India’s booming real estate sector has been cooling off somewhat since the start of the year but developers in India are looking forward to the regulation and development act, which is widely expected to be good for the sector in general but developers will need time to get used to the intricacies of the law.
India’s booming real estate sector has been cooling off somewhat since the start of the year but developers in India are looking forward to the regulation and development act, which is widely expected to be good for the sector in general but developers will need time to get used to the intricacies of the law. Here is an excerpt from a recent note from Knight Frank’s research team in India.
Come May 2017, India’s real estate market will not be the same again. India’s Real Estate (Regulation and Development) Act, 2016, will be a game changer for all the stakeholders in the sector. Currently, only a few sections of the Act, especially those that will enable the full enactment of the Act, have been notified. As per the provisions of the Act, it will come into full force by May 2017. So, what does the Act mean, especially for developers and homebuyers? The point of interest for most stakeholders is the impact the Act will have on the sector as a whole once all its provisions come into force.
The new watchdog
Presently, disputes between homebuyers and developers typically end up in consumer courts. Among other things, the regulator appointed through this Act will deal with all such disputes. The regulator will also ensure that the relevant provisions of the Act are maintained by the stakeholders, especially from the supply side. This, to a great extent, will reduce the instances of discord between homebuyers and developers. Ideally, there will be a regulator for each state, but there could also be two regulators for a state or one regulator for two states. But how will such a watchdog help the overall sector?
Transparency in the sector has not been satisfactory, though it has improved over the years and the road ahead looks promising. For example, if a homebuyer plans to buy a house in the present day, they would not have access to all the information required to take well-informed decisions. The Act will change the rules of the game completely, thus improving the transparency in the sector. All commercial and residential plots with an area of more than 500 square meters or eight apartments will have to be registered with the Real Estate Regulatory Authority (RERA). The states will have the power to lower this ceiling. However, projects that are meant only for self-consumption will be outside the purview of this Act. Developers will need to disclose all the information pertaining to a project when registering it with RERA. This includes details such as the project implementation schedule, layout plan, land status, government approvals, real estate agents, subcontractors, etc. This information will be made available to the consumers, which will empower them to take informed decisions. With all details of the project being documented, the consumer can approach RERA if the developer deviates from the details mentioned when registering the project. Similarly, developers facing problems with consumers can also approach RERA for solutions. While the Act lays down guidelines for the developers, one must also consider the enablers that will empower the developer to implement the project in a systematic manner.
Without the enabling factors that will help developers run the project, the Act will lose its purpose. The Act does not deal with this aspect, but the states will need to implement their own sets of laws that will enable the development of the sector. Delhi’s recently revised unified bylaws are a step in this direction, providing measures such as single window clearance, simpler documentation and faster approvals to help developers execute projects on time. The Act also carries an important piece of legislation that needs further clarification. It speaks of the title insurance of land, which ensures that chances of the said land being under any encumbrance are minimal. However, developers will have unlimited liability in case any charges of encumbrances are filed against them through the life of the project. Products that provide insurance on the land title are presently not available in India. However, one can expect such products by the time the Act comes into full force by May 2017.
The way forward
Going forward, one can expect certain clauses to be added to the Act, making it more robust. A clause to stop discrimination on the basis of religion, caste, sexual orientation, marital status and dietary preferences is expected to be added soon. Further clarifications will be provided on certain provisions of the Act, such as the clause that states that 70 per cent of the collections from the homebuyers need to be maintained in a dedicated account, to be used only for the said project. The developers can withdraw money from the said account to the extent of the work completed on a project. Does this mean that developers will need to implement the project from their own resources and be compensated as they complete the different stages of the project? Clarity on such issues will help the sector grow further and benefit all the stakeholders. By giving consumers a dedicated grievance redressal system, the load on consumer courts is expected to reduce. Disputes between consumers and developers as a whole is expected to decrease, as the Act will streamline the sector to a great extent.
The Real Estate (Regulation and Development) Act, 2016, is good for the sector, but developers will need some time to get used to its intricacies. They will need to realign their businesses in accordance with the Act, which could affect launches in the short term. The move by developers to comply to certain provisions in the Act could push up prices in the short to medium term, however, in the long run due to efficiencies brought in the sector, by RERA, prices would rationalize.