The roll-out of the Real Estate (Regulation & Development) Act 2016 (RERA) has been lauded as a watershed moment in the realty sector of India. The landmark policy reform is anticipated to change the functional dynamics of residential and commercial real estate transactions in the country. Underlining the need to sustain consumer confidence and protecting investor interest in the realty sector, the RERA Act has stipulated the provision of ‘title insurance’, an indemnity policy insuring against issues related to disputed land titles, delays on account of long-drawn litigations and project cancellations. It has been mandated that all new and in-progress real estate projects registered under RERA should have title insurance. Developers have been directed to take title insurance under Section 16 of the RERA Act.
A fragmented, unregulated property sector to date had not made it a compelling factor to introduce a comprehensive, full-fledged title insurance product in India. With the roll-out of RERA to regulate real estate transactions in the country and ensure coverage and safeguards from financial losses on account of title defects, the concept of title insurance is widely gaining ground. With a view to cash in on the emerging business opportunity and leverage its market potential, prominent insurance companies in the private and public sector have expressed their willingness to launch specifically-tailored Title Insurance products and register them with the insurance regulator.
One of the India’s largest insurance provider in the private sector, HDFC ERGO, has launched a Title Insurance Policy, the first such title insurance product introduced by an Indian private sector insurance player. The product is meant to provide indemnity coverage to developers and property owners from defective title-driven risks and losses. Public Sector player The New India Assurance Company Ltd (NIAC) has also launched a similar Title Insurance product. The policy would also cover litigation costs arising out of title defects.
The world over, title insurance has rapidly emerged as a widely accepted risk management tool and a multi-billion dollar business, especially in western countries. In the US and UK, Title Insurance forms an intrinsic part of all real estate purchases and consumers commonly buy it when entering into a transaction. In India, RERA has stipulated that title insurance will have to be bought by developers while starting a project but once the construction is completed, it will need to be transferred to flat owners of the society management association. The US and UK have a robust digital land records infrastructure. It will take some time before India can leverage the full benefits of a comprehensive title insurance policy as the domestic real estate sector continues to remain fragmented and mired in lack of operational transparency and uniformity in transactions. The absence of a centralised land records database in the digital format has not helped resolve the situation.
Though title insurance has been broadly welcomed by all the stake-holders in the real estate sector, its practical execution is being questioned given the exorbitant cost of the insurance. It is estimated that the title insurance premium cost would take into account not just the land value but the entire gross development value of the project.
Developers are expected to pay an upfront hefty fee linked to the project development value for availing of title insurance for their projects. As the potential premium would add to the per sq. feet cost of housing projects and vastly increase the property price, the consequent burden would be passed on to home buyers. With insurance companies needing to undertake a cumbersome effort to authenticate the title and assess its veracity, the final transaction costs are likely to be inflated tremendously.
All the stake-holders in the real estate sector need to come together to ensure the successful implementation of title insurance as a viable risk management tool. The wider acceptance of title insurance by the industry will provide a huge boost to the Indian real estate insurance market and ensure greater accountability and transparency in the domestic real estate sector.
This would also give a boost to the securitisation market and also enhance the value proposition for debt instruments. This product will have a cascading positive effect on real estate industry as a whole and also the financial industry closely linked to the real estate.
The writer is managing partner, SNG & Partners