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Monday, March 14, 2016

Real Estate (Regulation and Development) Bill

The Real Estate (Regulation and Development) Bill was cleared by the Rajya Sabha last week. It will become an Act once the President of India ratifies it, which is expected to be a formality. This Act will lead to the creation of regulator for the real estate sector to protect the interest of buyers by providing a uniform regulatory environment. This will also ensure a level field for developers. ADC reviews the positives as also brings forth the views of industry leaders and developers

The Act will improve buyer confidence and boost demand for residential real estate. It incorporates mandatory disclosure clauses, which would provide greater clarity on project standards and timelines for completion, says Crisil Research in an Impact Note on the same. According to it”For developers, while this Act implies stricter regulatory control, it will also translate into better demand, as buyer confidence improves. In terms of supply, delays in handover of projects are likely to decline as clauses mentioned in the Act mandate strong commitment from developers to complete projects as per schedule”.

Mandatory registration of projects with a regulator
The Act says that all residential projects with plot areas of 500 square metres or more, or 8 apartments need to be registered with a regulator, which will be possible after the developer submits all necessary clearances. This clause is expected to impact a larger gamut of projects in all major cities. Developers also need to disclose details on the carpet area of flats, the layout plans, the plans for development works, the architect and structural engineers.

The Act also mandates registration of real estate agents with the regulatory authority to ensure that agents only facilitate sale of registered properties.

Buyers to be safeguarded against pre-launch schemes
Pre-launch schemes are offers where the developers ‘soft’ launch their projects to a select group of buyers, typically priced at a 5-15% discount to the launch prices. However, these investments carry a substantial risk, as projects at that stage may not have received all required approvals. The Act seeks to protect interests of buyers by incorporating a clause that projects can be launched only after the developer secures all statutory clearances from relevant authorities.

Carpet area to be clearly specified
The Act directs developers to clearly specify the ‘carpet area’ of the project. Carpet area is the actual net usable floor area of a residential/commercial unit and does not include the area covered by walls, whereas the super built-up area is the built-up area (carpet area + wall breadth) in addition to the proportionate area of common areas, such as the lobby, lift shaft, stairs, etc. Thus, buyers will get clarity on the actual usable area that they will get, on receiving possession of the flat.

70% of realisations from buyers to be escrowed; stricter adherence to completion timelines
The Act has made it mandatory for developers of real estate projects to deposit 70% of the amount realised from the buyers in an escrow account to cover land and construction costs. By ensuring that developers do not divert funds meant for a particular project to their other projects, the Act seeks to curb delays in project completion, due to shortage of funds. The Act also protects buyers against project delays by requiring that developers refund the amount paid along with interest in the event of a delay. Buyers too have been made liable to pay the same interest rate in case of delays in payments to the developer. These factors are expected to ensure timely completion and handover of projects to the buyers.

Inclusion of the mandatory consent clause of two-third buyers before altering plans
Mandatory consent clause before altering project plan was introduced in the recent amendment. The clause mandates consent of two-third of the buyers before altering plans, structural designs and specifications of the plot, apartment or building. However, minor additions or alterations due to architectural and structural reasons are permitted without any consent.

Adoption by states/UTs a key monitorable
While the Real Estate Bill has been passed by the Centre, it will have to be cleared and implemented by the states/Union Territories (UTs). This is where the catch is because the actual impact of the Act will depend on how much of the clauses and provisions are adopted and rejected by the states and Union territories -- which have the right to do so.

Crisil View On The Applicability And Impact Of The Act

  • Applicable to both commercial and residential real estate projects
  • Necessitates the establishment of one or more real estate regulatory authorities in every state and Union territory to oversee transactions.
  • Real estate projects with plot areas of 500 square metres, or 8 apartments or more, and real estate agents will have to register with the regulator. Projects that are under construction at present also come under ITS purview
  • Makes disclosure of all registered projects, including details of promoter, project implementation schedule, layout plan, land status, approvals, agreements along with details of real estate agents mandatory. Projects can be launched only after securing all statutory clearances
  • Mandates maintenance of separate escrow accounts for all projects, and 70% of the amount realised from buyers and put in the escrow account has to cover land and construction costs
  • Will lead to the establishment of the Real Estate Appellate Tribunal to ensure faster resolution of disputes. Appellate tribunals will be required to adjudicate cases in 60 days as against earlier provision of 90 days while regulatory authorities will have to clear complaints in 60 days
  • Has a provision to imprison developers up to 3 years and real estate agents up to 1 year for any violation of Tribunals and Regulatory Authorities
  • While civil courts are prohibited from taking up matters defined under the Act, consumer court have been allowed to hear such cases
  • Developers will be liable to pay penalties if the project deviates from the original plan by more than 10%. Plans/designs cannot be changed without consent of consumers
  • Both builders and buyers will have to pay the same rate of interest in case of any delay on each other’s part
  • The liability of developers for structural defects has been increased from 2 years to 5 years. Developers will not be able to change plans without the consent of two-third of the buyers
  • Sale of flats only on a ‘carpet area’ basis and not on super built-up area and mandatory disclosures to be made on facilities/amenities provided on the regulatory authority’s website

Anita Arjundas, MD, Mahindra Lifespace
We welcome the passage of the Real Estate Bill, which seeks to restore buyer confidence with a strong thrust on transparency and accountability. Speedy action on single window approvals will enable more efficient use of capital and also support timely delivery.

