Real Estate Bill - Transformation underway!!!

Real Estate Bill - Transformation underway!!!

Introduction and Background

After months of moving from one House of Parliament to another, and from a standing committee to a select committee, the Real Estate (Regulation and Development) Bill, 2013, became law after being passed by the Rajya Sabha.

The law, which aims to set up a regulatory framework to govern contracts between buyers and sellers, will protect home buyers against faulty developers, besides bringing in investments and transparency in the real estate sector. The law provides for a three-year imprisonment for repeated flouting of rules; the promoter’s liability for structural defects has been set at five years.

Real Estate Experts see it as an effective bill as it will bring in trust and transparency in the real estate sector, as it providers an umbrella of  consumers rights for homebuyers, thereby increasing confidence and timely delivery of projects.

The bill is a step forward to end the age of information asymmetry, project delays, lack of accountability and marks the beginning of rising transparency and responsibility, liquidation of assets, and, most importantly, positive sentiments.

Such laws and guidelines are already in places in property markets like Dubai with good success to prevent unwanted speculation by both buyers and developers. Short-term investors interested in only flipping to make quick profits offer no long term value to both home buyers as well as the industry health – need to be routed out of the system.

The focus will be delivering value to genuine home-buyers

Scope and Coverage:

Applicable for all real estate projects both new and under-construction, wherein the completion certificate haven’t been received. This practically covers the whole spectrum of the real estate market as majority of real estate in India is sold much before handover.

Both residential and commercial real estate projects above 500 square metres and eight apartments will have to be registered

Salient features of the Bill

  1. Regulatory Authority & Customer Protection

  • The Real Estate bill requires a regulatory authority to be established at state (or UT) level to regulate the real estate transactions. This will instill greater transparency in the sector. Once this happens, the real estate investments including FDI would be become more structured and is likely to rise.
  • A Central Advisory Council will be established to advise the government on implementation of the Act. The body will also recommend policies for the protection of consumer interest and foster the growth and development of the sector.
  • State-level Real Estate Regulatory Authorities (RERAs) will be established to regulate and oversee transactions related to both residential and commercial projects and ensure their timely completion and handover. However the bill is silent on resales and the secondary market.
  • Disputes will first go to quasi-courts to reduce the load and time spend in legal disputes. Further, appellate tribunals will be set-up which will have to adjudicate cases within 60 days. Regulatory authorities will have to dispose complaints within 60 days.
  • For non-compliance, the Bill provides for imprisonment up to 3 years for promoters and up to 1 year for real estate agents and buyers with possible monetary penalties also, if they violate orders of appellate tribunals.
  • The Bill provides for arranging Land Title Insurance. Such insurance is currently absent in the market, benefits both the consumers and developers if land titles are later found to be defective.
  • Under this bill passed, no pre-launch of projects will be allowed without getting all project approvals from the local development or relevant authorities and project registration from the regulator.

Developers Point of View (PoV)

Genuine developers gave nothing to worry – it’s the small fry – typically the ones with no professionals on-board in for a quick ride to riches as a developers who need to worry. Industry watchers feel that this Bill would lead to a consolidation especially among small-time developers. Only developers with a long-term vision and lead by professionals are likely with these regulations in place.

Project Approvals

  • Real estate projects and real estate agents will have to register with this authority
  • Developers will have to disclose all project details including the approvals from government authorities, land use on which the project will be developed, layout plans, floor plans and conversion documents

 Registration

  • Registration of builders, real estate agents and brokers made mandatory. The idea to weed out these fly-by night brokers who have to real estate knowledge but just in for a quick ride to commissions.
  • Developers will have to provide their company history and project delivery capabilities highlighting details of projects launched in the past five years, and the present status of these projects. This information may be listed on the regulator's website, so that buyers can take an informed decision.

