Housing in India with RERA (Real Estate Act)

In most busy Indian towns and cities, half-completed buildings  (which remain to be in that state for a long period of time) are a ubiquitous sight constantly catching the attention of most people.

It is not surprising that what you saw yesterday, what you see today and what you will see after a year will draw any stark distinctions. The construction of residential/ commercial buildings and other developments enveloped under the ambit of the real estate sector is in a beleaguered state. Delays in completion and handover of projects, transparency and accountability from the builders end and a questionable pricing structure are the key problems plaguing the real estate sector currently. In response to this scenario, the incumbent government is intending to address these problems by giving a legal status to the Real Estate (Regulation and Development) Act which will effectively come into force from 1st May, 2017 in India. Will this revolutionize the Indian real estate sector and solve the problems with housing in India?

In context to the efforts of the government to act as a catalyst in real estate development, the need for progress in this sector is imperative to take into cognizance. Firstly, there is an underlying vision of “Housing for All by 2022” aiming to provide shelter for the entire population. Whether the scale of the project be large or small in valuation terms, timely completion and transparency are the onus of the builders (although not entirely in absolute terms due to unforeseen circumstances). Secondly, the real estate sector contributes 9% of the GDP and is forecasted to grow to 15% of the GDP in the long term. A robust regulatory framework is essential in giving firepower to this growth story. Lastly, demographic attributes are in a constant state of flux given the increasing availability of housing finance. The average age of a buyer in India has come down to the bracket of 30-35 years and is accelerating towards the bracket of 25-30 years. Aggregating these 3 factors thus raises the need for a comprehensive and easily enforceable real estate law.

Bottlenecks in Real Estate India

Funds transfer-Although, there is an existent set of laws governing real estate development in India, they are rife with errors and loopholes. In the current scenario, a builder is able to take funds from you for project A and transfer a part of the funds for project B. Thus there is ample scope for the completion of your designated project A to be delayed. Moreover, these consumer projects are financed by loans (by the consumer) and hence although the project is not complete, the consumer pays the EMI and the builder goes scot free without being penalized.

Pricing Structure-While determining the price of an apartment, the builder will quote on the basis of a super built up area, which includes areas you cannot utilize in the apartment (eg. a wall/ structure in the middle of your apartment). There is no mandate for him to state the price in terms of carpet area i.e area you can actually utilize (which is usually 70% of the super built up area). The builder inflates the price by including areas such as the common area outside your flat. Retail buyers have reported that these areas aren’t on their priority list while looking for a flat. In simplistic terms you pay a price for a particular tract of land, but end up getting a substantially smaller area to utilize.

 

Housing with RERA

The Real Estate Act has a plethora of provisions that can be looked into. However, the key provisions that demands attention and address the previously stated problems in real estate laws are:

  1. The current practice of selling solely on the basis of super built up area will stop. Carpet area will have to be defined thus giving the buyer a heads up as to the actual area he/she will be able to utilize.
  2. 70% of the project funds will have to be parked in a dedicated bank account (received from the consumer). The developer will have to raise the remaining 30% independently. The developer will not be able to book funds for one project and invest the same in numerous other projects.
  3. Buyers delaying payments and builders delaying hand-over of properties did not share same penalties thus far. Now, they will be made equal. The law ensures that any delay in project completion will make the developer liable to pay the same interest as the EMI being paid by the consumer to the bank back to the consumer.

From the perspective of comprehensiveness, there are yet a number of issues to be resolved. For example, the status of projects subjected to environmental clearances remains a looming issue. Leaving aside such disputable matters, the prospect of the Real Estate Bill has been welcomed with an overwhelming response in the capital markets. The BSE Realty Index which gives us an idea of the underlying value of the real estate sector in India has appreciated in value by 27% in the last 6 months. Without an iota of doubt, this legislation is the need of the hour and its implementation will be critical in steer heading the nation towards its housing vision.

Ayush Banerjee

Ayush Banerjee

Policy Intern at InPRA
Ayush Banerjee has completed his bachelor's in economics from Narsee Monjee Institute of Management Studies. He has been associated with several NGO's (Round Table India, Make a Difference, Save the Children etc.) in the past and is committed to making a positive difference. An avid follower of activist investing and Buffetology, he aspires to become a successful value investor in the Indian equity markets.
Participating in debates and MUN's has motivated him to research on international law and change the public perception about the prevalent laws by conducting a deep dive analysis of policies and it's ramifications. He hopes to do the same by writing for InPRA.
Ayush Banerjee