Real Estate (Regulation & Development) Act

Topic relevance

GS2 – Government policies and interventions for development in various sectors and issues arising out of their design and implementation

Context

• The much awaited Real Estate (Regulation & Development) Act is now in effect.
• The Ministry of Housing and Urban Poverty Alleviation recently notified 69 out of the 92 sections in total, which set the ball rolling for States to formulate, within six months, rules and regulations as statutorily mandated.
• Since land is a State subject under the Constitution, even after the Centre enacts the legislation, State governments will have to ratify them.
• States will have to set up the Real Estate Regulatory Authority’s (RERA) and the Real Estate Appellate Tribunals and have only a maximum of a year from the coming into effect of the Act to do so.
• The Act’s preamble details the legislative intention which is to primarily protect the interests of consumers and bring in efficiency and transparency in the sale/purchase of real estate.
• The Act also attempts to establish an adjudicatory mechanism for the speedy redress of disputes. RERA and the Appellate Tribunal are expected to decide on complaints within an ambitious period of 60 days. But no legislation can protect the interest of only one class.
• As one of the largest job creators, the real estate sector contributes almost 6% towards the GDP. Mindful of this, the Act seeks to assist developers by giving the regulator powers to make recommendations to State governments to create a single window clearance for approvals in a time-bound manner.

Highlights of the Act

• The Act regulates transactions between buyers and promoters of residential real estate projects by establishing state level regulatory authorities called Real Estate Regulatory Authorities (RERAs).
• Residential real estate projects, with some exceptions, need to be registered with RERAs. Promoters cannot book or offer these projects for sale without registering them.  Real estate agents dealing in these projects also need to register with RERAs.
• On registration, the promoter must upload details of the project on the website of the RERA. These include the site and layout plan, and schedule for completion of the real estate project.
• 70% of the amount collected from buyers for a project must be maintained in a separate bank account and must only be used for construction of that project. The state government can alter this amount to less than 70%.
• The Act establishes state level tribunals called Real Estate Appellate Tribunals. Decisions of RERAs can be appealed in these tribunals.

Key Issues

• One may question Parliament’s jurisdiction to make laws related to real estate as “land” is in the State List of the Constitution. However, it may be argued that the primary aim of this Act is to regulate contracts and transfer of property, both of which are in the Concurrent List.
• Some states have enacted laws to regulate real estate projects. The Act differs from these state laws on several grounds.  It will override the provisions of these state laws in case of any inconsistencies.
• The Act mandates that 70% of the amount collected from buyers of a project be used only for construction of that project. In certain cases, the cost of construction could be less than 70% and the cost of land more than 30% of the total amount collected.  This implies that part of the funds collected could remain unutilized, necessitating some financing from other sources.  This could raise the project cost.
• The Standing Committee examining the Bill has made several recommendations. These include:

1. the Act should also regulate commercial real estate,
2. smaller projects should also be covered, and
3. all real estate agents must be required to register.

• The real estate sector has some other issues such as a lengthy process for project approvals, lack of clear land titles, and prevalence of black money. Some of these fall under the State List.

Analysis

While the Act might transform the way in which various stakeholders operate, it will particularly have a far-reaching impact on residential developers, who would need to recalibrate their business practices to stay in the game.

1. Rigorous project planning and management

• Increased disclosure level for project registration would prompt developers to make realistic commitments on project specification, amenities and delivery timelines to avoid stiff penalties on default.
• Project configuration, planning and execution management would, therefore, get more efficient.
• Similarly, new projects might get broken down in phases to keep their sizes manageable and avoid execution delays.
• Some of the best practices, currently being neglected by the majority but followed by international and corporate developers may become the new industry norm in the RERA world.

2. Conservative project finance structures

• RERA would require new projects to have all approvals before a launch. This would lead to larger gestation period prior to a project launch.
• Consequently, new projects would require higher proportion of working capital towards land procurement, architects, consultants and regulatory approvals being financed by promoter equity as against the current practice of sourcing it from customers through hurriedly done half-baked project launches.

3. Efficient project cost control mechanism

• RERA would make product pricing structures extremely transparent. Post sale and last minute product price escalations by developers on frivolous grounds would be history.
• This would encourage developers to establish strong cost and delay control mechanisms within their project management and monitoring systems.
• Procurement efficiencies would need to be raised and leakages due to negligence or internal corruption would need to be plugged to protect project profit margins.

4. Increased participation by institutional players

• In the past, many of these institutional players have burnt their fingers badly due to lack of governance and execution efficiency.
• Their past experiences have hitherto forced them to either stay away or invest through extremely conservative debt structures to protect their investments.

5. Cheaper capital pricing by institutions

• Capital pricing at the new investment stage is always a function of perception of risk—market, regulatory, execution and counter party.
• RERA would reduce the risk perception significantly due to its stringent disclosures and penal provisions.
• Consequently, pricing of both debt and equity instrument are expected to come down once RERA is implemented in letter and spirit.
• The transformation in business practices with RERA being a catalytic force would ensure that only serious and strong players remain within the sector.
• Therefore, going forward, a consolidation among players within the sector cannot be ruled out.
• The transformative impact of RERA would lie in the intent and speed at which various state government implement the regulation.

What are the grievances of the Builders?

• While consumer interests have been protected, some developers find provisions of the Act to be exceptionally burdensome on a sector already ailing from a paucity of funds and multiple regulatory challenges.
• The builder lobby has been demanding “industry” status for the real estate sector as it would help in the availability of bank loans.
• Real estate companies say that most delays are because of the failure of authorities to grant approvals/sanctions on time.
• While the Act addresses some of this, it does not deal with the concerns of developers regarding force majeure (acts of god outside their control) which result in a shortage of labour or issues on account of there not being a central repository of land titles/deeds.
• Some of these concerns are legitimate but the real estate sector has become a sort of untamed horse galloping in all directions.
• The cracks emerging in their books are largely of their own making.
• Once 100% foreign direct investment was permitted in real estate, international money flooded the market. Builders/developers overstretched themselves and diverted funds while some began to cross-invest in non-core activities.
• In the race to announce the next “mega project” one came across, in many instances, real estate companies embarking on projects without even consolidating land.

Conclusion

• Like with any new legislation, it takes time to iron out the creases.
• In fact, the 22 sections still to be notified relate to functions/duties of promoters, rights/duties of allottees, recovery of interest on penalties and other offences.
• It appears that the law makers have consciously delayed the notification of these provisions till such time as regulators, developers and buyers familiarise themselves with the new legislation.
• Eventually the benefit of any statute is contingent on its effective implementation. Despite a model set of rules, only a few States have notified their rules.
• The onus is now on States to formulate rules and establish the regulatory authorities on time. There shouldn’t be just paper compliance, by designating an existing authority to take additional charge as the real estate regulator, as that would affect the timeliness prescribed under the Act.
• It will go a long way in assisting upstanding developers.
• More importantly, it will ease the burden on innocent home buyers who put their life’s savings into a real estate investment in the hope of having a roof over their head but often find their dreams come tumbling down.

Practice Questions

1. Discuss the provisions of the Real Estate (Development and Regulation) Act, 2016. How will it impact the ambitious scheme “Housing for All” by 2022?
2. What is the significance of the real estate sector in the Indian economy? Chart it out in the respect of the Real Estate Act.