Issues in the Real Estate Sector in India and the RERA Act – Explained, pointwise

Introduction

The controlled demolition of Supertech towers in Noida grabbed media headlines all over India. The towers were demolished after a prolonged legal battle of almost a decade. In 2021, the Supreme Court had upheld the 2014 Judgment of the Allahabad High Court that had ordered the demolition. The Court had held that the towers were built in violation of building and city planning norms. Several experts have remarked that the demolition is symptomatic of the ills affecting the Real Estate sector in India. They contend that while the demolition is being celebrated as the law catching up with the culprits, the rot run by nexus of corrupt government officials, political leader and builders is too deep to be cured by one corrective action. The Government has enacted the Real Estate (Regulation and Development) Act in 2016 to regulate the sector. While there have been some positive impact, but more efforts are required to address the gaps.

About the Real Estate Sector in India

The real estate sector is one of the most globally recognized sectors. It comprises of four sub-sectors: Housing, Retail, Hospitality, and Commercial. The construction industry ranks third among the 14 major sectors in terms of direct, indirect and induced effects in all sectors of the economy. In India, the real estate sector is the second-highest employment generator, after the agriculture sector.

According to NITI Aayog, by 2030, the Indian real estate market is predicted to be worth US$1 trillion from US$ 200 billion in 2021 and will contribute 13% of the country’s GDP by 2025.

Source: India Brand Equity Foundation

The sector will be driven by rapid urbanization as Indian cities grow over the decade. According to the Economic Times Housing Finance Summit, the current shortage of housing in urban areas is estimated to be ~10 million units. An additional 25 million units of affordable housing are required by 2030 to meet the growth in the country’s urban population.

Source: India Brand Equity Foundation

In addition, the rapidly expanding digital economy will create demand for real estate as well. According to Savills India (Real Estate Consulting Agency), real estate demand for data centres is expected to increase by 15-18 million sq. ft. by 2025.

What are the major issues in the Real Estate Sector in India?

Affordability, Inflation and Volatility in financial market: Urban housing is characterized by high prices. It is nearly impossible for majority of Indians to buy a house in major urban areas. The surge in global commodity prices has increased the cost of construction substantially. Rise in cost of living and interest rates on home loans further reduce affordability. Apart from this, inflation and volatility in the financial markets remain key concerns for the real estate sector.

Lack Of Efficient Project Management: It remains a major impediment. The requirement of multiple clearances from multiple Government departments, delay in grant of approval by civic authorities, a lack of funding sources, and budget overruns due to significant delays lead to delays. According to an estimate by a realty consultancy firm, the construction of about 240,000 homes remains stalled in the National Capital Region (NCR) alone

Source: Mint

Lack of Transparency: Though the real estate agents and projects are registered, all of them are not necessarily verified. This reflects the drop back of authorities in action.

Corruption: There is a nexus between corrupt government officials, builders and local political leadership. Often, there is blatant violation of laws and rules in terms of land-use norms, FSI or fire and safety compliance etc. For instance, the Supertech towers were built on land initially earmarked for a public park. The plan was changed to allow construction of 9-storey towers. Eventually, towers were built with 40 floors. Similarly, the commercial building in Mundka, Delhi, where fire tragedy occurred in May 2022, was operating without Fire NOC.

What steps have been taken to resolve the issues in the Real Estate Sector in India?

The Government’s focus has been towards making housing affordable for everyone. Changes in floor space index (FSI) rules have made land hoarding unsustainable. Similarly, the Government’s push for ‘Housing for All’ fuelled the demand for affordable housing and in turn generated much-needed liquidity in the sector.

The Government has also tried to make the sector more transparent with the enaction of Real Estate (Regulation and Development) Act, 2016 (RERA). It has improved the availability of information on project approvals. It has enhanced investors’ confidence.

Other initiatives by the Union Government include: (a) Revival of stalled projects through Special Window for Affordable & Mid-Income Housing (SWAMIH) fund; (b) Creation of affordable housing fund with an initial corpus of about INR 10,000 crore to fund housing finance companies (HFCs) in the priority sector; (c) Real estate debt restructuring; (d) Moratorium benefits during COVID-19 pandemic (moratorium on interest payments on loans).

What are the salient provisions of the RERA, 2016?

The Real Estate (Regulation and Development) Act, or RERA, was enacted to regulate the real estate industry, protect buyers’ interests, and encourage developers to provide more professional and timely services.

The salient provisions of RERA, 2016 include:

Regulatory Authorities: The Act provides for State Governments to create regulatory authorities (Real Estate Regulatory Authority, RERA) with a mandate to register and maintain a database of real estate projects; and to protect the interest of buyers. All projects with plot size of minimum 500 sq.mt or eight apartments need to be registered with Regulatory Authorities. Real Estate Agents also need to register with the Authority.

Grievance Redressal: Regulatory Authorities have power to address grievances of buyers. If buyer is not satisfied with the decision, they can challenge it to the Appellate Tribunal established in each State.

Penal Provisions: The Authorities can send show cause notices to developers, brokers and promoters if they violate their obligations under the RERA. If they are unable to justify their acts or omissions, they can be subjected to heavy fines. There are provisions of imprisonment of up to 3 years for developers and up to 1 year in case of agents and buyers for violation of orders of Appellate Tribunals and Regulatory Authorities.

Timely Completion: 70% of the funds collected from buyers need to be deposited in a separate dedicated account (escrow account) meant for that project only. The deposited money can be used only for the construction of that project. The provisions has been added to prevent diversion of funds by developer to some other project as was the common practice earlier. It will ensure timely construction.

In case of delays, builders have to refund buyers or pay interest on their money for delays.

Transparency: At the time of registration of project, the developer has to furnish specific details related to project like the Sanctioned plan, time period or completion etc. The Act defines terms like Carpet Area, Common Area etc. Buyers will be charged for the carpet area and not super built-up area. Developers can’t do alteration or addition in the sanctioned plans and specifications of project layout, without the written consent of 2/3rd of allottees/homebuyers.

Protecting Buyer’s Interest: The developer is liable to repair any structural defects that occur within 5 years of purchase. Similarly, a builder cannot take more than 10% of the cost of the project from the buyer as advance or application fees.

What has been the impact of RERA on Real Estate in India?

The impact of RERA is not fully evident yet. This is because real estate projects have long gestation period. Since RERA is not applicable to projects prior to 2016, very few RERA compliant projects have been completed so far.

However, according to a report by the Government, RERA has led to improved compliance to timelines by builders. A project that had faced prolonged delays in Gautam Buddh Nagar was completed through intervention of the UP Real Estate Regulatory Authority at the request of the buyers.

Real Estate Market experts have observed that the urban market is now becoming dominated by big real estate developers that are more professional and transparent in their dealings (Corporatization of Real Estate). This is going to be good for the buyers in the long run. Going ahead, there is going to be reduction in over-supply; as earlier, many developers used to undertake multiple projects without due clearances. Now, this will be kept in check.

What should be the approach going ahead?

First, the RERA does not address the issue of delays in grant of approvals by the Government authorities. There is a need to reform the approval process and make it more transparent. The practice of violation of planning and building norms followed by subsequent regularization of illegal projects and buildings need to be strictly prohibited.

Second, as pointed out by several policy experts, the process of urban planning is poor in India. This has resulted in haphazard urbanization and creation of slums lacking basic amenities. The urban planning process should involve expertise of professional urban planners.

Third, several studies, including by the National Institute of Public Finance and Policy, have noted the link of the Real Estate Sector and Black Money. Government is taking steps to increase transparency in real estate transactions and curb use of black money (like rationalization of stamp duties). However, more steps are needed in this regard e.g., stricter implementation of Benami Transactions Act, 2016.

Conclusion

India is poised to undergo rapid urbanization in this and the coming decade. The real estate sector has an important role to play. It is crucial to address the lacunae challenging this sector in order to achieve sustainable urbanization. RERA, 2016 is the first corrective step in this regard. The Government must undertake further reforms related to urban planning bodies and checking corruption to make the process of urbanization inclusive and equitable.

Syllabus: GS III, Indian Economy and issues related to growth, development; Infrastructure.

Source: Mint, Mint, Business World, Financial Express, PIB, Indian Express