtaining approvals to fund land acquisitions and generate money to complete other projects. Once the law is in force, they only will be allowed to sell off-plan after getting all approvals, which may delay cash flows, Chattopadhyay said.

“The intent is fabulous when it comes to real estate regulation, but they should regulate not only the developer but also all the authorities that give approvals as well as financial partners and customers,” said Boman Irani, chairman and managing director of Mumbai-based developer Rustomjee Group.

Red Tape

Developers need to get more than 57 approvals from various authorities to build an apartment, Irani said. Cutting the time in giving approvals and streamlining the processes in itself would help developers deliver apartments to customers at a faster pace and reduce the prices for finished apartments by as much as 20 percent, he said.

The law will be positive in the longer term and may help trigger a re-rating of property stocks, according to Maybank Kim Eng Holdings Ltd.

Home prices in Mumbai, India’s most expensive real estate market, rose to a record 13,120 rupees ($207) a square foot in the quarter ended Dec. 31, according to data from Liases Foras. Even as prices soared, shares of developers’ declined. The S&P BSE India Realty Index dropped 30 percent in the two years through 2014 versus an 8.8 percent gain in the benchmark S&P BSE Sensex.

Modi’s attempt to pass the bill is already facing headwinds as opposition members in the upper house of parliament, where his party lacks a majority, proposed sending it to a panel for alterations, signaling further delays. The legislation was first presented to parliament in August 2013.

“The bill will have to become a reality first,” said Das. “Developers who make promises which they can keep have nothing to worry about.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE