Ground rules

Given that it is a vital cog in the economy and soaks up a sizeable portion of household savings, it is surprising that real estate has been allowed to operate in a regulatory vacuum for so long. While it is debateable whether the laissez faire approach set the scorching pace of growth for this industry, there is no doubt that it gave rise to malpractices — mis-selling, opaque pricing, unconscionable delays on projects, and patently one-sided contracts among others. The Real Estate (Regulation and Development) Bill 2016, passed by the Rajya Sabha, is an attempt to establish some basic ground rules by regulating the buyer-builder transactional relationship in real estate. The Bill has had a rocky passage from the time it was first mooted in 2013. But, overall, the multiple revisions have resulted in a more consumer-friendly piece of legislation than the original draft.

The new Bill calls for smaller projects (area of 500 square metres or eight apartments, instead of 1000 sq m and 12 apartments) to be registered by the state-level Real Estate Regulatory Authorities (RERAs), thereby throwing its protective umbrella over smaller home buyers. Builders are required to disclose layouts, approvals and funding plans for every launch on the regulator’s portal. It also mandates that developers deposit 70 per cent of buyer advances into a separate escrow account, over-ruling objections from the developer lobby that this would strait-jacket finances. This rule will check the co-mingling of capital, which results in the buyers in one project unfairly bearing the risks and costs of other delayed projects. Developers will be required to pay penal interest for delays and held liable for structural defects. Stiff penalties, including imprisonment, are specified for violation of directives. While the rules are quite stringent, their effective enforcement will lie largely in the hands of the State governments under whose aegis the RERAs will operate (land is a State subject). Clearly, for the developers to clean up their act, State agencies will have to cooperate by digitising their property records, establishing transparent approval processes and rooting out entrenched corruption in their system, all of which is easier said than done.

While real estate developers have publicly welcomed this new law, it is bound to create significant upheavals for the industry. For timely deliveries, players will have to tighten the screws on their sub-contractors — who are not covered by the law but who execute most of the projects. The escrow provisions will require a sea-change in the way developers manage their project finances. As banks have always shied away from funding this sector, the resulting cash crunch may well aggravate the ongoing downturn. However, recent relaxations in the Foreign Direct Investment norms and new tax breaks to REITs could smoothen the transition. All in all, however, the move towards transparency, consumer-friendly contracts and above-board funding are necessary to win back investor confidence, essential for sustainable growth of the real estate sector in the long run.

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