The Real Estate (Regulation and Development) Bill 2016 (RE Bill), now approved by Parliament, is an attempt at finding a perfect balance between two seemingly difficult extremes. In a tightrope walk, the RE Bill tries to provide an institutional framework to protect and further the interest of buyers and in the same breath also seeks to give necessary support and thrust to the development of the real estate sector.
In the statement of reasons for the 2013 version, it was stated that the ‘real estate sector plays a catalytic role in fulfilling the need and demand for housing and infrastructure in the country’. Although the sector has witnessed significant growth in the recent past, it was felt that the sector was largely unregulated and thereby needed a measure of standardisation and professionalism to promote orderly progress.
The focus areas of the RE Bill include greater accountability towards consumers, reduction of frauds and delays, reducing transaction costs and bringing about professionalism and transparency in the real estate sector. The Bill covers both developers and real estate agents alike. The RE Bill is comprehensive and prescribes regulations spanning over the entire lifecycle of a project including booking, development, final handover and responsibility in respect of any defects arising post such handover. A new regulator, termed the Real Estate Regulatory Authority (RERA), has been designated to carry out the outlined objectives. RERA is expected to be set up within a year from the date of the regulations coming into force.
The real estate sector hitherto did not have a defined regulator and any grievance regarding any real estate project were to be taken up either by the consumer courts (under the consumer protection laws) or by the competition commission suo motu or on a complaint. In that context, RERA is a welcome introduction, especially since the relief under the earlier laws were either limited to specific customers (customer protection laws) or covered only large developers leaving a huge target segment of customers/projects out of its ambit.
While the reactions to the impact of the Bill on the sector and its growth are mixed, on a closer look, it is amply evident that the interest of the buyers have far outweighed that of the developers.
The RE Bill applies to all real estate projects where the land/number of apartments proposed to be developed is in excess of 500 square meters/8 units. Every real estate project falling within these parameters is required to be registered with the RERA prior to marketing/offer to sell the same to the customers. Far-reaching in impact, the RE Bill covers all real estate projects whether ongoing/under construction or yet to be developed.
No clear transition provisions have been laid down under the RE Bill in relation to the under-construction projects, and this may have an adverse impact on timely completion. Especially in the case of any pending litigation, utilisation of the acquired funds from the customers, etc, it is unclear whether the RE Bill would apply in toto and the projects have to be stalled for want of approvals or funds or not. The first scenario would be a tragedy for the sector already ailing from high cost of funds, excess inventory and low customer interest.
While the Bill’s earlier avatar covered only residential units, the latest version extends its reach to even commercial properties (with an intent to sell all or some of the developed area). Generally speaking, commercial properties are not developed for final sale to customers but are held as rent-yielding assets. Given this, the inclusion of commercial assets which has differing characteristics from residential properties including in relation to fund raising, timelines for completion, maintenance, etc, may have been unwarranted, given that such properties are acquired by sophisticated investors who are generally more aware of the product and the remedies available under law.
The strictures raised against developers require them to register the project with the RERA which include detailed disclosure on various aspects including track-record, title of the project, etc, prior to any promotions/ advertisements/ notice given to the customers regarding the project. Even on fund-raising, not more than 10% of the project cost can be raised without an agreement to sell and the RE Bill requires 70% of the funds paid by the customers to be parked in an escrow account and used towards construction purposes only after due certification and in line with the percentage of completion of the project.
The developers are required to provide quarterly updates to the customers through a pre-designated portal on the progress of the project, including the list of apartments which have been booked and approvals pending, prior to the issue of the completion certificate. All of the above measures while laudable in spirit have created almost a stifling atmosphere for the developers to flourish. In a desire to create a protective environment for customers, the RE Bill has added layers of approval and procedural requirements which impacts developers right from fund raising to timelines for completion of the project.
In some cases, where the cost of the land is well in excess of 30%, the developer would still have to maintain 70% of the funds in an escrow. Even the amount earmarked can be taken only in proportion of the completion of the project with approvals. Since some of the costs incurred would be front-ended, this would also mean additional funding requirement in the hands of the developers which in turn would only increase the cost of the product and make it unaffordable. In case of any stressed project, the promoter would also not be able to bring in a new investor without the consent of at least two-thirds of the allottees which could further delay the project completion and impact consumers.
The RE Bill is also onerous in its requirement and lists out higher interest costs, detailed penalties, prosecution for promoters who are in violation of these regulations. Certain requirements such as insurance for construction and title of land, without such products being available in the market, also would bring additional pressure on the cost of the projects.
One therefore feels that the RE Bill is a little farther from the mean and the interest of end customers have been treated as “more equal” to that of other industry participants. Hence, while the intent of the lawmakers is undoubtedly good, the question is whether it is yet another instance of over-regulation?
With inputs from Vinay K. The author is partner,BMR & Associates LLP .Views are personal
Resource: http://www.financialexpress.com
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