Real Estate New Horizons

article

With the Real Estate Act now in force, home buyers can expect predictability and transparency. But states need to bring their legislation in line with the Central act, babudom could stymie land acquisition and building approvals and there are multiple forums for dispute resolution BY G. SRINIVASAN

At long last, a shaft of light in the dismal tunnel of the realty sector where questionable practices remain rife. A semblance of order is expected with the passage of the much-delayed Real Estate (Regulation and Development) Bill, 2015 with both the Upper and Lower Houses clearing it within a week in the first part of the budget session of Parliament.

The bill has been on the agenda for the last five years, it was subject to numerous rounds of parleys with copious alterations built into its original text in different contexts. It aimed at instituting a regulatory structure so as to regain confidence in a sector that is riddled with unregulated players holding hapless house-buyers literally on the knife’s edge, with the latter exposed to heavy leverage.

It is not sans reason that the 2015-16 Economic Survey said real estate and ownership of dwellings is a crucial contributor to the economy, constituting eight per cent of India’s gross value added (GVA) in 2014-15 and grew by 9.1 per cent. The sector has grown at a compound annual growth rate (CAGR) of 8.1 per cent since 2011-12, but the construction sector saw a significant slowdown in the last few years, with growth rates of 0.6 per cent in 2012-13, 4.6 per cent in 2013-14, 4.4 per cent in 2014-15 and 3.7 per cent in 2015-16, led by weakening of both domestic and global growth.

Even as the slowdown in sales in the housing sector has caused a sharp spurt in the inventory of unsold housing units, realty prices are just holding up due to huge inflow of capital over the last few years. It is estimated that since the start of 2015, about 10 billion dollars or Rs 60,000 crore was invested in the sector by domestic and foreign investors, the highest in the last seven years. The authorities on their part had put in place several policy initiatives in 2014-15, including amendments of the FDI policy and removing the minimum floor area and minimum capital requirement provisions.

The Reserve Bank of India and the National Housing Bank (NHB) also reduced risk weight for individual housing loans of upto Rs 75 lakh from 50 percent to 35 percent for Banks and Housing Finance Companies respectively. Besides, the loan-to-value ratio has been increased to 90 per cent for loans upto Rs 30 lakh. The government also unveiled plans to build six crore houses by the year 2022 under the Housing for All scheme. It has also identified 98 cities to be developed as smart cities and announced 20 cities to be taken in the first place.

THE POSITIVES

It is against this backdrop that the passage of the Real Estate Bill ought to be seen, as a positive development, particularly when other weighty legislation have been held up in controversy and obdurate opposition by Opposition parties. According to the Union Minister of Housing M.Venkaiah Naidu, 76,044 companies are engaged in the real estate sector with a total of 17,526 projects having been launched in the last four years with an investment of Rs 13.70 lakh crore. The massive heft of projects and players alone vindicate that this sector should be run on transparent lines, with Naidu in his trademark alliteration contending reassuringly that the Bill “brings in only regulation and not strangulation”.

A facet of the new law is that it covers residential as well as commercial real estate, besides proposing state level real estate regulatory authorities, appellate tribunals for addressing and redressing intra-party affrays and to ensure timely completion and handover.

Under the new law, builders will have to register all projects with the authorities and disclose all details. And they can begin construction only after have got all the approvals required for this purpose. Builders will have to deposit 70 percent of the money received from buyers in an escrow account, which could be used for the project for which money has been primarily raised. Hitherto, builders have the abhorrent tendency to use money raised from buyers, to buy land for new projects or other activities unrelated to the primary purpose of building housing for the hard-pressed home buyers.

The Act is bound to transform the domain from business-as-usual to putting in place a framework that could ensure genuine growth

Other prominent features include, compulsory registration of any project of the size of 500 square metres in size or eight apartments, greater clarity in the definition of carpet area, a stringent penalty norm for structural snafus in construction and a mandatory consent clause for changes in construction plans. These are exemplary features that will boost the morale of home buyers. The reduced compulsory registration of the project is significant for heightened quality of supervision by regulatory agencies because in the previous version of the bill, constructions below the size of 1000 square metres or 12 apartments were permitted.

