The real estate sector in India is growing at a rate of about 20% per annum and this sector has been contributing to about 6-7% to India’s GDP but it is not able to balance the supply-demand problem. The demand for housing has been increasing exponentially for the last decade. In Spite of the Government’s efforts through various schemes, it has not been able to cope up with increasing demands. The ensuing situation was the lack of a governing body or set of rules, which private players used to their advantage.
The biggest problem homebuyers face is a delay of projects which may happen due to various reasons like court intervention in land issues, finance, approval etc. Due to this homebuyer has to suffer as he is doing a dual duty paying rent where presently resides and paying EMI for the home loan at the same time due to the delay of projects. Further, there is little or no provision for necessary compensation from the side of government.
Fraudulent advertisement to sell a product is also quite popular and frequent in real estate. The main reason for flourishing fraudulent methods is an absence of any regulator and standard guidelines. Further builders pay only 2 to 3% interest in case of default from their side but when customers default (like refuses to buy) then they have to pay around 16 to 18% which is unfair.
The key challenges to the Indian real estate industry:
Approvals and Procedural difficulties: There are almost 50 approvals or more that need to be taken for starting a real estate project and further these approvals are required form different govt departments or authorities. This is one of the major causes of delays and high amount of corruption in real estate sector. Consequently corruption and delay cause inconvenience to customers only.
Lack of clear land titles: The land titles are not clear because of poor record keeping and division of land in many parts till independence. The slow pace of modernization of land records is further aggravating the problem.
Speculation in Land and Real Estate Prices: The prices of land and real estate in India has increased exponentially in last decade and causes overpricing of commercial or residential property. In recent times, real estate is the most favorable destination for investment in India and far ahead than equity or gold. Further real estate agents or brokers buy or sell property frequently with their own investments and cause surging of prices in property.
Sources of Finance: Finance is the key for development of any industry. Due to poor image of Real Estate sector, banks are becoming reluctant to provide loans and making regulation tougher to avoid bad loans. Alternate sources of finance are very costly and ultimately impact total cost of the project.
High Input Cost: Real estate is a capital and labour intensive industry; thus rise in cost of labour and construction material due to inflation poses many problems to real estate industry. Further real estate builders many times raise the question about unfair practices in cement industry for rise of price more than 50% in quick time.
Further government intervention of building minimum 20% affordable housing putting extra burden on developers and ultimately on the rest 80%.
Real estate is the most famous sector for soaking the black money without any ambit.
High taxation like stamp duty, VAT etc. and land acquisition are other major challenges faced by real estate sector.
All the above issues can be verified by the facts that more than 30% of houses and commercial spaces are lying vacant in major cities like Mumbai or Delhi despite being so much demand in real estate sector.
Thus to handle the above issues government of India has launched Real Estate (Regulation and Development) Bill. It seeks to regulate contracts between buyers and sellers in the real estate sector to ensure consumer protection, and standardisation of business practices. It establishes regulatory authorities at the state level to register residential real estate projects.
The emergence and need of RERA
The Government of India enacted the Real Estate (Regulation and Development) Act 2016 on 26th March 2016 and all its provisions came into effect, from May 1, 2017. Developers were given until the end of July 2017, to register their projects under RERA. Likewise, real estate agents, who also fall under its ambit, are still in the process of registering themselves. Several states still need to notify the rules under the Act and most importantly for buyers, developers/promoters need to register their projects under RERA.
For long, home buyers have complained that real estate transactions were lopsided and heavily in favour of the developers. RERA and the government’s model code, aim to create a more equitable and fair transaction between the seller and the buyer of properties, especially in the primary market. RERA, aims to make real estate purchase simpler, by bringing in better accountability and transparency, provided that states do not dilute the provisions and the spirit of the central act. The RERA is giving the Indian real estate industry its first regulator. The Real Estate Act makes it mandatory for each state and union territory, to form its own regulator and frame the rules that will govern the functioning of the regulator.
Functions of Real Estate Regulatory Authority
To register and regulate real estate projects and real estate agents
To publish and maintain a website of records for public viewing of all real estate projects for registration has been given including information provided in the application for which registration has granted;
To maintain a database on its website for public viewing and enter the names & photograph of promoters as defaulters including the project details, the registration of which has been revoked or penalised under the Act with the reasons therefore;
To maintain a database on its website for public viewing and enter the names & photograph of real estate agents who have applied and registered under this Act including those whose registration has been rejected or revoked;
To fix regulations for each area under its jurisdiction, the fees to be levied on the allottees or the promoters or the real estate agent;
To ensure the compliances of the obligations cast upon the promoters, the allottees and the real estate agents under this Act and rules and regulation made there under;
To ensure the compliances of its regulations or orders or directions made in exercise of its powers given under this Act;
To perform such other functions as may be entrusted to the Authority by the Govt. to carry out the provisions of this Act.
10 key features of RERA Act
The RERA Act is considered as one of the landmark legislations passed by the Indian Parliament. Its objective is to address grievances of buyers and to bring transparency and accountability in country’s real estate sector. The bill will lay groundwork for increased investments in the real estate sector.
The government is planning to implement RERA Act starting from May 1 this year.
Following are the main features of this legislation: –
According to the new law, the developer can’t make any changes to the plan without the written consent of the buyer. This provision will not allow the developer to increase the cost of their projects.
