What will it take for India to have computerised land records, wonders Rajiv Handa

Imagine if we had a centrally sponsored, nationwide, real-time data base of land owners in the country which is accessible to all users, be they owners, mortgagors, bankers, IT and land authorities. Such an electronic common user interface will make real estate transactions tax compliant and transparent, and remove a lot of concerns and fuzziness that cloud real estate deals in the country.

Growing urbanisation

Real estate developers moving out of New Delhi in search of greener pastures have sunk billions of dollars in high-rise structures that stand upon a narrow sliver of land that lies between the Toll Bridge on the Delhi-Gurgaon Expressway and the Golf Course Extension area, in Gurgaon. But they are dogged by concerns over counterparty risk and its redressal. The risks, simply stated, are two-pronged: One that emanates when land parcels (a land parcel is a continuous area of land, declared by one farmer, which does not cover more than one single crop group) get aggregated and two, when developed land is sold.

The first refers to encumbrances to the owners of the land that disallow its full use, such as, inter-party claims between multiple owners; liens of mortgagors, such as banks and financial institutions; and revenue claims from land or taxation authorities on the underlying parcel of land. The second category refers to the grant of completion and occupancy certificates by land authorities and the execution of sale deeds between the developer and the ultimate consumer or investor. The real-time data base of land records will reduce the red tape and bureaucracy that bogs down the system of land transfers; most importantly it will remove discretion that ensues from manual processing of land transfers; in the grant of NoCs by various government departments; and the possibility of over-looking claims of lenders or liens left unrecorded during manual notations and recordings by a relevant bureaucrat. These can hide under red tape and still get a land parcel transferred in the name of the buyer, but to the disadvantage of the interested party, that is the lien holder or the mortgagor.

A real-time data base of land records will reduce the red tape and bureaucracy that bogs down the system of land transfers; most importantly it will remove discretion

A mad rush towards Gurgaon…

The shortage of open spaces for development in New Delhi, forced real estate prima donna DLF to take the help of the Haryana Government to set up a new township South of Delhi, that could house over a million residents. The state Government obliged by converting agricultural parcels adjoining the old Gurgaon city into mixed-use land parcels, where commercial and residential real estate thrive. This was in the mid-‘80s, and it began India’s first experiment with setting up a new planned city. It exists alongside the 300-year-old city and the National Capital of Delhi and is famously known as ‘DLF City’ - a city which can provide its residents modern infrastructure and amenities, gated complexes, hi-tech BPO, and KPO centres, immaculate transportation systems, medical, and educational institutions. A truly ‘Millenium City’ that offers a walk-to-work environment.

…Bombay, Kolkata, Hyderabad, and Bangalore face similar problems

Aggregating land and parceling out developed land, be it in South Bombay, Navi Mumbai or the more recent re-development of the mill land in Central Bombay, and Slum Rehabilitation at Dharavi, confirm that urban India is changing at break-neck speed. But all new developments face similar problems when it comes to the transfer of land. A study by real estate consultant Jones Lange La Salle indicates that close to USD 20 billion has been invested in new buildings and structures in the decades 1990-2010. Even though an average apartment in a new building in Mumbai costs anywhere between USD 1 million to USD 5 million, there is still a component of under-hand cash and murky deals that continue to be in existence. So, at least from the user point of view, there is no dearth of cash for creating a nationwide database of land owners, and putting it upon a common platform.

So large are the cash inflows in land deals that privately, almost every buyer, builder, and politician names the real estate sector as the prime conduit for the enormous sums of ‘unaccounted cash’ in the system. Since, there is no way such an extraordinary quantum of cash can be put into bank accounts without alerting the revenue authorities, the money simply moves from one real estate deal to another, keeping the real estate price at lofty levels. The recession be damned.

How are such projects financed?

The Government has officially banned public sector banks from financing the acquisition of land parcels by realtors. It has done this to prevent ‘cornering’ of the market and excessive speculation in land prices, so that acquiring real estate does not either become a dream job for the millions joining the ranks of job seekers every year, or reduces labour mobility.

So where do the realtors seek finance from? They access mortgage lenders like HDFC, GIC Housing, Can Fin Homes, Dewan Housing and a host of Non-banking Financial Companies (NBFCs) and brokerage firms turned mortgage lenders like Edelweiss Finance, India Bulls, and India Infoline. There are also the traditional lenders like ICICI Bank, and Kotak, and a host of other banks which have got real estate arms or have set up real estate funds in the form of venture funds or real estate investment trusts that identify and fund projects end-to-end.

