Real Estate Bill: Building on solid ground

Published: Thu, 03/17/2016 - 11:59

The recently passed real estate regulation and development bill will bring some much needed transparency to what is an opaque and unaccountable sector

Nikhil Thiyyar Delhi

In September 2007, Rahul Gupta, a consultant with McKinsey Knowledge Center ponied up all of his savings and brought a flat in a leading real estate developer’s high rise tower. Nine years later, circa 2016, he is still waiting for his flat to be delivered. As it turned out the real estate developer did not obtain the necessary approvals for the project. Not only does Rahul have to pay a steep monthly EMI for the home loan he has taken, he also has to bear the unnecessary burden of paying rent.

The Real Estate Bill which has been pending for a long time was passed by the Rajya Sabha on March 11, 2016. In what is decidedly welcome news for the average property buyer like Rahul it has many provisions which purport to safeguard his interests. The need for the bill arose because of the current malaise the real estate sector in India finds itself in.

The Real estate sector in India suffers from three basic problems: excess inventory, rising NPAs, shrinking demand. All three factors merit a deeper analysis. The foremost and the most troubling issue plaguing the real estate sector is the sharp plunge in the demand for residential spaces. As sales remained tepid and cash flows uncertain, a number of real estate firms have fallen into a potential debt trap and are borrowing heavily.

The most important safeguard that is baked into the bill is that fifty percent of the buyers investment has to be deposited into an escrow account which must be used only for construction purposes

What’s worse this would seriously affect the credit metrics of the entire sector. As to the problem of excess inventory, The real estate market has been among the sectors worst hit by the economic downturn which, coupled with high interest rates in the face of persistent inflation and delays in securing mandatory government approvals, has kept wary homebuyers away for the last couple of years. Unsold inventory in NCR in January-March rose 12.63% to 235,908 apartments from a year ago.

These problems are largely the result of lack of regulation. In the past decade following high growth, real estate became the hub for profiteers who appropriated land in the name of mindless development, took big loans from banks and did not bother to check if there were any demand-side constraints. These were the same set of conditions which led to the Global Financial Crisis of 2008.

The real estate bill therefore aims to correct the problem by disciplining the sector-and-market-forces to adhere to demand and consumption patterns and deliver on them. This includes provisions such as a) penalty on delays in possession, b) compulsory registration, c) consensus-oriented building and revision of building plans/architecture etc. It also aims to protect the homeowner/buyer by ensuring strict penalties for developer in case of breach of provisions of the act. Lastly it intends to sanitise competition in the sector by forcing compliance to law (through RERAs), thereby ensuring that only financially viable developers offering sustainable projects survive in the market.

Unsold inventory in NCR in January-March rose 12.63% to 235,908 apartments from a year ago

The bill will bring a long-needed structure to the real estate sector in India which is headed for imminent disaster otherwise. In this context, the exemption of dividend distribution tax for real estate investment trusts in 2016 budget should also be seen as an incentive for the industry to comply and welcome the regulations.

The Bill provides for mandatory registration with the Real Estate Regulatory Authority (RERA) in each state, this would ensure that all property transactions are above board. Moreover all registered projects must provide details of promoters, layout plan, land status, schedule of execution and status of various approvals. The RERA in each state would also seek to enforce the contracts between buyers and sellers, acting as a fast track mechanism to settle disputes. The most important safeguard that is baked into the bill is that fifty percent of the buyers investment has to be deposited into an escrow account which must be used only for construction purposes. The bill also prohibits developers from making changes to the building design until two-thirds of the allottees agree. For a largely unregulated and unaccountable real estate sector, the passage of this bill is a welcome move.

The recently passed real estate regulation and development bill will bring some much needed transparency to what is an opaque and unaccountable sector
Nikhil Thiyyar Delhi

Read more stories by Real Estate Bill: Building on solid ground