Real estate regulator

Now that RERA is a reality, should you buy an under-construction property?

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The Real Estate (Regulation and Development) Act, 2016, or RERA for short, has come into effect from May 1, 2017.

With this happening, the question on everybody’s lips is, should we buy an under-construction property? If you plan to buy a home to live in, an under-construction property makes sense because it comes cheaper than a finished one. If you plan to buy home as an investment, given that an under-construction property is cheaper, the returns are always better, depending how early in the construction stage you make the investment.

But that it the theoretical part of it. It comes with the assumption that the builder will deliver the property for which you have paid, and he will deliver it on time. The problem is that this does not always turn out to be the case. Many people in the Delhi National Capital Territory region and other parts of the country, have found this out in the last few years.

In the process, they have ended up paying EMIs on the home loans they had taken to fund their home purchase and the rent on the home in which they continue to live in. The homes they had hoped to live in are nowhere in sight.

But all this happened in era when there was no RERA. Now we have RERA. The real estate sector in the country up until now had next to no regulation from the point of view of the buyer. Buying a house required a lot of leap of faith and prayers at the same time.

The RERA essentially has these five basic purposes: a) to make sure that home that has been bought is delivered on time. b) to make sure what has been promised has been delivered with respect to the actual size of the house, the facilities etc. c) to make sure that the money taken from the buyer is used to build what has been promised and is not diverted to something else, as many builders tend to do. They tend to raise money for one project and then use it to finance another project. d) to make sure that the many permissions required to build a housing project are in place. e) to make sure that if any changes are made to the project, they have the approval of the majority of the buyers.

RERA also makes it mandatory for state governments to set up a real estate regulator. As the Act states that: “Any aggrieved person may file a complaint with the Authority [i.e., the real estate regulator of a particular state] or the adjudicating officer, as the case may be, for any violation or contravention of the provisions of this Act.”

What this basically means that if the builder takes the buyer for a ride, he can approach the real estate regulator and hope to set things right. This is precisely why there have been a flood of acche din articles in the media saying how RERA is going to save the day for real estate buyers.

There are multiple problems here:

a) While RERA is a central Act, land is a state subject. Hence, states are allowed to make the operational rules to implement RERA. Given the nexus that prevails between state level politicians and builders, state governments have already started diluting the basic spirit of RERA. In particular, an effort is being made to ensure that the ongoing projects are not brought under the ambit of RERA. This basically means that many buyers who are currently in trouble will not be able to benefit from this Act.

b) Only three states (Maharashtra, Rajasthan and Madhya Pradesh) have set up regulators up until now. Hence, the process of setting up a regulator is going to take some time.

c) It is important to understand that regulators don’t start becoming effective from day one. Take the case of the Securities and Exchange Board of India, the stock market regulator. It was set up in 1992 and in 1994 the vanishing companies scam, one of the biggest stock market scams, happened. This was followed by the Ketan Parekh scam in 1999-2000. Hence, it takes time for regulators to mature.

d) Also, it is important to know that the regulators don’t necessarily bat for the consumers. The Insurance Regulatory and Development Authority(IRDA) of India, the insurance regulator, for a very long time, turned a blind eye to all the misselling carried out by the insurance companies. It kept clearing investment plans which worked well for the insurance agents but not for the consumers who had bought them. The point being whether real estate regulators bat for the consumers or the builders, remains to be seen. Also, this is something that may vary from state to state.

To conclude, there are many practical things which continue to remain unclear as of now. Hence, if you are looking to buy a home to live in, it makes sense to still buy a fully finished one, rather than something which is under-construction. This may mean compromising on the size or the location, perhaps, but what you will get in return is peace of mind. And nothing is more important than that.

The column originally appeared on Business Standard The column originally appeared on Business Standard online on May 3, 2017.

All you wanted to know about the Real Estate Bill but were afraid to ask

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On December 9, 2015, the union cabinet led by Prime Minister Narendra Modi approved the Real Estate (Regulation and Development) Bill, 2015, as reported by the Select Committee of Rajya Sabha.

In May earlier this year, the bill had been sent to a Select Committee of the Rajya Sabha. The union cabinet has accepted all the suggestions made by the Select Committee. The Bill will now be put up before both the houses of Parliament.

So what does the Bill have to offer? The real estate market in India is an excellent example of information asymmetry where one side has much more information than the other. In this case, the real estate promoters and the real estate agents have much more information than the home-buyers. Even getting something as basic as the going price of an apartment in a given area is very difficult.

The Rajya Sabha Select Committee on the Bill met real estate consumers and this is what it had to say in its report: “These consumers were unanimous in their submission that they have no means to know about the real status of the project for example whether all the approvals have been obtained, who is holding the title of the land, what is the financing pattern of the project and what has been the past record of the builder etc.? As a result, they invested their money without having any information about the project. In many cases, they were not given what was promised to them and in almost all cases the project was delayed.”

