Consult Us For Construction
The real estate sector in the country is set for a major change. The Real Estate Regulatory Authority (RERA) will come into force in each State, as mandated by the law passed by Parliament in 2016.
Finally, the Real Estate (Regulation and Development) Act came into force across the country on May 1, to the immense relief of homebuyers and investors alike. This will usher in a new era of transparency in the real estate sector in the country and, perforce, corporatise the operations of all developers.
Once the Real Estate Regulatory Authority (RERA), mandated by the Act, is established by every State, experts expect projects covered under RERA to be completed on time, that too without any deviation from the original proposed plan. This is likely to improve the confidence of buyers in the system and entice them to buy in projects under construction.
Uttar Pradesh and Maharashtra have already notified RERA rules. Karnataka and Haryana are likely to notify the rules soon, so that it is implemented on time. A government source said the Union government has asked State governments to include all current projects, where completion certificates have not been given out, under the ambit of RERA. All current projects have been given three months up to July 2017 to comply with RERA regulations.
A senior government official said that even those States which have not notified the RERA rules and appointed an authority will be required to do so before July 2017, so that all the current projects may be registered as required by the law.
RERA does not permit developers to launch new projects before registering them with the regulator. This will be a major shift from the current practice where developers sell a part of their project through a soft launch or pre-launch activities, said CRISIL, the credit-rating agency.
Developers will now have to refund or pay compensation to allottees for any delay in projects, with an interest at the State Bank of India's highest marginal cost of funds based lending rate plus two percent, within 45 days of its becoming due. This will come to around 11-12 percent.
According to the rules, which the central government is pushing all State governments to follow, developers of current projects should deposit 70 percent of the amount collected and unused for the completion of these projects within three months of applying for registration of a project with RERA in a separate bank account.
The rules also makes it mandatory for developers to disclose project-related details, including project plan, layout, and government approval-related information to buyers like sanctioned FSI, the number of buildings and wings, the number of floors in each building etc. However, buyers will pay only for the carpet area of an apartment which does not include the common area of a condominium, on a pro rata basis. This will force developers to quote higher rates per square feet for the carpet area. In almost all the State government rules, consent of two-thirds of the allottees is a must for any major addition or alteration in a project.
Effective implementation of RERA will improve transparency and timely delivery of residential units. RERA is also expected to put an end to fund diversion, and transform the realty sector into a more organised and trustworthy industry, instilling confidence in end-users, CRISIL said in a report. Developers also say that RERA will bring back buyers into the market.
From now on, developers will have to work under an onerous mandate with 70 percent of all the money collected from the sales of units in a project to buyers transferred into an escrow account, which will be used for the construction and meeting the land cost of the project.
Withdrawal from the account will be in proportion to the completion of the project and must be certified by the engineer, architect, and a practising chartered accountant. So, any diversion of funds from a project is not possible.
Any structural defect, or any other obligations of the promoter as per the agreement of sale, brought to the notice of the promoter within five years from possession have to be rectified free of cost. The rules also provides for buyers to comply with the payment schedule mentioned in the model sale agreement.
Manoj Gaur, Vice President, CREDAI National, said that RERA will bring transparency in the system. But, until the time that authorities are not made responsible for timely approvals, the cost of real estate may go up, Gaur said. Every developer will have to remodel his business processes now. At the CREDAI level, the apex body of developers is holding training sessions for developers to educate them on the changes expected in the new business environment.
Gaur said that as a project can now be launched only after securing all the approvals, it should make buyers confident to buy in projects under construction. To that extent, it is a welcome move
With RERA coming into force, the realty landscape of the country is not going to be the same anymore.
Indian real estate has seen significant changes in the last year, especially with regards to government policies, the major ones being demonetisation, Real Estate Regulatory Authority (RERA), FDI relaxations, Benami Transactions (Prohibition) Amendment Act 2016, and Goods and Services Tax (GST).
RERA was passed by the Parliament in March 2016.All States are expected to meet the deadline of implementing RERA, i.e. May 1, 2017. This being a major pro consumer law, it is expected to bring in transparency within the sector along with establishing an adjudicating mechanism for speedy dispute redressal and also establishing an Appellate Tribunal.
The Appellate Tribunal will directly help in hearing appeals from the decisions, directions or orders of RERA and the adjudicating officer(s) and for matters connected therewith or incidental thereto. RERA is expected to ensure that real estate projects are completed and delivered on time to key stakeholders. Provisions in the Act, such as the imposition of similar penal interest for developers and buyers, will encourage timely delivery of projects.
Based on key observations and discussions, one can see RERA impacting in these ways:
Unorganized sector to organized RERA
coupled with the recent demonetisation move is expected to bring in discipline within the real estate sector, which should lead to a significant consolidation and clean-up. Developers and promoters must adapt to the changing environment and make suitable changes to the business model while adhering to compliances.
Pre-launches and soft launches of projects before obtaining adequate approvals and permissions have been a common phenomenon during the last few years. The Act attempts to address this issue by prohibiting sales and marketing of the units before registering the project with the regulatory authority. With developers disclosing approval status, project layout and timeframe for project completion to regulators and buyers, RERA is set to increase transparency in the real estate sector.
Today, aggrieved homebuyers must reach out to consumer courts, which are already loaded with cases from various sectors. Once the real estate authorities are set-up, buyers can expect faster redressal of their complaints as these authorities will handle only real estate related matters.
Change in investor approach
While investors are expected to show an increased interest in the real estate sector in the coming times, there might a change in their approach, to accommodate risks and legal aspects in their contracts with developers. Many investors are showing concern on the RERA provisions that might define them as 'promoter' and, hence, may increase their responsibility towards legal contractual obligations.
The investors would now be more careful while finalizing contracts with developers, thus keeping a check on their (investor) liabilities in case of non-compliance with RERA. They might also be looking to dilute their stakes in existing troubled investments contracts and might renegotiate terms to limit liabilities.
Empowerment of consumers
Minister of Housing and Urban Poverty Alleviation, M Venkaiah Naidu said, "Real Estate Act is one of the most consumer-friendly laws passed by the Parliament and States have no power to dilute its provisions. This law, which was widely welcomed and appreciated benefits both, the buyers and sellers of real estate properties besides enhancing the credibility of the sector".
Also, the preamble to the Act says, "An Act to establish the Real Estate Regulatory Authority for regulation...and to protect the interest of consumers in the real estate sector". The Act includes multiple provisions to protect and empower real estate buyers. It wouldn't be wrong to say that consumer empowerment and protection would be the most important themes of RERA.
The key provisions empowering a real estate buyer include, refund of the amount paid along with interest and compensation if the promoter fails to comply with the terms and conditions of the agreement for sale or is unable to give possession of the unit purchased; prior written consent of at least two-thirds of the allottees for any structural changes, or transfer assignment of the majority rights and liabilities by the promoter; defect liability period of five years from the date of possession.
Sound real estate market
There might be a possibility of a reduction in new launches of projects, as developers aim to complete existing projects and take a pause to clearly understand RERA implications before launching new projects.
While it's a long road ahead with several opportunities for improvement, RERA signals towards a path leading to a more sound and robust real estate market in India. Much, however, will depend on the government avoiding past mistakes and the success of implementing RERA.