- May 29, 2017
- Posted by: admin
- Category: Economy & Markets, Research Reports
-Report by Aditi Jain
The Indian realty sector deserves attention as it directly impacts the Indian Economy’s health. In the past few months, the Indian government has been making major changes to it by introducing RERA. According to RERA (Real Estate Regulation and Development Act) 2016, every state is supposed to appoint a regulatory authority for the formation of rules applicable for both residential and commercial real estate.
RERA does not cover constructions for the purpose of renovation and projects where the area of land proposed to be developed does not exceed 500 square mts or if the number of apartments proposed to be developed does not exceed 8 inclusive of all phases. The Act plans to control fund manipulation, inefficiencies in real estate and fiscal indiscipline. It will not be possible for unsound players to operate in a properly regulated market. The rule was notified last year and modified on 1st October, 2016.
The Act was to be operational from 1st May, 2017 for all the states, However, only a few states and Union Territories are ready with their drafts. The projects undertaken after 1st May will commence under RERA rules. The laws are non-uniform throughout the states regarding the ongoing projects. The report discusses the rules of RERA and how the different states have modified 0them in their favor.
Why state Regulatory Authority is required even when central rules are out?
This is so because RERA is a central Act but land is a state subject. Construction of homes requires land. The different state governments need to come up with the operational rules to implement RERA.
Purpose of implementation of RERA:
- Big developers/ players have been diverting funds to other projects. The possession of the flats is never timely because of delay in completion of the projects (and buyer’s money is stuck with the developer). Now the escrow account clause will take of this problem and penalty on non-compliance of rules will create fear in developers.
- REITs (Real Estate Investment Trust): REITs are listed entities that invest in leased office and retail assets. It allows developers to raise funds by selling completed buildings to investors.RBI’s decision has the potential to attract a large number of REITs listing in India by offering a safe asset class to invest in and provide competition to foreign institutions. The RBI has permitted banks to invest up to 10% of the unit capital of REITs. The REITs will invest only in a transparent system where the companies want specific rules to operate in. Inclusion of banking system and REITs will itself bring in more clarity in the real estate. This is also one of the reasons that property share prices have been rising since the RBI announcement about REITs. Introduction of RERA is slated to spur transparency and boost confidence amongst the investors.
- NBFCs and Private Funds– Debentures interest rates might be reduced after the introduction of REITs and banks will be willing to loan buyers after RERA.
The Centre tried to bring transparency into the real estate sector with the implementation of the following rules:
|1.||Escrow account clause: Separate bank account# for maintaining 70% of buyer’s money for construction purpose||Avoid misuse of funds|
|2.||Separate Account to be audited after six months after every financial year by CA in practice||Avoid fund manipulation|
|3.||Warranty for 5 years for any structural defect after possession, to be rectified within 30 days without further charge||Quality of construction taken care of by promoter|
|4.||No more than 10% of the total cost of property to be taken as booking amount/advance payment without entering into registered agreement for sale||Beneficial to buyer whose money will not be stuck with developer|
|5.||“Apartment” mentioned would mean block, chamber, dwelling unit, flat, office, showroom, shop, godown, premises, suit, tenement||No discrimination in sale of properties|
|6.||Each phase in project to be considered as standalone project and registered separately under RERA||Each activity will be under the watch of RA|
|7.||RERA registration number will be provided project wise and can’t be marketed/advertised without it||Least possible chance of bluffing buyers|
|8.||Projects with CC, OC can only advertise from May 1st. Ongoing projects cannot advertise without RERA registration number||Will force the developers to register with the RA* soon|
|9.||Builders required to register with RA and furnish information like financial statements, copy of legal title deed, details of projects of past 5 years, commencement certificate||More transparency|
|10.||Developer responsible for obtaining completion, occupancy and lease certificate||Reduce burden on buyer and lesser chances for the developer to cheat the buyer|
|11.||Required to maintain a website for public viewing, of all real estate projects for which registration has been given||Completely transparent system without any flaws to cheat buyers|
|12.||Adjudicating Officers, Real Estate Authorities and Appellate Tribunals shall dispose of complaints within 60 days||To avoid delay in proceedings|
|13.||Penal provisions such as imprisonment of promoters/employees in case of failure to comply with regulations||Create fear in the developer community|
*RA: Regulatory Authority which is appointed for every state
#Separate account is a current account opened in the name of the promoter with a scheduled bank.In this escrow account, the bank and the account holder (the builder) enter into an agreement and appoints a trustee for the account. In real estate projects, the banks itself would be the trustees. The role of the trustees would be to release the funds as per the terms and conditions of the agreement.
- The tax payers will get tax benefits in home loan payments if they receive Occupation Certificate under the RERA.
- Delay in completion of projects can be mitigated: no more diversion of funds to other projects or buying of new lands because the developer will be responsible. Developer will be obliged to pay compensation for delay with an interest rate of the State Bank of India’s highest marginal cost of lending rate plus 2% within 45 days of it becoming due. This would come to around 11% to 12%.
- Several states do not have planning areas defined and many census towns are still governed by panchayats. These areas would not ordinarily fall within the description of ‘urban areas’ as defined under the Act.
- Occupancy Certificate (OC) is issued by local authority for occupation of building having civic infrastructure. Developers are rushing for OC because the on-going projects don’t want to be in the purview of RERA. If OC is issued, the registration is not required under RERA. If on-going projects will not be considered in the state rules, then the whole purpose of the Act will be defeated. The quality of construction, time of completion and the possession can be compromised later. OC is supposed to be given to allotee under RERA.
