Regulating Realty

The union cabinet has finally cleared the long awaited real estate regulatory bill that is likely to empower buyers and bring transparency into the unregulated real estate sector. The legislation, which is yet to be approved by the parliament for its implementation across all states and union territories, is a positive policy measure towards cleansing the murkiness that this sector has been mired in for so long.

Real estate deals have always been one-sided with customers having little or no say. Projects get delayed by several years and developers in most cases get away without paying fines or being punished. The regulatory bill suggests stringent punishment, including jail terms, for realtors issuing misleading advertisements.

While this will bring cheer to the buyer, developers, however, say the bill is a tad harsh on them because on many occasions the delays occur, as they don’t get approvals on time despite having all the permissions in place.

Brotin Banerjee, MD and CEO of Tata Housing, said the government should focus on speeding up the entire process of approvals. He said even government officials should be held accountable for delaying approvals.

Niranjan Hiranandani, MD of Hiranandani group, said, “The bill will definitely bring more transparency and benefit customers. However, the norms are so stringent in the bill that many developers may find themselves behind bars.”

Lalit Kumar Jain, chairman and managing director of Kumar Urban Development Limited, said, “The real estate sector definitely needs a regulator on the lines of the one controlling telecom, banking, stock markets and insurance sectors. He called for a regulator covering all stakeholders like defaulting customers, approving authorities and financial institutions that fund projects.

The bill includes norms such as mandatory registration of projects with plot areas of 4,000 sqm or more. All clearance documents will need to be submitted to the regulator before the construction activity commences.

The bill stipulates that registration of real estate agents should be done with clear responsibilities and functions and strict action will be taken against releasing misleading ads. Projects should be launched only after securing all statutory clearances and sale of flats should be done only on a carpet area basis. Mandatory disclosures should be made on facilities/amenities provided on the regulatory authority’s website and a separate escrow accounts is mandatory for all the projects. Builders will have to refund payments — with interest — to buyers, in case of delays. Further, there will be establishment of the Real Estate Appellate Tribunal to ensure faster resolution of disputes.

The bill, once implemented, will improve buyer confidence and boost demand for residential real estate. The bill will incorporate mandatory disclosure clauses, which will provide greater clarity on the project standards and timely completion of the projects. For developers, while it will lead to stricter control, it will also lead to better demand with the boost in buyer confidence, said Dipali Modi of Crisil.

This is likely to protect the buyers from misrepresentation, delays in delivery and failure from developers in meeting contractual obligations. So, this is an encouraging move from the government towards promoting accountability in the sector and protecting buyers from unethical business practices.

“The bill will spur the industry to higher levels of professionalism and transparency and that will make the Indian real estate sector more attractive for overseas investors,” Om Chaudhry, founder and chief executive officer, FIRE Capital said.

However, it would have a bearing on funds inflow to the sector as funds will have to be more circumspect now in terms of qualifying deals on promoter and project risk. This scenario increases the quantum of funding required for a project as well as the time-frames involved — thereby increasing the perceived risks for such projects. The preference going forward would be to choose developers that have approvals ready with them. Some small and under-capitalised players might lose out as they might not qualify for private equity funding while they otherwise would be deserving candidates. Initially, this will create a little difficulty but once things get streamlined the real estate sector will see a big positive change, said Chaudhry.

It will bring complete transparency between the buyers and the developers like now flats will be sold on carpet area and the buyer will have the complete idea of super area and carpet area. It will also help the builder to fight the cash crunch for specific projects through ESCROW accounts and the projects will be delivered on time without any delays, said Pankaj Kapoor, chief executive officer at Liases Foras.

The proposed appellate tribunal is also a positive step towards addressing disputes and reducing the burden on consumer courts, while the proposed penalty imposed for default is likely to deter developers (and property agents) from duping buyers, Kapoor added.

Developers, however, said that the regulatory authorities issuing permission and funding under the jurisdiction of the bill should also be made to be accountable.

The bill has been drafted taking into account appropriate checkpoints in key stages of a property transaction where regulation is most required, given the history of fraudulent practices and unfulfilled promises by developers.

A common complaint is that developers and builders do not deliver what is promised when selling apartments. While their advertisements show buildings and landscaping to match international quality, in a majority of cases, the ground reality is far different leaving buyers feeling cheated. And the regulatory body envisaged under the draft bill would ensure that the developers are held accountable for what they promise and provide recourse to the customers in case these promises are not fulfilled.

Provisions such as restricting launch of projects or advertisements unless all approvals are received, maintaining separate account for customer monies, sale of projects based on carpet area will indeed help bring in transparency. Stipulation of ‘carpet area’ as the only measurement unit will limit fraudulent practices arising from use of measurement units such as saleable area, super built up area etc. The provision will no doubt protect customer interest and create more transparency in transactions, according to an RICS report.

However, a bigger concern that still remains unaddressed is the definition and measurement standards for carpet area. Since the definition mentioned in policies and laws tend to be subjective, the carpet area is interpreted differently and calculated such that it amounts to a higher area than actual. And this problem is not unique to India — it exists in many parts of the world, the report said.

The bill has a national advisory council that can be responsible for prescribing national standards and best practices in different areas like property measurement, builder buyer agreements and brokerage standards. The same can also be implemented by state regulators. This will go a long way in ensuring standardisation in line with international best practices, the report added