The Real Estate (Regulation and Development) Bill aspires to create a win-win situation for both developers and buyers in India. But is it really that simple? Ankit Saproo explores
In the 1990’s, Skipper Builders conned many property buyers of their hard-earned money by promising them apartments in a housing scheme in Ghaziabad, near the Indian capital of New Delhi. The builders did not disclose essential information regarding land allotment. Later on, the Ghaziabad Development Authority (GDA) cancelled the land allotment for not paying the due amount, leaving those who had put their money in the housing scheme in the lurch.
As the Indian real estate sector has grown over the years, so has the number of those victimised by fraudulent housing schemes crafted by builders in the absence of stringent regulation. The Real Estate (Regulation and Development) Bill, tabled in India’s upper house of Parliament (Rajya Sabha) last year, seeks to establish a regulatory authority for the industry which has been functioning without any form of oversight. India has seen an explosion in the real estate market in the recent past. Prices have sky-rocketed and many incidents of customers being duped have come to light.
The objective is to hold the developer accountable at every stage of the process. The idea is to increase transparency and ensure that consumer rights are not trampled upon.
The Bill was tabled in the Rajya Sabha last year in August. It was sent to the Standing Committee on Urban Development for its consideration, which submitted the report on February 17, 2014. The Real Estate (Regulation and Development) Bill is aimed to encourage fair practices in real estate dealings and will fix accountability at every stage of development, according to real estate experts. The passage of the legislation will create a real estate regulator in every state.
The real estate sector in India is valued at over US $70 billion. It is one of the most important segments of our economy both in terms of contributing to the overall growth of GDP and employment generation. But over the years, as this sector has grown rapidly, it has seen instances of consumers being duped by fraudulent schemes. The real estate sector has been functioning largely without any regulatory oversight to safeguard the interests of the consumers and uphold their rights. The Bill has a number of provisions to deal with several grey areas that exist today. The proposed regulatory authority will guarantee consumers the right to all necessary information regarding the housing project. It seeks to penalise those who mislead buyers by publishing incorrect information about projects. For repeat offenders, it has provisions like jail term of up to three years.
The Bill proposes a Real Estate Appellate Tribunal which will hear orders from the adjudicating authority to be appointed under the legislation. The Adjudicating Officer will be an officer not below the rank of a joint secretary (a high rank in Indian bureaucracy). The Bill intends to make it mandatory for developers to launch projects only after acquiring all statutory clearances from relevant authorities. It makes it mandatory for builders to clarify the carpet area of flats as well.
The proposed legislation will also include property agents within its scope. The standing committee in its report has said that a proper training mechanism for agents should be put in place.
The real estate sector is expected to grow at 10-15 per cent CAGR (compounded annual growth rate), accounting for between five and seven per cent of India’s annual GDP. Industry bodies like CREDAI (Confederation of Real Estate Developers of India) have asked for a regulator for the sector on the lines of IRDA (Insurance Regulatory Development Authority), a regulator for the insurance sector and SEBI (Security and Exchange Board of India), which regulates the capital markets. The idea is to protect consumer rights and at the same time clear the existing bottlenecks that impede the growth of the industry.
At present, developers have to face a number of hurdles before getting all necessary clearances for a project. “The developers have to face delays and difficulties to get approvals for their projects as each project requires approval from multiple bodies. This gives rise to corruption, bribery and ultimately to delays in launching the project,” says Rohit Kumar, head of research, DTZ India. The ordeal which consumers have to go through is equally harrowing. In the absence of specific rules governing the sector, some developers mislead consumers into putting their money in fraudulent schemes, thereby conning them of their hard-earned money.
There are no clear guidelines on the basis of which the price of an apartment can be quoted. “The developers quote prices on different parameters such as built-up, super built-up, chargeable area, etc. This creates confusion in the minds of the buyers and also does not give them clarity on actual carpet area of the property,” adds Kumar. The proposed legislation takes into account this grey area which exists in the system and tries to address it. The Bill makes it mandatory for builders to disclose the carpet area.
The Bill seeks to make the buyers an equal partner in the process of developing real estate projects. The level-playing field which it seeks to create will shield the consumers from potential fraudsters. While talking to WCRC Leaders, Ashutosh Limaye, head- Research & REIS, Jones Lang LaSalle India, said, “Many of the clauses under the Bill are clearly meant to protect property buyers from the malpractices that have resulted from information asymmetry. However, some of the clauses under the Bill are also viewed as hurdles by the industry’s stake holders. One such clause is the mandatory procurement of all construction approvals prior to project marketing/sales.”
In India, according to a World Bank report, a developer has to get approval from 34 different authorities before starting a project, a figure that is way more than the number of approvals required in some of the other emerging markets like Brazil or South Africa where it stands at 17 and 13 respectively. The approvals have to be received from different civic authorities (sewage, environment, water, urban planning, etc.), electricity board, traffic authorities, fire department, airport authorities etc. The entire process is time consuming and leads to cost escalation. “The Bill is silent on the approval authorities coming under the ambit of this clause. Seen in this light, the concerns of the developers are genuine. The government or the market will have to come up with some workable solution in order to avoid cost escalation,” adds Limaye.
CREDAI agrees to the fact that the regulator should not add an extra layer of licensing for the industry that is suffering from cost escalations and delays as multiple approvals and permits are required for real estate projects.
In its report, the standing committee has recommended that the Real Estate Regulatory Authority (RERA) should be authorised to give directions to the state government to provide a single window clearance to real estate projects. Another important clause of the Bill will force the developers to lock 70 per cent of the amount received for a particular project which will be used for the development of that project only. This will restrict the use of these funds for other projects. The developers used to generate funds by selling units to buyers at attractive prices in pre-launch offers and those proceeds were used for the completion of previous projects, as pointed out eloquently by Vivek Kaul on an online article.
This is one of the primary reasons for the delay caused in delivery of homes. Once the proposed regulator for the sector is in place, these concerns will be adequately addressed to a large extent. As for the developer community, the need for reducing the cost of financing can be met by creating alternate sources of funding.
One of the ways of doing that, feels Limaye, is by allowing banks to capitalise land acquisition in India, with suitable conditions imposed on developers to launch and complete projects in a reasonable period. “This would directly compensate developers who were hitherto partially dependent on funds from pre-launch sales to make new land acquisitions,” he further adds.
Another major concern that plagues the sector is the lack of transparency. The real estate regulatory authority will help in restoring transparency to a great extent by mandatory disclosure of essential information to the regulator. “A central regulatory body can also implement standard procedures for quality control, taxation, price bands, timelines as well as mandatory disclosures for all developers. Such processes can therefore aid in bringing more transparency and also reduce corruption,” claims Kumar of DTZ India.
The creation of a real estate regulator will not only streamline the process but also help in making the sector more attractive to future investments. The regulatory authority is the first step for better governance. It has to be supplemented by efforts from the government to cater to the requirements of the industry. One such requirement is to provide infrastructure (or industry) status to the sector, which has been pending for long. This will help the industry in easy access to funds via the Foreign Direct Investment (FDI) route and allow them to secure domestic funding from banks under priority sector lending.
At a time when the real estate sector faces rough weather and owning a house has become a matter of luxury, it remains to be seen whether the regulatory authority proves to be a boon for both the developer and the buyer.