Regulate Real Estate Industry in India

Times of India ran an article on 3rd Feb on how real estate companies are taking customers for a ride. I am sure many of the readers who have made real estate investments in India will relate to this. If you think about it and put a number to it, this could be the largest scam in India, larger than even the so called 2G scam – if you take the number of associated with it to be the true size of the scam!!  I think that number is a joke, but let’s stick to real estate for today. BTW, isn’t it sad that SCAM has become part of our daily vocabulary in India.


I will not go into the issues with real estate industry in India because the TOI article pretty much captures it – although that article is for Gurgaon market, I think it will hold good for any part of the country. The only additional thing I would like to add is by sharing something I know about another very interesting industry in the US – Death care industry, and then comparing that with real estate industry in India. Death care is a huge organized industry in the US with the largest player (Service Corporation International) being a $2 bn company. We Indians will probably find it funny but most people in US make prearrangements for their funeral and also pre-pay for it. The death care companies take money for goods (coffin, burial site etc.) and services (funeral) that will get delivered sometime in future. Now compare that with real estate in India – here also the builders are collecting money in advance for goods (house) that they will deliver in future. Even in the construction linked plan, they take significantly more amount of money upfront – something like 95% of the amount when construction status is 50%.


BTW, in case you are wondering why didn’t I compare it with the real estate industry in US – I think in US builders cannot take money in advance from customers anyway (I am not sure though…) – they usually build properties and then sell it.


Now let’s see the difference from regulation perspective. In the US, death care companies are bound by regulation to keep the money collected in advance in a Trust account. The company is bound to give investment options for the money in Trust to the customer – that means, if I have made prearrangement for my funeral and have paid money in advance, I decide where it gets invested and gains from that investment are mine. Under no circumstance can a death care company take control of that money or recognize that money as revenue. In the event of death of the customer, goods are services are delivered to the family and only then can the company take money out of the Trust and settle accounts.


What do builders in India do? They take that money, delay projects by years, invest that money in future projects and pay a miniscule penalty to customers for the delay. Some even close shop or run away with the money. It’s almost like borrowing money from a bank for no interest. In fact, one way to look at it is that the customer is actually funding the builder and also paying interest to the bank on behalf of the builder because most of these investments have a loan component.


So, why aren’t politicians and babus doing anything about it? Well, if they regulate the real estate industry, where else will they park their black money and recirculate when needed!!


I think I will instigate media to run a sting operation on this scam. Prannoy Roy, Barkha Dutt, Rajdeep Sardesai, India TV… whoever else has a livelihood on sting operations, hope you are listening!