At least from the user point of view, there is no dearth of cash for creating a nationwide database of land owners, and putting it upon a common platform

While land acquisitions are funded by private institutions, normally, development costs are forked out by the individual home owner, investor. The individual home owner or investor, in turn, approaches the public sector government-sponsored entities like Can Fin Home, GIC Housing, or LIC for funding upfront payments to the builder through 20-25 year, term loans. In this process, it is the realtor who is most at ease, as he gets funding for land acquisition from private banks or NBFCs, and construction funding from individual or corporate buyers. Should a glut emerge, construction and deliveries can be easily moved forward or simply delayed, and the buyer takes a hit. Such instances are common across the industry, and do not exclude even luxury projects.

Absolutely not! Everything is not hunky dory. In early April 2012, the Government of Delhi put up for sale 80 apartments which were a part of the Commonwealth Games Village 2010, through closed bidding. Through this sale the state Government garnered close to Rs 400 crore or about Rs 2-5 crore per apartment at an average price of Rs 25,000 psft. The DDA authorities claim there were two reasons for putting up a smaller number of apartments for sale. First, three out of the 34 towers that comprise the CWD2010 Village have yet to receive completion or occupancy certificates. Two, with a floor price of Rs 16,500 per sft the DDA wanted to test the waters

Two years after the games came to a close, and nearly five to six years after construction at the complex began, the whole project represents a maze of claims and counter-claims made by the developer (Emaar-MGF), builder (Ahluwalia Contracts), the state Government of Delhi, and the nodal Development Authority, the DDA. Some of these have been settled. To put it in perspective the 1100 plus flats of the CWG2010 should be worth close to USD 1bn or roughly Rs 5500 crore today, an amount large enough to make everyone interested sit up and take note. Of these, 700-plus flats are owned by MGF-Emaar (since sold), and 333 by the DDA (of which 80 got auctioned in May 2012).

Where does this leave the buyers of the apartments? Not only does the buyer make an upfront payment of Rs 5 crore (USD 1 mn), but he has to wait for the bureaucracy to facilitate the transfers. The 700-odd individuals who bought these flats from the developer of the complex Emaar-MGF, are yet to move in, as the sale deeds have not been executed by Emaar because the DDA has still to give the ‘developer’ the completion and occupancy certificates.

Such a delay has forced the Residents’ Association to seek legal remedies as Delhi has banned property transfers on power of attorney. So, while some rich investors and buyers may have had the liquidity, others will have borrowed the amounts to pay the developer without receiving the apartments for them to move in.

Another city, a similar example Mumbai-based billionaire Vivek Talwar was in the news recently, for having come under the net of the central investigating agencies for selling a 2200 sq ft flat in Il Palazo for Rs 5.5 cr (USD 1 mn) to a maid a few years’ ago, against the then market price of Rs 20 crore (USD 4 mn). The current market price of this flat is Rs 40 crore (USD 8 mn), but worse still, the transaction went through even though the property had been mortgaged to a branch of PNB in Mumbai, which held a lien thereon. A realtor once told me that one in four real estate transactions in the country are either disputed or simply forged. Had a computerised record existed, the claim of PNB will have been automatically addressed and the transfer would have been blocked by the system. The fact that the transfer went through speaks of graft and the weakness of manual checks.

While some rich investors and buyers may have had the liquidity, others will have borrowed the amounts to pay the developer without receiving the CWG apartments for them to move in

The Indian mortgage market

The various state-level land authorities have made it mandatory the physical presence and affixation of photographs of the transferor and transferee on the transfer document. This document is then notarised and accepted for transfer. However, inspite of all the checks and balances, the rights of a financier are still likely to get overlooked, as could the claims of revenue authorities.

To cite an example of a transparent system, on the US real estate portal www.zillow.com, an interested party can see a Google image of every property in the US. A visitor to the site can check out the current owners, the previous owners, the transaction value the last time a property got sold, and the current bid value on the property. Additionally, the peak price ever bid for this house and the current indicative valuations, and vital details like the last time the roof was re-laid are also available. This type of information is as vital to a transaction involving mortgaged properties, as any other.

The fact that a nationwide database exists, means that property transfers, execution of court orders, decrees, mutations, settlement of land, and IT demands can be handled in very little time. For instance, a normal transfer in the US takes seven working days making it one of the most liquid and transparent markets in the world. In India, the process can take months and this too, with a lot of graft in Government offices.

It is nearly three decades and nothing much has changed

One of the first assignments given to me 30 years ago, in my first job, was to help ensure the creation of a mortgage on all immoveable properties owned by my employer in favour of a consortium of nine PSU banks and financial institutions (FIs).