THE NEGATIVES

While enough safeguards are built in to secure the interests of consumers (homebuyers), the builder community has its own set of woes particularly those pertaining to obtaining clearances from various government departments and municipalities, including for lands that remain cumbersome and irksome. Such procedural delays for the builders would defeat the very purpose of empowering homebuyers, if left untouched and unresolved. According to the World Bank’s “Doing Business 2016”, India ranked 183rd out of 189 economies in terms of construction permits, requiring on an average of 40 procedures to get permits as compared to an average of 15.1 in other parts of South Asia and 12.4 in developed nations. It is contended that about a quarter of housing projects in India are delayed and hamstrung, largely due to inept project management and delay in regulatory approval. What makes the developers’ plight unenviable and unendurable, is that over 40 different kinds of approvals and No Objection Certificates (NoC) need to be obtained for building a project, which can consume anywhere between two and three years for construction to commence! They range from land acquisition, registration, transfer, taxation and a slew of permissions and clearances from babudom.

The new Act is deafeningly silent on these vital issues that have an overriding bearing on the affairs of the realty companies from functioning without hassles and with minimal of approvals from various agencies to make the process simple and devoid of delay.

On their part developers should also be transparent in their dealings on taking public deposits to finance real estate ventures from household savings. For instance, realty company Unitech has not honoured principal amount of short maturity after paying a one-time interest to legions of its small term depositors, as it was revealed at the National Consumer Complaint Forum.

It is unfortunate that investors can have recourse through courts under various acts such as Consumer protection Act, 1986, Indian Contract Act, 1872, Specific Relief Act, 1963 for genuine grouses against developers/real estate companies. But these are all decades-old pieces of legislation, not designed for the digital age for expeditious redress. The financial sector regulator, Securities and Exchange Board of India (SEBI) does not regulate real estate activity or real estate companies.

The proposed Real Estate Regulatory Authority, both at the national and state level, should have the remit to keep track of such odious practices of hoodwinking gullible investors of their life-time savings by realty companies and penalize them so that the rotten apples are jettisoned and the persistently recalcitrant ones do not get let off.

As realty magnates have the tendency to arrange a line-up of celebrities to promote their development projects, Naidu jocularly remarked: “We are trying to make the beautiful advertisements given by developers in front page of newspapers, dutiful. Our ultimate intention is to ensure consumer satisfaction. Once the Bill is notified, you will get more investments in the real estate sector, early clearances and property prices will come down”.

Whether all this happens in that sequence or not, the fact remains that cooperation of the states in enacting their state legislations or bringing the extant ones in conformity with the Central Act before long, should be on a faster track to gain the confidence of the people involved. It is also a travesty of justice for the stakeholders and shareholders as the Act has proposed multiple forums for dispute resolution of consumer grievances. Even as the Act debars any civil court from exercising jurisdiction on such matters, consumer forums under Consumer Protection Act 1986 are not excluded. Besides, the Act accords the consumers the discretion to recant a pending matter from a consumer forum and file it before the regulatory agency charged with the Act.

As a result, the consumer court and the proposed regulatory agency for the realty sector would continue to simultaneously command jurisdiction, enabling forum-shopping and conflicting jurisprudence, according to domain experts. This is bound to put paid to conferring any real benefits to market participants and consumers.

However, all said and done and despite warts and all, the Act is bound to transform the domain from business-as-usual to putting in place a framework that could ensure genuine growth.

Summary

  • The Real Estate Act promises transparency and accountability in the housing construction and realty sector at large
  • But states have to bring their legislation in line with that of the Centre, their bureaucracies have to streamline land acquisition and building approvals
  • The existence of multiple forums for dispute resolution may lead to conflict over which body has the last word on settlement
  • It is not sans reason that the 2015-16 Economic Survey said real estate and ownership of dwellings is a crucial contributor to the economy, constituting eight per cent of India’s gross value added (GVA) in 2014-15 and grew by 9.1 per cent

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