Chintan Sheth - Director, Sheth Corp
The bill will boost the entire industry and will definitely prove to be a game changer for the market. The impact of this bill will be profitable to both consumers as well as builders as it will bring transparency in the industry and confidence amongst buyers.

Shubham Jain, Director JP Infra
"The new real estate bill, cleared by the cabinet, is being hailed equally by the home buyers and developers alike as it will lead to consolidation of the industry and will pave way for growth for the industry in a well defined regulatory framework. The implementation of the provisions of the bill, if done efficiently, will boost confidence of the buyers, lenders and investor, which is crucial for long-term growth of the realty sector.

Anuj Puri, Chairman & Country Head, JLL India
With real estate having linkages to the largest number of industries, the incumbent government has succeeded against various odds and given Indian real estate its most valuable card. The bill is a verdict to end the age of information asymmetry, lack of accountability and unwarranted project delays, and marks the beginning of rising transparency, liquidation of assets - and, importantly, positive sentiment.

Arvind Jain, Managing Director - Pride Group
It has finally received the green signal and is all set to revolutionize the Indian realty market. It will empower consumers by giving them confidence while making their real estate investments. It imposes strict regulations on how developers conduct their business, and underwent various redrafts aimed at doing this. It is very encouraging that the bill is now a reality.

Kishor Pate, CMD - Amit Enterprises Housing Ltd
Strict enforcement of project delivery timelines, verifiable construction quality and assurance of legal clearances will finally become a reality, and the consumer confidence which had all but evaporated will return. It is a most welcome development.

Anil Pharande, Chairman, Pharande Spaces
It will have a profoundly positive effect on how both domestic and global investors view Indian real estate. More importantly, it will give homebuyers a strong measure of assurance.

Vikas Oberoi - Chairman & MD, Oberoi Realty Ltd.
It will ensure more transparency in realty deals and help protect the rights of the buyers. This will boost buyer confidence and in turn will also help increase sales. This bill also looks at the developer's interest by taking into consideration external factors in case of project delays.

Jason Kothari, CEO,
We applaud the balance it strikes between heeding the needs of the sector like creating a single window clearance for all approvals; and protecting consumer interests through measures like fines for project delays, faster redressal to consumer complaints, minimum of 70% collections from buyers to be deposited in separate escrow account to cover cost of construction and land.

Rajesh Prajapati, Managing Director, Prajapati Constructions
This will make the real estate industry more organized and mature. It will bring transparency to the sector and the passage of this bill will mean that the reputed long term players will be greatly benefited along with customers. Timelines will be more closely adhered to and also the quality of construction in projects will increase.

JC Sharma, VC & MD, Sobha Ltd.
The provisions like fast track dispute resolution mechanism and disclosure of all approvals by developers will help transform the housing sector. It will make buyers more confident and will perk up the market sentiments as well. The regulations of RERA will weed out fly-by-night developers and help customers in identifying good players in the market.

Rajesh Krishnan, CEO, Brick Eagle
This bill would enhance credibility, transparency and trust worthiness of real estate sector benefiting all stake holders particularly the consumers. However, the bill seems to come across as a deterrent to the growth of small developers specifically those dedicated to affordable housing.

Neha Hiranandani, Director, House of Hiranandani
"We welcome the passage of the Real Estate (Regulation and Development) Bill in Rajya Sabha that aims to bring in transparency and protect the interest of the consumers. Though the objectives are noble and correct in the long term, we believe lack of clarity on the various mechanisms proposed will only add to costs through delay, making projects not only more expensive, but ensuring that affordability continues to be a distant dream.

Real Estate Bill Could Encourage FDI Inflows, Says Nomura
The Real Estate Bill can bring greater credibility to the sector through more transparency as well as accountability and could encourage flow of FDI funds into the market, a Nomura report says. The Upper House on March 10 passed the Real Estate (Regulation and Development) Bill, 2016, aimed at protecting the interests of home buyers, bringing in more transparency and accountability into the real-estate sector.

According to the global financial services firm, the Bill could go a long way towards protecting the interests of home buyers by facilitating more timely completion of projects and ensuring greater transparency. This bill was touted as a major reform measure to regulate the vast real estate sector and bring order in it. "Mandatory disclosures and registration may reduce black money transactions in this sector; and greater credibility of the real-estate sector (through greater transparency and accountability) could encourage flow of FDI funds into the sector," Nomura said in a research note.

"The Bill is yet to be passed in the Lower House, though that should be easier, as the government has an absolute majority in the Lower House," Nomura added. The key features of the bill include, timely execution, accountability and transparency. The Bill proposes setting up state-level real-estate regulatory authorities, where builders will be mandated to register all projects above 500 sq mts (earlier 4000). This would apply to both residential and commercial real estate projects, including those currently under construction.

State-level appellate tribunals will be set up for addressing complaints. A timeline of a maximum 60 days has been set for resolution of disputes. Failure to register a project could result in imprisonment of up to three years for developers or 10% of the project cost or both. Home buyers and real-estate agents could also face up to one year of imprisonment, if found in any violation of the tribunals or regulatory authority.

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