The rules specified in the Central Act were drafted to create a transparent system in the real estate sector. The states have come out with their draft rules which has not been in line with the Central Act.
- Home buyers can’t file complaint against unlisted developers on RERA website: existing/ ongoing projects are given three months to be registered. This does not provide relief to the people whose money is already stuck with the promoters.
- The ongoing projects meant the projects without OC and CC from 1st May will be under the purview of RERA. The definition of ongoing projects is not homogenous throughout the states. It has been diluted to favor the developers. Some states have taken OC and CC to be interchangeable which will infuse further problems for the home buyers.
- The rules for non-compliance specifies imprisonment (3 years) and penalty fees (10% of project cost). The states have forgone the imprisonment clause to avoid creating much fear among the developers. They have added a clause of compounding of offence. The promoters can again get away by paying bribes.
- The liability for structural defects lies with the developer for 5 years after possession by the buyer. This time frame is not clearly mentioned in some of the draft rules by the states.
- RERA would not be able to penalize early delays by developers i.e. only the delays after 1st The builders will themselves define the timeline of completion and cannot be penalized until the developer registers under RERA.
- RERA unfortunately does not take the issue of commencement certificate into consideration. The commencement of construction will still be a pain area as its issue involves a lot of corrupt practices like bribery or wait ages to get the certificate issued in a legal way.
The complete purpose of RERA will be defeated if the states do not act according to the Central RERA. The big players in the sector will get their way out and the buyer will again suffer. This will not help the buyers get their dream houses as they had expected earlier. The Centre should take care of these deviations and give orders to modify the relaxed rules.
STATE- WISE REGULATIONS:
Till date, the following states and union territories have come up with their draft rules.
|STATE/ UNION TERRITORY||IMPORTANT HIGHLIGHTS/ REGULATIONS AS PER DRAFT RULES|
|Andhra Pradesh|| The Following ongoing projects are excluded:
1. Amenities handed to local authority
2. Sale deed of 50% of house executed
3. Application filed for CC or OC
Only 10% of project cost will be taken as penalty for non-compliance (dilution of the central act)
|Bengal||No meeting with the government held so far regarding RERA rules|
|Delhi||Promoters need to provide details of only those court cases which have been disposed of during last 5 years (despite housing ministry stating that builders need to provide details of all pending cases)|
|Haryana||Excludes projects which have received CC in case of plotted colony and OC for building blocks of integrated complexes like group housing|
|Gujarat||Exempts all the projects before November 2016 from RERA|
|Fight for RERA has begun and the protesters want the ongoing projects to be a part of the rules (Act should be brought without changes in tandem with the central act)|
|Uttar Pradesh||·Ongoing projects definition is diluted: Excludes following
1. 60% of sale deed completed
2. Application filed for CC
3. Services handed over to local authoritiess
No reference to the rate of interest at which the money has to be refunded to home-buyers as against central RERA Act
*OC: Occupancy Certificate which authorizes customers to stay in the property (issued after standards, fire and elevator safety norms, drainage are in place).CC is completion certificate which means that the project has been developed according to the layout.
Andaman and Nicobar Islands, Chandigarh, Dadra and Nagar Haveli, Daman and Diu, Lakshadweep, and National Capital Territory of Delhi have their laws in line with the Central Act.
WHY PRICES RISING FOR REALTY?
Source: RBI Press Release
According to a press release by the RBI, the property prices have not come down as it was expected after demonetization (All-India HPI recorded a sequential increase of 2.2 per cent in Q3:2016-17). The prices have been bullish. Benami Transactions Act, GST and RERA together have skyrocketed the property prices in 2017. It seemed that people hid their black money from government by buying property in fictitious names and enjoying the benefits. So Benami Transactions Act was implemented. Sales in residential property sector are effected by sentiment and trust factor which is taken care by RERA. The tax component is addressed by GST.
The realty sector has seen some fundamental change that it has been shooting since January, 2017. The RBI announcement about the REITs has also been one of the factors.
There may be a small negative impact also. After RERA is fully operational, the developers may transfer the premium to the home buyers. This premium is the risk of delays and qualitythat will be now borne by the developer. There is no cushion for developers to absorb these extra costs and hence may be transferred on to the customers by way of price rise. This case is analogous to increase in taxes.
It could also be possible that there is short supply of houses just after the RERA implementation because very few developers have registered with the RA and the buyers have been waiting eagerly for this act. The developer with ongoing projects has a three month window to register under RERA.
OTHER GOVERNMENT STEPS TO IMPROVE HOUSING SECTOR
Apart from the major policies, some policy decisions announced for enhancing the housing sector in India are:
- Affordable Housing(backbone of the Indian real estate sector) has been given infrastructure status.
- Government has announced construction of 1 crore rural houses by 2019.
- Fund allocation to Pradhan MantriAwasYojanahas been increased from 15,000 crore to Rs. 23,000 crores.
- Developers will get tax relief on unsold stock. They need to pay capital gains only in the year when the project is completed.
- New FDI policywill help the sector get access to larger pool of funds.
- National Housing Bank (NHB) will refinance Rs. 20,000 crore loans.
- Fund allocation for development under AMRUT andSmart Cities projects has been increased to Rs. 9,000 crore.
he concept of RERA is excellent if implemented as it is. But the diversion and modification of rules by the states from the Central Act (issued by HUPA) will not fulfill the purpose of RERA. Some states like Karnataka started ‘Fight for RERA’ days ago for the implementation of the Central RERA. The home buyers are stressing the state governments to not to modify the original Act rules so that the benefits are not compromised with. The state wise regulations stated above shows that the state governments are unwilling to dump the benefits of big players of the real estate.