Beware unscrupulous builders, the regulator is coming

Details of the notified bill can be downloaded from here. Homebuyers please read it to know your rights.

The passage of the Real Estate (Regulation & Development) Bill, 2015 by Parliament received warm reception in the country especially on social media platforms. It is pertinent to ask: why do we need a tough housing regulator?In the absence of a tough regulator and unwillingness of an average home buyer to get into expensive court proceedings that could take years, most builders – reputed or otherwise - have been shamelessly taking hapless home buyers for a ride.

Delay in completion of housing projects by 3, 4 even 5 or 6 years is not uncommon so do arbitrary changes in lay out plans, and manipulation of ratios of supper built up and carpet area. A 3-year delay will make a home buyer to cough up 30-35% extra while the seller gets defacto interest-free fund for 3 years.

Builders avoid paying penalties for late delivery of possession by inserting smart clauses in thick apartment buyers’ contracts that most buyers don’t bother to read and later repent having no real recourse. Diversion of money collected from one housing project to another or for speculation in land deals jacks up land prices, and makes homes increasingly un-affordable to most end users.

Let me give some real examples. A Noida builder, The 3 C Company which is yet to give possession to flats sold in as late as 2009, has a clause in its apartment buyer’s contract that says penalty payment for late possession will be due from the date of notice given by home buyers, subject to force majeure.

Another builder, Mahagun India who has none other than Shahrukh Khan as its brand ambassador forced its hapless buyers to sign modified apartment buyers’ contracts that extended possession date by two years and halved its penalty obligation to Rs 5 per sq feet per month.

Mahagun itself though extracts 15% a year from buyers if they delay in paying. Many builders simply don’t have any provision for late possession penalties or simply cap their penalty payment obligation.

A Mumbai builder was reported to have no possession date in apartment buyer’s contract. Another builder sold 100 flats to over 200 buyers. Such abuses cannot go on for ever. Thus, the passage of realty bill has come as a rude shock to such unscrupulous builders.

No doubt, the bill aims to protect home buyers from unfair mis-selling, and requires all projects of 500 sq meters and above to register with the regulator. It says that builders must specify time frame for completion of housing projects and then stick to that or be ready to pay penalty at the same rate they charge home buyers.

Builder lobbies say that the bill should also have a time frame for municipal and other authorities who don’t give timely approvals leading to delay in handing over possession. No doubt, there’s some truth to this assertion.

However, regulatory approvals are delayed because builders keep changing their layout plans, try to get higher FSI and submit inadequate documents or incorrect/incomplete information. Moreover, the bill doesn’t say when to give possession. It simply says that builders must stick to whatever they promise – be it 3 years or 5 years. If not pay the penalty at the same rate that they charge home buyers.

Delays also happen because builders divert funds for other use simply because there’s no accountability as of now. Plus they somehow avoid paying penalty. It’s the buyers who have to bear the brunt of late delivery of apartments either because of slower regulatory approvals or diversion of funds by builders. Noida builders for instance, top the chart for delayed completion of housing projects even if timely approval is not a problem there.   

To check diversion of fund, the bill stipulates that 70% of the money collected for a project will be kept in a separate escrow account which can only be used for that project. Another good measure of the bill is making it mandatory to sell homes on the basis of carpet area and not super built area. Big builders usually keep carpet area unchanged but manipulate super built areas to extract extra money from unorganized home buyers. Such practices have to stop.

Inclusion of ongoing realty projects (which are now over 17000) is a commendable feature of the bill despite builders’ objection that it will add to cost of compliance and lead to further delays. Submitting a few more details about past projects and brokers ought not to be a problem. The real worry for realty companies is the imposition of penalty for violation that they are not used to paying. Regulation of brokers is again a good move as brokers are the key instrument builders rely on to lure innocent home buyers to agree to shoddy dream home deals that often turn nightmarish.

Is it really negative for builders and developers?

Not at all. Without a tough housing regulator, it’s difficult to differentiate a good builder from a bad one. I think, housing regulator is a bad news only for unscrupulous builders. It will eventually help the sector, at a time when prospective buyers are simply not looking at under-construction projects. Hence, an interest free source of funds has dried up for debt-ridden realty companies. An effective regulator will bring back both buyers and investors.

 It will also ensure that fly by night operators and land grabbers are kept out. As a result, there will be less number of competitive bidders vying for limited amount of land. That will put a check on land prices from shooting off. Timely completion of projects will also mean there is steady increase in the supply of homes which can further get a boost if timely regulatory approvals are ensured.

All these things will bring down home prices, and make more end users becoming interested in buying homes. That will be good not only for realty sector but also for the overall growth of Indian economy as housing sector has strong backward and forward linkages with other industries starting from cement, steel, electrical & electronics to interior decoration. That would also mean creation of more jobs than at present the housing sector is able to support.

Realty sector accounts for 9-10% of India GDP – thus a 10% decline in realty GDP chops 1% growth rate from India’s GDP. The sector must grow to play its part in India’s growth story. The bill if implemented in letter and spirit, can be game changer and bring respectability to the sector.  

Minister of Urban Development Vekaiah Naidu says that once regulations are in place, FM would be willing to look into the long pending demand of granting infrastructure status to realty sector that will be immensely beneficial to the sector’s prospect.

However, it will take some time before housing regulator becomes a reality as states have to take up follow up actions assuming the bill is cleared by President Pranab Mukherjee.

It still doesn’t make sense to run after under-construction properties as builders would want to impress upon the states authorities to drop the idea of including ongoing projects under the ambit of the bill.

Why to hurry when home price are likely to fall further so do home loan rates. Till then stay in rented accommodation as it’s cheaper to rent houses in India than buying them. As on now, there are at least 12 million houses lying vacant in Urban India, mostly in top cities that you can rent out for very low rental. 

A modified version of this post has been published by The Hindu Business Line and Quartz.com: India’s new real estate bill: Builders’ agony, buyers’ delight

A detailed version of this post has also been published by Nikkei Asian Review

Please share your home buying experiences even if  you differ from me. Humans should differ because we're all unique in our own ways. If we're not connected, it's time to get to know each other. You may follow me on twitter @RiteshEconomist and@DSmartConsumer

First two photographs are actual depicting uncompleted Lotus Boulevard Project in Noida/NCR Delhi and buyers waiting for possession for years giving petition to local Noida MLA. Source: The 3C website and Twitter