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The Real Estate Matrix

Monday, June 24, 2013

While there is no doubt that the Real Estate Regulation & Development Bill is a necessity policing mechanism for the sector, as analysis and debate continues, various other realities seem to be cropping up. In fact, a complex matrix form has emerged with different permutations and combinations revealing that the numbers game on the pricing front will remain the same, although its presentation formats will change. Simply put, the property now bought on ‘Super built up’ area at price ‘X’ will remain the same, but presented as ‘Y’ on ‘Carpet area’. Similarly on the black money and corruption fronts new game changers will unfold. Mayura Shanbaug reports...

The Real Estate Regulation & Development Bill aimed at checking the huge inflow of black money into the realty sector; bring greater accountability, transparency and prevent fraud and delay has proposed the appointing of a national regulator. However, there is widespread cynicism about whether it can stamp out the practice as there are various windows left open for developers and corrupt officials to manipulate the system.

According to experts, with the clause of selling the property as per  carpet area and not by super built up area as the practise is , the fear is that developers will demand a greater  percentage of the transaction as ‘on’ or cash,  there by failing the very purpose of the bill . Many developers in the country demand up to 30 % of the price in cash, a small slice of the ubiquitous, unaccounted "black money" that costs India's straitened exchequer billions of dollars in lost taxable income.

This practise is vehemently denied by Lalit Kumar Jain, chairman of the Confederation of Real Estate Developers in India (CREDAI). According to him in this part of the world the practice of demanding black money does not exists any more. “None of the registered reputed builder indulges in such malpractice any more. The transactions done by them are white,” he says.

However, he indicates that black money will enter the scenario in a different form. “The Bill has many lapses like appointing a government official as regulator rather than a third party person, who will create a situation where corruption will again be rampant and black money will enter the system,” he says. Black money comes in handy for bribing corrupt officials. "There is a cost of pushing the file. But what is the alternative?" asks Jain.

Though the draft says developers will have to get accreditation for projects from the regulator, make public disclosure of details including the price of units, and maintain a separate bank account for each project to collect payments from buyers, it will not have control over land deals, which is where illicit activity is widely believed to be rampant.

"The bill is not going to help solve the issue of black money," says Anurag Mathur, chief executive officer of project and development services at Jones Lang LaSalle India. "Black money is tied in or shifted through land transactions and the regulator will have no jurisdiction over that,” he says.

According to Liases Foras, a consultancy firm, in the year to June 2012, about $6 billion, or 30 % of total transactions in the property sector, were executed using black money. Real estate accounts for more than a 10th of India's $1.85 trillion economy.

Incidentally, RBI rules prohibit bank loans to fund purchases of land, a regulation designed to curb speculation and reduce balance sheet risk for banks. To fill that void, wealthy individuals, including politicians, are widely believed to invest "black money" in real estate sector.Some of that money can later be poured back in the form of election campaign donations from developers, say experts.

Though the government claims that the records of project account would help in trailing the money inflow into the sector, there are many aspects that can not be curtailed. “Till now investigating agencies used to face a tough time trailing black money in the absence of any record," said Former Housing & Urban Poverty Alleviation minister, Ajay Maken while presenting the draft.

However, the belief that a large share of illicit money sloshing around the sector is tied to politicians makes it look difficult. "There can't be a legal measure to put an end to black money ... because ultimately it ends up in the political cycle,” said a Mumbai-based analyst.

Expect a 20-25% hike in property prices
The Bill is also assumed to make holes in home buyer pockets. According to the developer community a few clauses in the bill will push the property prices in India by 20-25% once it comes into being.

The developers site various reasons as a justification. According to the bill, the developers will have to maintain a separate bank account for a particular project in a scheduled bank. 70 % of the amounts realized for the project from the buyers, from time to time, would be deposited within fifteen days of its realization. This money will solely be utilized for meeting the costs of the particular projects only and not be allowed to divert the money for others.

“As the money does not come cheap and permissions take 1-2 years to get, hence the growth in the industry will be affected,” said Pratik Patel, Director, Rajesh Builders.  “If I am building 5 projects per year now, I will be able to do just 2-3 at the most. The smaller builders will bear the brunt of this. The supply demand gap will be adversely impacted,” he said. Plus compliance for each and every aspect will delay the projects further and also increase the interest on the funds,” he added.

“The increased interest burden will eventually be passed on to the end users there by taking the rates upward by 20-25%,” Patel said. He further added that if developers can’t pre- sell the projects, the delay in projects will also aggravate supply demand imbalance which already exists there by pushing the prices further.

Real estate experts are also of the opinion that although the bill has many benefits for the actual users, it also has its share of limitations. They believe that this move would suck up the liquidity in the market. “Developers would have to look at other sources which could push up the prices further. So the property prices could go up a bit due to these regulations,” said   Niranjan Hiranandani managing director of Hiranandani Group of Companies.

Hiranandani feels that the bill completely ignores the delays which take place from the side of the authority. “Authorities take a lot of time to grant us the building permissions. It could take anywhere between 2 and 3 years for a developer to get in all the approvals. There should be certain provision which would ensure that the developer should get in the approval in a certain time frame,” he adds, explaining that a developer would now launch a project only after he has received all the approvals which are a long process.

 “So we can anticipate a drop in all new launches at least in the short run. Also the property prices would also go up due to various factors like additional capital burden and paper work once the bill comes in force,” he says.

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