Builders beware, the regulator is here

The passage of the Real Estate (Regulation & Development) Bill, 2015 received warm reception in the country, especially on social media platforms. Why do we need a tough housing regulator?

In the absence of a tough regulator and the unwillingness of an average homebuyer to get into expensive, long legal battles , most builders have been shamelessly taking hapless buyers for a ride.

Delay in completion of housing projects by three, four, five or even six years is now common; so are arbitrary changes in layout plans and manipulation of ratios of built up and carpet area.

A three-year delay will make a homebuyer to cough up 30-35 per cent extra while the seller gets a de facto interest-free fund for 3 years.

Builders avoid paying penalties for late delivery of possession through inserting smart clauses in thick buyers’ contracts that most buyers don’t bother to read and later repent.

Diversion of money collected from one housing project to another or for speculation in land deals jacks up land prices, and makes homes increasingly unaffordable to most users.

Let me give some real examples. A Noida builder has a clause in its contract that says penalty payment for late possession will be due from the date of notice given by buyers, subject to force majeure .

Another builder, who has none other than Shahrukh Khan as its brand ambassador forced its buyers to sign modified apartment buyers’ contracts that extended possession date by two years and halved its penalty obligation to ₹5 per sq feet per month.

This builder though extracts 15 per cent from buyers if they delay in paying. Many builders simply don’t have any provision for late possession penalties or cap penalty payment.

A Mumbai builder was reported to have no possession date in apartment buyer’s contract. Another builder sold 100 flats to over 200 buyers. Such abuses cannot go on for ever. Thus, the passage of realty Bill has come as a deserving shock to such scrupulous builders.

The Bill aims to protect home buyers from unfair mis-selling, and requires all projects of 500 sq metres and above to register with regulator. It says that builders must specify timeframe for completion of housing projects and then stick to that or be ready to pay penalty at the same rate they charge homebuyers.

Builder lobbies say that the Bill should also have a time frame for municipal and other authorities who don’t give timely approvals leading to delay in handing over possession. No doubt, there’s some truth to this assertion.

However, regulatory approvals are delayed because builders keep changing their layout plans, try to get higher FSI and submit inadequate documents or incorrect/incomplete information.

Moreover, the Bill doesn’t say when to give possession. It simply says that builders must stick to whatever they promise. If not, pay the penalty at the same rate that they charge home buyers.

Delays also happen because builders divert funds for other use. Plus, they avoid paying penalty. The buyers have to bear the brunt of late delivery of apartments either because of slower regulatory approvals or diversion of funds by builders. Besides, Noida builders top the chart for delayed completion of projects even if timely approval is not a problem there.

To check diversion of funds, the Bill stipulates that 70 per cent of the money collected for a project will be kept in a separate account which can only be used for that project. The Bill is making it mandatory to sell homes on the basis of carpet area and not super-built area.

Big builders usually keep carpet area unchanged but manipulate super built areas to extract extra money from home buyers. Such practices must stop.

Inclusion of ongoing realty projects (which are now over 17,000) is a commendable measure despite builders’ objection that it will add to cost of compliance and lead to further delays. Submitting a few more details about past projects and brokers ought not to be a problem.

The real worry for realty companies is the imposition of penalty for violation that they are not used to. Regulation of brokers is again a good move as brokers are the key instruments builders rely on to lure innocent home buyers to agree to shoddy dream home deals.

Is the Bill really negative for developers? Not at all. Without a tough housing regulator, it’s difficult to differentiate a good builder from a bad one. A housing regulator is a bad news only for unscrupulous builders. It will eventually help the sector, at a time when prospective buyers are simply not looking at under-construction projects.

Hence, an interest free source of funds has dried up for debt-ridden realty companies. An effective regulator will bring back both buyers and investors.

It will also ensure that fly-by-night operators and land-grabbers are kept out. As a result, there will be less number of competitive bidders vying for limited amount of land. That will put a check on land prices from shooting off.

Timely completion of projects will also mean there is steady increase in the supply of homes which can further get a boost if timely regulatory approvals are ensured.

All these things will bring down home prices, and make more end users becoming interested in buying homes. That will be good not only for realty sector but also for the overall growth of Indian economy as housing sector has strong backward and forward linkages with other industries starting from cement, steel, electrical and electronics to interior decoration. That would also mean creation of more jobs than at present the housing sector is able to support.

However, it will take some time before housing regulator becomes a reality as States have to take up follow up actions.

It still doesn’t make sense to run after under-construction properties as builders would want to impress upon State authorities to drop the idea of including ongoing projects under the ambit of the Bill.

The writer is a former government official and currently a corporate economic advisor based in Mumbai. The views are personal

COMMENT NOW