Some relief to home-buyers

Home-buyers in the country can at long last heave a sigh of relief with Parliament recently passing the much-awaited Real Estate Bill, known in legalese as the Real Estate (Regulation and Development) Bill, 2015 with both the Upper and Lower Houses clearing it within a week. In the course of five years it was on the anvil, the Bill underwent multiple rounds of parleys with copious alterations incorporated into its original text in different contexts. The Bill is aimed at instituting a regulatory structure so as to regain confidence in a sector that is riddled with opacity and unregulated players holding desperate house-buyers on the tenterhooks.

It is not without reason that the 2015-16 Economic Survey said real estate and ownership of dwelling is a crucial contributor to the economy, constituting eight percent of India’s gross value added (GVA) in 2014-15 and grew by 9.1 percent. The sector has grown at a compound annual growth rate (CAGR) of 8.1 percent since 2011-12. But the construction sector saw a significant slowdown in the last few years, with growth rates of 0.6 percent in 2012-13, 4.6 percent in 2013-14, 4.4 percent in 2014-15 and 3.7 percent in 2015-16, led by the weakening of both domestic and global growth.

Even as the slowdown in sales in the housing sector has led to a sharp spurt in the inventory of unsold housing units, realty prices are just holding up due to heavy inflow of capital in the sector 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 in this sector, including amendment of the FDI policy and removing the minimum floor area and minimum capital requirement provisions. 

The RBI and the National Housing Bank (NHB) have also reduced risk weight for individual housing loans of up to 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 percent 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.

It is against this setting that the passage of the Real Estate Bill needs to be viewed as a positive development, particularly when other important pieces of legislations have been embroiled in controversy and opposition from the non-NDA parties. The Union Minister of Housing and Urban Poverty Alleviation and Parliamentary Affairs, M. Venkaiah Naidu, said a total of 76,044 companies are engaged in the real estate sector with 17,526 projects having been launched in the last four years with an investment of Rs 13.70 lakh crore.

The humongous heft of projects and players alone vindicates that this sector should be run on transparent lines with Naidu in his trademark alliteration asserting rather reassuringly that the Bill “brings in only regulation and not strangulation”. A noteworthy aspect 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 rows and to ensure timely completion and handover.

Under the new law enshrined in the Bill to be set as rules, builders will have to register all projects with the authorities and disclose all details. And they can begin construction only after getting all the approval required for this purpose. Builders will have to deposit 70 percent of the money received form 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 any other activities unrelated to the primary purpose for which money was raised from the hard-pressed home buyers.

Other prominent features include, among others, 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 are salutary features that will boost the morale of home buyers. The reduced compulsory registration of the project is significant for heightened quality of supervision by the regulatory agency, because in the previous version of the bill, constructions below the size of 1000 square metres or 12 apartments were permitted.

While enough safeguards are built in to secure the interests of consumers (homebuyers), the builder community has its own set of concerns particularly those pertaining to obtaining clearances from various departments of the government 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 unsolved. 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 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 Certificate (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 the babudom.

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 could be seen from the complaint board, 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. These are all decades-old pieces of legislation, not designed to 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 penalise them so that the rotten apples are thrown out and the willful defaulters do not go scot free.