The company had roughly 60 acres of land in Dharuhera, in District Mahendragarh, in Haryana where the plant had been set up, but the land records including the registration of the pattas had been done at the tehsil office in Rewari. My daily grind used to be to pick up a bunch of IFCI representatives from their Delhi office and drive all the way to Rewari in the scorching summer heat only to verify that no alternative claims had been filed upon the company’s land in Dharuhera.

At Rewari, the tehsil officials would load their tables with the big fat registers containing land records which, apart from being written in the vernacular, were handed to us only after we had sufficiently greased their palms. The whole process of going through land records manually, page by page, was extremely painful. Just like the electoral votes were counted in the pre-EVM days, while I shuffled through the pages of the register, the IFCI inspector perched patronisingly over my shoulder would put a tiny mark on each page that I flipped through. Post-completion of this ‘search’ we would travel to a remote village in Narnaul in search of the tehsil Patwari to get his final blessings that all was clear.

Things have not changed much in the succeeding three decades, though in certain states and municipalities some form of an electronic database is taking shape. A lot however, needs to be done. First, the databases of municipalities used for collection of property tax need to be linked to the data base at the land registry office. This can help to end the system of rampant ‘greasing of palms’ that takes place in land offices whenever a property gets sold and then registered. Second, and most importantly, this data must be made accessible to the Income Tax authorities in a user-friendly manner. All clearances from say, the MCD, the Land Registrar and IT authorities must be made available simultaneously, in a fixed tenure.

There is money, but no will to execute

A successful Delhi-based realtor ventured to build 234 apartments in a gated complex where the average tenement sizes range between 5250 to 6000 sq feet. While four years ago the initial buyers paid upfront about Rs 8000 psft, today’s market values them at close to Rs 20,000 psft. A single apartment is now worth between Rs 12 and Rs 15 crore (about USD3-4 mn), but the project shows no signs of completion. Though the management claims otherwise, market sources indicate that the developer has retained some apartments from the sales that took place at the launch. This is with a view to raise more sums of money from the new buyers when the project nears completion, to cash in on the price appreciation at that time.

The cost of developing such a complex will be no less than USD 1 bn today. Had there been the will, realtors and investors could have called for the time-bound completion of the project and execution of the property deeds. This will have allowed buyers to either move in or sell out, and there may have been no need for the completion schedules to get extended. Time-bound execution and delivery of projects is not an Indian forte.

We cannot take away all the risks and red tape associated with real estate development in India, but the extensive use of computers could make life much easier for all parties

Do we have an alternative? We cannot take away all the risks and red tape associated with real estate development in India, but the extensive use of computers could make life much easier for all parties in a transaction, right from the developing to the developed stage. The South-East Asian nations have been at the forefront of adopting new technology. Both Hong Kong and Singapore have created central data bases that cover from land ownership, to credit cards and automobile mortgages. The records are accessible to all users, whether realtors, real estate developers, tax authorities and the land revenue authorities; and above all, the national courts. Among countries that have made enormous progress in making land records electronically accessible are Malaysia, Indonesia, and most nations in West Asia which have a big mobile population of expats.

Hong Kong’s path-breaking move in automobile mortgages
The unified registration of auto loans and mortgage collaterals will henceforth be required; this is following a directive from Hong Kong’s central bank stating that guarantees (collaterals) behind auto loans and mortgages will have to be registered at authorised registration and clearing entities.

Banks and NBFCs which are primarily the leading players in the field and are already exposed to the registration of liens and auto loan contracts will be the natural main beneficiaries. While no short-term impact is expected to be seen, news like this only reinforces the view that a pro-active government is ideally placed to facilitate business and cut red tape compared to a ‘reactive’ state. Mind you, Hong Kong has already positioned itself to capture information both on the development of its financial markets under stricter regulation; and the increasing credit penetration (including corporate bonds and now potentially, mortgages).

Clearly, the Hong Kong Monetary Authority (HKMA) - the pseudo Central Bank of Hong Kong Special Administrative Region (HKSAR) of the People’s Republic of China - is aiming at reducing fraud and delinquency by requiring information to be unified and kept in nationwide systems. This will also improve the assessment of credit risks. Information on auto loans will be provided by banks and NBFCs.

The combined effort of mortgagors and authorities can meet lenders’ needs through their information services (which is already in a ramping up process). But, as of now, on mortgages, the information is consolidated from fragmented public notaries. A lot is yet to be done, but the potential of an integrated system is promising (fraud reduction, a faster credit approval process, and mortgages’ strong growth outlook altogether).

While the timetable for its implementation is still to be defined, by replicating the success of the OTC derivatives and fixed income markets, the whole financial system will benefit from the development of a more regulated and integrated environment. Indian authorities should take note of these developments. The move is in the interest of everyone, but political will has to prevail.