A Win-win For Real Estate

With hopes of getting a house delivered in four years, Atul Joshi booked an under-construction house in the central suburbs of Mumbai. Joshi completed all the payments to the builder, but is still awaiting delivery of his two-bedroom apartment. The builder has just built a few floors and left the project incomplete.

Stories like these are quite familiar to buyers of housing property. Despite doing all the due diligence about the reputation of builders, the delivery-schedule scores and then carefully choosing a builder, scores of buyers are still awaiting delivery of their houses.

It’s these scenarios and problems like this that the new Real Estate Bill is seeking to address. And it will.

If you are looking for a property say a year from now, you will be able to look up all the development projects that are around the particular area that you are targeting. You will know when the project is scheduled to start, its proper specifications, and when it would be delivered to you. You will find all these finer nuances of the project on the Website of the regulator. You will also rest assured that you will get delivery of your house on time.

The real-estate business, and buying and selling new property, is set to undergo a sea change in this year once the new Real Estate Bill is adopted by the state governments and a regulator. But, broadly, the Bill will be a welcome change in the real estate sector. Says Sudhir Nair, director, Crisil Real Estate Ratings: “There is a 12-month window as state governments have to put mechanisms in place. Broadly, compared to the situation where we did not have any regulator and it was a free-for-all, where developers used to have a significant upper hand, the fact that a regulator has come will bring a lot of transparency to the sector, which was a crying need.”

Among the many things the new Bill will do is that it will pave the way for cleaner business in real estate. Buyers will know in advance what they are paying for, what the specifications are, fittings, etc.

The builders, on their part, will not be able to deviate once plans of development and bookings are open to the public. They will have to deliver what they have promised to the buyers.

The Bill seeks to create a Real Estate Regulation Authorities (RERA) and Appellate Tribunals at the state level, besides ensuring consumer protection even while standardising business practices across the industry. In a way, buyers of properties will know what they are likely to sign up for anywhere across the country.

The Real Estate (Regulation and Development) Bill goes a long way in streamlining an otherwise unregulated sector. It provides that all residential and commercial projects of 500 square meters or with eight flats will have to register with the state RERA, before they are offered for sale. On their part, the regulatory authority will have to approve a project within a stipulated time, failing which the project would be automatically approved.

Says Neha Hiranandani, director, House of Hiranandani: “the Bill does justice to its prime cause of protecting the interest of the consumers through setting up of regulatory authorities in each state, mandatory registration of all real estate projects, providing additional avenues for grievances. This will bring in a systematic approach and enhance transparency thereby giving a boost to domestic and foreign investments which will aid growth of the sector.”

Among the many clauses in the Bill that seek to protect an investor, one of the biggest that buyers stand to gain the most from is the creation of an escrow account.

Developers will have to place 70 per cent of pre-sale proceeds into an escrow account, which also includes the land cost. This is to meet the cost of construction of the project.

In the past, when faced with a cash crunch, builders would divert funds from one project to another. This would often be the chief cause of project delays. Now, this will be a welcome change from the past.

Impact on Prices
But, while the Bill seeks to bring organisation to a chaotic sector, builders may find the flexibility to fund their projects curtailed. As builders would use the proceeds to start different projects or to build a land bank for future development, the limited use of funds would mean that they do not have the leeway to use additional funds.

This would increase costs for house buyers. Says Neha: “Placing 70 per cent of receivables in an escrow account in an economy with such high interest rates is going to lead to a complete shift in the business model of many companies. Owing to lack of holistic approach, the end price to consumers will continue to rise, putting a severe strain on affordability.”

So, if you are banking on house prices going down, you might be disappointed. All this compliance is a huge cost for developers. In the past, developers would provide a variety of schemes and free goodies for the real-estate buyer that would bring down the cost of housing. But with the RERA, this would vanish.

What’s more, buyers may see premium prices for housing projects. Big builders are likely to charge more for products because they will not only be assured of delivering projects on time, but buyers can be assured of the amenities they are going to pay for.

Besides, land costs are still quite high in the country, and the land-buying process has yet to see much transparency. While the Bill is welcome from a buyer’s point of view, it’s very unlikely that it will reduce costs. On the contrary, big builders are likely to pass on the additional costs of housing to purchasers. Says Nair: “Reputed developers may actually start charging a premium because they will deliver the project on time.”

On the other hand, the Bill also provides that developers will be liable for structural defects for five years. Another clause that goes in favour of buyers is that developers have to pay interest to home buyers on delays at the same rate that customers would be charged if they were to default.

So, among the many things buyers would be assured of is the delivery of his project. Most buyers are willing to pay a premium for a project that would most certainly be delivered than one that is stalled. With this new Bill, developers would have to have all approvals in place from all authorities before they launch a project — which is often the root cause of project delays.

Among other clauses, there is a time-bound dispute resolution mechanism and penal provisions. The regulatory authorities will have to dispose of complaints within 60 days, while the Appellate Tribunals, too, would have to adjudicate on cases within 60 days. But the penalty on builders could be severe; imprisonment of up to three years for developers and up to one year for real estate agents, and buyers if there is a violation of the orders of the Appellate Tribunals.
Hence, buyers too should exercise due diligence before signing up for a project.

Projects May Speed Up
The Bill, though, is applicable even to current projects. But, till state governments adopt it and set a regulator in place, developers will have a window of 12-odd months to complete and deliver projects to buyers. In the interim, this could see a rush of new deliveries into the market, which could perhaps soften prices in the short term.

In the longer run, though, buyers could expect higher prices once the new projects come under the ambit of the real-estate regulator.

Besides, experts point out that the Real Estate Bill is a win-win for the entire sector. While consumers will benefit, the sector will also benefit as there will be increased transparency. Investors would come in and newer projects such as Real Estate Investment Trusts would make their presence felt.

Buyers would not only be able to participate directly in real estate and physical property but also through real estate paper in the next few years.

The Bill could also see a sea-change in the industry. Quite a few of the smaller builders may have to wind up their operations because they would require additional funds. Established builders would be able to spread their wings and there would be far more organised products being delivered.

Buyers can be assured of consistency in products, no matter in which location they purchase it. The serious ones will spread their wings. There will be far more organised products being delivered. Consistency in products will ensue, no matter where you pick up a project. Overall, says Nair “It’s a win-win for real estate.”

clifford.alvarez@gmail.com