The law ensures that realty project is completed in time. If delayed, then the developer will have to pay interest on the amount paid by the buyer.
Registration is mandatory for all commercial and residential real estate projects where the land is over 500 square metres or includes eight apartments and which are under-construction.
As per the new act, every phase of apartment will be considered a standalone real estate project, and separate registration needs to be obtained for each project.
It is compulsory for a state to establish a State Real Estate Regulatory Authority as per the new act. Buyers could approach this body for redressal of their grievances.
The property will have to be sold to buyers based on carpet area and not on super built-up area which will become illegal under the new law.
Failing to register a property will attract a penalty up to 10% of the project cost and a repeated violation could send the developer to jail.
As per the new law, the developer will have to place 70% of the money collected from a buyer in a separate escrow account to meet the construction cost of the project. This will keep a check on developers who divert the buyer’s money to start a new project, instead of finishing the one for which money was collected & also ensure that the respective project is completed on time.
If the buyer finds any shortcomings in the project then the buyer can contact the developer in writing within one year of taking possession.
The law has a provision of a maximum jail term of three years with or without a fine, for a developer who violates the order of the appellate tribunal of the RERA.
How will RERA impact home buyers
Some of the important compliances are:
- Informing allottees about any minor addition or alteration.
- Consent of 2/3rd allottees about any other addition or alteration.
- No launch or advertisement before registration with RERA
- Consent of 2/3rd allottees for transferring majority rights to 3rd party.
- Sharing information project plan, layout, government approvals, land title status, sub-contractors.
- Increased assertion on the timely completion of projects and delivery to the consumer.
- An increase in the quality of construction due to a defect liability period of five years.
- Formation of RWA within specified time or 3 months after majority of units have been sold.
The most positive aspect of this Act is that it provides a unified legal regime for the purchase of flats; apartments, etc., and seeks to standardise the practice across the country. Below are certain key highlights of the Act:
Establishment of the regulatory authority: The absence of a proper regulator (like the Securities Exchange Board of India for the capital markets) in the real estate sector, was long felt. The Act establishes Real Estate Regulatory Authority in each state and union territory. Its functions include protection of the interests of the stakeholders, accumulating data at a designated repository and creating a robust grievance redressal system. To prevent time lags, the authority has been mandated to dispose applications within a maximum period of 60 days; and the same may be extended only if a reason is recorded for the delay. Further, the Real Estate Appellate Authority (REAT) shall be the appropriate forum for appeals.
Compulsory registration: According to the central act, every real estate project (where the total area to be developed exceeds 500 sq mtrs or more than 8 apartments is proposed to be developed in any phase), must be registered with its respective state’s RERA. Existing projects where the completion certificate (CC) or occupancy certificate (OC) has not been issued, are also required to comply with the registration requirements under the Act. While applying for registration, promoters are required to provide detailed information on the project e.g. land status, details of the promoter, approvals, schedule of completion, etc. Only when registration is completed and other approvals (construction related) are in place, can the project be marketed.
Reserve account: One of the primary reasons for delay of projects was that funds collected from one project, would invariably be diverted to fund new, different projects. To prevent such a diversion, promoters are now required to park 70% of all project receivables into a separate reserve account. The proceeds of such account can only be used towards land and construction expenses and will be required to be certified by a professional.
Continual disclosures by promoters: After the implementation of the Act, home buyers will be able to monitor the progress of the project on the RERA website since promoters will be required to make periodic submissions to the regulator regarding the progress of the project.
Title representation: Promoters are now required to make a positive warranty on his right title and interest on the land, which can be used later against him by the home buyer, should any title defect be discovered. Additionally, they are required to obtain insurance against the title and construction of the projects, proceeds of which shall go to the allottee upon execution of the agreement of sale.
Standardisation of sale agreement: The Act prescribes a standard model sale agreement to be entered into between promoters and homebuyers. Typically, promoters insert punitive clauses against home buyers which penalised them for any default while similar defaults by the promoter attracted negligible or no penalty. Such penal clauses could well be a thing of the past and home buyers can look forward to more balanced agreements in the future.
Penalty: To ensure that violation of the Act is not taken lightly, stiff monetary penalty (up to 10% of the project cost) and imprisonment has been prescribed against violators.
Impact of RERA on real estate industry
- Initial backlog
- Increased project cost.
- Tight liquidity.
- Rise in cost of capital.
- Increase in project launch time.
Initially, a lot of work is to be done to get the existing and new project registered. Details such as status of each project executed in last 5 years, promoter details, detailed execution plans, etc., needs to be prepared.
With the advent of RERA, specialised forums such as the State Real Estate Regulatory Authority and the Real Estate Appellate Tribunal, will be established for the resolution of disputes pertaining to home buying and the aggrieved party will have no recourse to other consumer forums and civil courts, on such matters. While the RERA sets the groundwork for fast-tracking dispute resolution, the litmus test for its success, will depend on the timely setting up of these new dispute resolution bodies and how these disputes are resolved expeditiously with a degree of finality.
Which projects come under RERA
- Commercial and residential projects including plotted development.
- Projects measuring more than 500 sq mts or 8 units.
- Projects without Completion Certificate, before commencement of the Act.
- The project is only for the purpose of renovation / repair / re-development which does not involve re-allotment and marketing, advertising, selling or new allotment of any apartments, plot or building in the real estate project, will not come under RERA.
- Each phase is to be treated as standalone real estate project requiring fresh registration.