Changing trends

Mumbai, Aug. 19: The country’s real estate market is plagued by one problem: an acute shortage of clear land titles. Unlike in the US where investors are protected against any risk involving legal claims against property titles, realty buyers in India have no way of minimising their risks on a property deal.

Two NYSE-listed firms — LandAmerica Financial Group and First American Corporation — are now sniffing out opportunities to offer title insurance services in India that will take some of the pain out of dodgy land transactions.

A major problem in domestic real estate is the lack of clear land titles. The ownership of the land is not clear. Unlike in the US, where investors are protected against any risk involving legal claims against property titles by title insurers, the Indian market lacked any such product so far. But global players have now found a market for themselves here.

Policy push

Joel S. Peck, senior vice-president of LandAmerica Financial Group Inc, said, “The Indian government, the RBI, and private sector real estate investors, developers and mortgage lenders have identified title insurance as an important driver to continued growth in the Indian real estate capital market. This will be particularly important with the development of Indian real estate investment trusts and mortgage securitisation.”

“Our company will be able to write the risk on Indian titles for international entities. All risks, including fraud and forgery of titles, are covered by the title insurance and claims are on a no-fault basis. In the event of a claim, we defend on the insured’s behalf and cover both financial loss and legal costs of defence,” said a First American official.

“A title insurance is an entirely different product,” said Peck. It is issued today, based on a legal analysis of the history of the title to the property. An owner’s policy guarantees that the purchaser is getting a good title to the property, free and clear of liens, encumbrances or charges, and has legal access to the property at the date of issuance, he added.

Transparency focus

A loan policy guarantees to the mortgage lender that the borrower has a good title and that the mortgage has a first priority and is properly registered on the date of issue. Title insurance policies are a protection against risks arising out of past events. They, however, do not cover future events.

“They are not based on actuarial assumptions. Instead, each risk is underwritten based on a search of specific property and mortgage records, and policies are written based on legal certificates of title and legal opinions,” Peck said. The premium is a one-off payment based on the property value at purchase and the policy runs for as long as one owns the property. “As a general guide, we are pricing India in the region of 0.35 per cent to 0.5 per cent of the property value,” said a First American official. But to be in a position to issue the policy, the companies will have to conduct their own due diligence.

“We work with the client’s own attorneys and underwrite based on their title due diligence report and our examination of that. This avoids double costs. The final premium amount will depend on the results of our due diligence exercise. A deposit is payable upon engagement and this is deducted from any premium paid subsequently,” said a First American release.

Problem areas

But there are hurdles. “One of the major roadblocks is the ability of international firms to create a product that works in the Indian markets and is based on understanding and underwriting risks within India. The lack of land records as well as multiple levels of ownerships create an impediment in ascertaining the risk profile of projects,” said Archana Hingorani, ED of IL&FS Investment Managers.

“There is no government support like land record available in the country,” said Pranay Vakil of Knight Frank India.