For the past few years, there has been an air of pessimism in the market about the real estate sector. There are various reasons which has affected the growth of the sector negatively. The recent announcement of the Real Estate Regulator Bill (RERA) which was passed by the Indian Parliament in March 2016 has ushered a new era in the Indian property market. This bill lays the groundwork for a more accountable and transparent system in construction and buying and selling of properties. This also provides the much needed cheer and hope for both buyers and investors.
Rise and fall of the real estate sector since liberalisation
For decades the sector has faced a gamut of issues primarily stemming from real estate developers. Major problems include:
- delay in construction and delivery of flats,
- lack of transparency,
- incorrect information related to area/size of the property, etc. (Nandy 2015).
The resulting effect of these issue is low investor and buyer confidence, liquidity crisis and un-affordable property rates in the recent decade.
However this was not always the case. In the aftermath of the liberalization of the Indian economy in the 1990s’, the real estate sector saw a significant boost in the domestic investments. It quickly became one of the biggest contributor to the country’s Gross Domestic Product (GDP) (CRISIL 2010). In 2005 the Indian government opened its door to foreign investors in the real estate sector. It became one of the top 5 sectors to attract foreign direct investment in India.
While the sector saw a steady inflow of foreign investments for the initial few years. However, the system remained opaque with lack of accountancy on the flow of funds, infusion of black money and misuse of investor’s money. Developers were engaging in detrimental practices like diverting the buyers’ money towards creating massive land banks in order to show more activity in their annual reports (Taneja 2016).
After the money for construction activities ran out, the projects had to be stalled and developers defaulted on deadlines. When buyers failed to get their property on time they started defaulting on their loans, affecting investors’ business too. Consumers eventually started losing interest in purchasing property but new projects kept coming up, especially in metro cities. Due to this trend, the sector is experiencing an inventory pile-up which is bad news for not just developers but also investors and allied industries such as construction and furniture (Indian Express 2016).
Real Estate Regulator Bill (RERA) and its impacts
The Real Estate Regulator Bill or RERA was first proposed in 2013 to end this vicious circle of industry malpractices related to residential and commercial properties. It puts in place certain operational rules for real estate developers in order to protect the interests of consumers, which will cultivate an environment of trust and efficiency in the purchase and sale of property. The bill mandates every state to establish a Real Estate Regulatory Authority and Appellate Tribunal by April 2017. The tribunal will oversee the registration of all projects over 500 sq m. Similarly it will also be responsible for solving buyer and sellers’ disputes in case of breach of contract.
The RERA Act has also brought real estate agents under its purview. The Act mandates all real estate agents to register with the Tribunal for legal sale of property. Perhaps one of the most notable features of the Bill is that developers will now have to park 70% of the amount received from buyers in an escrow account to be used only for construction of that property. This will ensure that developers do not divert the money to purchase new land and that there are no delays in the completion of projects.
Moreover the developers will have to submit the project layout, government approvals and land title status to this Tribunal. Failing to do so will result in a fine or imprisonment or both, depending upon the severity. This sector was in a desperate need for such a transparent system to improve the market sentiment. The Bill also mandates buyers to honour their payments to developers within the stipulated time, failing which suitable action can be taken against them (Madhavan 2015).
Limitations of the Real Estate Regulator Bill
There is also a downside to the provisions of the Real Estate Regulator Bill (RERA). According to this bill developers now have the liberty to use only 30% of the funds for other purposes. Purchase of land may become more expensive because banks are not allowed to lend money for land purchase. NBFCs’ may increase their rates of interest (presently hovering between 15 and 18%) which developers will be forced to pay. This additional cost might ultimately lead to increase in property prices.
Also in case of projects in which construction cost is estimated to be less than 70%, there is no clarity as to how the case will be treated. Moreover, maximum construction time is spent in obtaining necessary government permissions and licenses. However the Act does not set any deadline for these government agencies to process them. It is important to address these issues in order to further strengthen the scope of the Bill.
Possible revival of the real estate sector with the implementation of the bill
RERA coupled with the Goods and Services Tax (GST) Bill likely bring down the prices of raw materials by up to 3%. It is a boon for the sector and not just for the investors and buyers confidence but it will also lead to an increase in foreign investment in the sector. With the necessary regulations in place, financial transactions will become more efficient. Developers will be forced to reveal their constructions costs accurately. This will help reducing circulation of black money. Once the motion of black money is in check, property prices will also be stabilised to an extent. Buyers will stop fearing loss of homes to illegal or unplanned constructions or long legal battles and will protect and secure their investment.
Right now, the industry needs an infusion of funds to restart stalled projects and to initiate new, affordable projects. The Real Estate Regulator Bill or RERA is a step further in support of the government’s ‘Housing for all by 2022’ scheme has received a major boost due to the bill. The time is ripe for investors to aggressively team up with developers to fist clear the ready-to-move inventory stockpile and look at developing affordable property in tier 2 and tier 3 cities and villages across India. With such large scale positive reforms set to take effect from next year, the sector will see a dramatic resurgence which everyone has been hoping for.
- CRISIL, 2010. India Real Estate Overview, Mumbai. Available at: http://www.crisil.com/pdf/capitalmarket/Industry-content.pdf.
- IndianExpress, 2016. Real Estate Bill passed: Here’s how it will help home-buyers. Indian Express. http://indianexpress.com/article/india/india-news-india/real-estate-bill-to-be-tabled-in-rajya-sabha-today-heres-how-it-will-help-home-buyers/.
- Kant, K., 2015. Top builders sitting on 70,000 crore worth of unsold inventory. Business Standard. Available at: http://www.business-standard.com/article/companies/top-builders-sitting-on-70-000-crore-worth-of-unsold-inventory-115072301258_1.html.
- KPMG, 2014. Indian real estate- Opening Doors, New Delhi.
- Madhavan, N., 2015. The pros and cons of the real estate regulation Bill. Hindustan Times. Available at: http://www.hindustantimes.com/india/the-pros-and-cons-of-the-real-estate-regulation-bill/story-GIocvfKJrJazrTVI2642fK.html.
- Nandy, M., 2015. Is this India’s worst real estate nightmare? LiveMint. Available at: http://www.livemint.com/Companies/N9eZnRP5BpS8kyRGWjRoYK/Is-this-indias-worst-real-estate-nightmare.html.
- Taneja, M., 2016. Developers want real estate Bill to address approval delays. Business Standard. Available at: http://www.business-standard.com/article/companies/developers-want-real-estate-bill-to-address-approval-delays-116012001180_1.html.