The Bill seeks to tackle this information asymmetry and the fact that the real estate sector does not have any single regulator regulating it. The Bill talks about setting up of a real estate regulator (Real Estate Regulatory Authority to be very precise) in every state and union territory. A real estate promoter needs to register a project with the real estate regulator before he starts selling or advertising it.

Projects with the area of land proposed to be developed exceeding five hundred square metres or where more than eight apartments are to be developed, need to be registered with the real estate regulator of the state they are based in.

The application to the regulator needs to be accompanied with details like the real estate projects already launched by the real estate promoter in the past five years. It also needs to be mentioned whether these projects have been completed or are still under development. If the projects has been delayed, the reasons for the delay need to be mentioned.

Over and above this an authenticated copy of the approvals and commencement certificate from the competent authority also needs to be submitted. Other important details like land title, the layout plan for the proposed project, the location details of the project, also need to be submitted to the regulator.

After an approval is granted by the real estate regulator, the real estate promoter will have  to upload all these details on to the website of the real estate regulator. Any advertisement of the project should have the precise link to the project details as well.

At the time of booking and issuing an allotment letter to the buyer, the promoter needs to make available to the buyer, the time schedule of completion of the project, including the provisions for civic infrastructure like water, sanitation and electricity.

Many real estate companies over the years have sold homes without the basic amenities in place. In some cases, housing societies have even lacked a water connection and have needed to get water delivered through water tankers almost on a daily basis for years. The Real Estate Bill hopes to correct this. It also hopes to correct the information asymmetry that prevails in the sector up until now.

The Bill also allows any real estate buyer to file a complaint against the real estate promoter or real estate agent with the real estate regulator in case any violation of the provisions of the Bill as and when it becomes an Act.

A major problem with the sector has been a delay in the delivery of homes. One of the major reasons this happens is because real estate companies announce a new project, raise money and then use that money either to complete an earlier project or pay off debt.

This has led to a situation where many projects have been delayed endlessly given that the trick of starting a new project and raising money doesn’t seem to be working anymore. The Bill seeks to correct this situation. The real estate promoter needs to maintain 50% or “such higher percent, as notified by the appropriate government” of the amount raised from the buyers of homes, in a separate bank account.

This money can be only used for the cost of construction and can be withdrawn by the real estate promoter in proportion to the percentage of completion of the project. This is one of the major clauses in the Bill and if implemented correctly can bring huge relief for the buyers.

This clause has been diluted. In the original version of the Bill, the promoter needed to maintain 70% of the amount raised in a separate bank account. The reason offered for this dilution is that in many cases land prices form a major part of the project and maintaining 70% of the money raised in a separate bank account isn’t the best way forward.

Further, up until now the buyer while buying a home had no clue about what exactly was the area that he was paying for. The Bill defines the term carpet area exactly as: ““carpet area” means the net usable floor area of an apartment, excluding the area covered by the external walls, areas under services shafts, exclusive balcony or verandah area and exclusive open terrace area, but includes the area covered by the internal partition walls of the apartment.” Again, if implemented well this clause can bring huge relief to home buyers.

Real estate agents will also need to register with the regulator. This is another good move where not anyone and everyone will jump into become a real estate agent or a broker, as is the case currently.

Also, currently the real estate promoters keep changing the plans as they keep building the project. Once the Bill becomes an Act, this may no longer be possible. Any alterations to sanctioned plans, layout plans and specifications of the buildings or the common areas within the project will need written consent of at least two-thirds of the buyers other than the promoter, who have bought apartments in the building.

This is another buyer friendly measure. On a jovial note what this means is that real estate promoters will have to stop advertising all those swimming pools which are planned at the time a project is launched but never get built.

Up until now buyers have had to pay a huge rate of interest every time they miss a payment to the real estate promoter. But the promoters never pay or at least don’t pay the same high rate of interest, if there is any delay on their part. The Bill essentially calls for the same rate of interest to be paid by the real estate promoter as well as the buyer in the eventuality of a default on either side.

Further, if the promoter violates any one of the provisions under section 3 of the Bill he shall be punishable with imprisonment for a term which may extend up to three years or a fine which may extend up to a further 10% of the estimated cost of the project, or with both. Section 3 of the Bill basically deals with the real estate promoter having to register with the real estate regulator before launching a project and then following a series of buyer-friendly steps.

On paper, the Bill seems to be well thought out and takes care of the all the issues that buyers have had with real estate promoters in the years gone by.

Nevertheless, the implementation of the Bill as and when it becomes and Act, will be carried out at the state government level. And whether state governments carry out the implementation in true letter and spirit remains to be seen. I have a few reservations regarding the implementation of the Bill when it becomes an Act, which I shall discuss in a column next week.

Postscript: The Rajya Sabha website has uploaded the Select Committee’s recommendations as well as the Real Estate Bill in a scanned format instead of uploading the proper report.
If Digital India is the way forward this is clearly not done. Information needs to be made available to everyone in the most accessible way. Hope the concerned authorities are listening.

The column originally appeared on The Daily Reckoning on December 11, 2015