Project Delivery

  • Unit of Measurement (UoM) - Developers cannot sell property on the basis of super built-up area (flat area plus common area). They will have to clearly mention the carpet area, which is the actual area enclosed to literally lay a carpet. This area excludes common areas, amenities and the thickness of walls. Hence a buyer will know what he/ she getting as the living area and the price he/she is paying for it.
  • No diversion of project funds to other businesses. Then delivery gets endlessly delayed as funds will have to come another project.
  • Builders frequently change project plans mid-project, including the number of floors in a building or floor plans, will now be barred from doing so, without the approval of 2/3rd of the buyers.
  • The local authorities that provide certain approvals will also be under the ambit of this law. This is to protect the developer’s’ interests. Many times, developers fail to meet project deadlines due to delays in receiving a necessary approval from the authorities. But now they have a legal recourse for the same.

Project Finance:

70% of the amount realized from buyers in pre-sales of homes will have to be deposited in a separate account and used solely for funding the construction of the project for which the money was collected. Realty projects often get delayed because developers divert funds receivables meant for one project to another. But now, real estate developers will have to deposit at least 70% of this money collected from buyers in an escrow account to meet construction costs. This would ensure developers who run out of cash, don't stall projects.

The only risk is that developers may factor these holding costs, which may lead to an escalation of prices. In the short-term, there is a chance that the compliance costs associated with project registration could have financial implications to buyers. But in the long term, the overall real estate market would become more attractive to investments from REIT (Real Estate Investment Trusts).

Documentation

Formerly, sale and construction agreements were one-sided, offering almost no rights or protection to home buyers. Once the bill becomes an Act, one-sided legal agreements will be a thing of the past. Any delay in deliverables by the builder will attract the same penalty as what the buyer needs to pay, if his payment is delayed.

Promoters will disclose relevant project information, adhere to approved building plans and project specifications, maintain honesty in the promotional collateral's, rectify any structural defects, and refund money in cases of default.

Marketing

Though the Bill has been passed and different state governments may implement with different degrees of seriousness, it’s our job to respect the law both in letter and spirit. In fact it will have to be the established players who lead the way. Some of the main provisions are:

  1. Maintain honesty in the advertisements and project brochures. It would be difficult to change floor plans/ designs without client’s approvals. Developers are also banned from making false claims in advertisements or publishing photographs of the site/ project which are untrue. Misleading advertising have been made punishable. For non-compliance of any of rules laid out, the developer can be fined 10 per cent of the total project cost. Also for repeat offenses, the builder can be jailed.
  2. Developers cannot sell property on the basis of super built-up area (flat area plus common areas). Developers will have mention both the carpet area and saleable area in all communications including brochures, EDM’s, websites and print ads.
  3. Subsequently price sheets will have to have to be modified to charge customers on the carpet area. This could lead to lot of confusion in the minds of customers as presently the loading on the carpet could vary from 20-50% depending on the city. Cities like Mumbai where the loading in residential apartments is commonly ~50%, potential customers may be surprised that apartment sizes has shrunk by half and pricing per sqft has doubled.
  4. No real estate project will be allowed to be sold to buyers, unless it has all necessary building approvals from local authorities to start construction.
Praveen Yadav

Project Management – Real Estate Developments

7 年

Lets wait & see how many states implements the act.... mainly the basic rule

Nikhil J Isaac, MRICS

Business Strategy Specialist | EMBA Switzerland | Turnaround Expert | Real Estate, PropTech & Hospitality Leader | Strategic Leadership, Stakeholder Engagement, Consulting Professional |

7 年

Maharashtra and Karnataka all set to notify the Real Estate Act by May 1 2017 https://profit.ndtv.com/news/commodities/article-days-of-lower-petrol-diesel-prices-may-be-over-read-why-1411659?fb

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Nikhil J Isaac, MRICS

Business Strategy Specialist | EMBA Switzerland | Turnaround Expert | Real Estate, PropTech & Hospitality Leader | Strategic Leadership, Stakeholder Engagement, Consulting Professional |

8 年

RERA will help separate the men from boys

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Nikhil J Isaac, MRICS

Business Strategy Specialist | EMBA Switzerland | Turnaround Expert | Real Estate, PropTech & Hospitality Leader | Strategic Leadership, Stakeholder Engagement, Consulting Professional |

8 年
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