Regulator only first step; grey zones only partially addressed

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A closer look suggests it is just the first step in the right direction and the Regulator as of now only partially covers the grey zones. 

Legal Hammer, Judicial Review, Real estate regulator, Regulation in property market, Builders cheating, real estate fraud in India, Track2Media Research, Track2RealtyAfter years of delay and confusion around what could be the ideal mechanism to have a Regulator with the Indian real estate, suddenly the political compulsions paved the way for a new built environment with Real Estate Regulator. It has no doubt given a facelift to the business reeling under the crisis of confidence.

The collective consciousness of the homebuyers at large as well as the key players of the realty business have their own reasons to cheer up the move, yet a closer look suggests it is just the first step in the right direction and the Regulator as of now only partially covers the grey zones.

There can be no denying that the Regulator ensures transparency in the sector, separates serious developers from fly-by-night operators and safeguard the buyers’ concerns with regard to project delays and construction defaults. But a closer look at the fine prints of the Regulator Bill suggests it has to go a long way through trial and error before a free & fair mechanism could be evolved.

Concerns galore

There are legitimate concerns of both the homebuyers and the developers that seem to have not been addressed. For example, what if the sanctioning authorities delay the project clearances, since the Regulator does not regulate the government officials. Will it lead to a breeding ground of corruption in that case?

Will it add to the litigation, further delaying the project timelines? What if the States delay the implementation of State Regulatory Authority? Does the government have the support infrastructure to register and make online the number of launches that are happening every year?

Where should the buyer approach in case of any grievance – Regulator, Appellate Tribunals or various consumer courts? From the buyers’ standpoint though punitive action against the defaulting developer sounds justice, but the Bill does not seem to answer as to how will the Regulator ensure that the project is finished and the homebuyers get their apartment. Certainly, the Regulator sounds more like an administrator who does not have any mandate or authority to make the supply side seamless.

Due appreciation

In the meantime, the leading voices of the business are appreciating the move in a bid to be seen as being in favour of reforms. Anshuman Magazine, CMD, CBRE South Asia calls it a significant announcement. He believes the Real Estate (Regulation and Development) or RERA Bill will have a far-reaching implication for the real estate and construction sector. It will help regulate the sector and promote transparency.

“If implemented in the right spirit, it could facilitate greater volumes of domestic as well as overseas investment flows into the sector. Homebuyer confidence in the property market is also likely to revive,” says Magazine.

Expressing pleasure, Vikas Oberoi, CMD of Oberoi Realty says when the Bill will become an Act, it will ensure more transparency in realty deals and help protect the rights of the buyers. This will boost buyer confidence and in turn will also help increase sales. This Bill also looks at the developer’s interest by taking into consideration external factors in case of project delays.

“This Real Estate Regulator will look at all stake holders – the buyers, developers and the authorities. We hope all the States will start adopting this act without any further delay so that the housing industry witnesses uniformity across the country to ensure that our Prime Minister’s goal of Housing For All by 2022 is achieved,” says Oberoi.

David Walker, Managing Director, SARE Homes says the passing of the Regulator Bill will give homebuyers the confidence to return to the market. The Bill will make real estate more transparent and organised and responsible builders will prosper.

“We encourage the government to also bring EDC charges paid to local authorities under the scope of the regulator to ensure timely delivery of infrastructure that has been paid for by homebuyers. A more formal and regulated industry should in time also benefit from improved access to capital markets,” says Walker.

Rohan Agarwal, Managing Director of Mumbai-based Geopreneur Group believes this is a much needed Bill for revival of the consumer’s faith in the real estate sector which was lost over the past half a decade. “It will also revive the faith of financial institutions in the developers as it will put a timeline on the project. The fact that only a RERA approved project can be promoted and sold by a developer in a given timeline only will make the buyer’s life easier.”

Aakanksha Joshi, Associate Partner, Economic Laws Practice sums it up well when she says that given that the Regulatory Authority will now need to be constituted, property buyers may still have to wait for the law to come into force. Further, the manner of implementation of this legislation is yet to be seen and builders may be anxious given the new regime.

“This Act nevertheless is a step in the right direction for property buyers given the detailed disclosure requirements, stringent penalty provisions and restrictions on deployment of funds and change in plans by promoters,” says Joshi. 

Voices of dissent

JC Sharma, VC & MD, Sobha Limited calls it a big step in the right direction but adds certain riders. It will help distinguish good real estate companies that conduct business by the book from those who have not. The Bill will definitely enhance the credibility of the construction industry as a whole by promoting transparency, accountability and efficiency in execution of the projects. The provisions like fast track dispute resolution mechanism and disclosure of all approvals by developers will help transform the housing sector.

“The Bill made no mention of time-bound approvals by various Central, State and local agencies, which is critical to the growth of the sector. We believe that the decision to have up to 70 per cent of the funds collected from consumers into an escrow account may not be the best way to make use of the collected funds, especially at a time when liquidity in the sector is not too good and the poor availability of bank finance impacts the consumers as well. The inclusion of the existing projects in the ambit of this Act may cause lots of confusion as developers might already have taken advances from the customers and might have sold it on the super built up area basis,” says Sharma.

A candid Neha Hiranandani, Director, House of Hiranandani points out that the bill has failed to bring the government authorities into the ambit who are responsible for the continuous changes in regulations, lack of transparency and predictability in functioning. The Bill is therefore incomplete in its approach, and the outcome of this is going to be more expensive products for consumers.

“Placing 70 per cent of receivables in an escrow account in an economy with such high interest rates is going to lead to a complete shift in the business model of many companies. Owing to lack of holistic approach, the end price to consumers will continue to rise, putting a severe strain on affordability. In June 2015, The Doing Business Report by the World Bank ranked India 183 out of 189 countries in ‘Dealing with Construction Permits’. The passage of the Bill adds to the layers of bureaucracy and timeline and puts pressure on an already strained sector,” says Neha.

In conclusion

Nikhil Hawelia, Managing Director of Hawelia Group has a caveat when he questions the timelines of implementation as well as the final time by which the trial & error with Regulator will be over. He believes if it took several years in the power corridors, then in all likelihood it will take many more years at the policy level where the Centre and the States might be at loggerheads in many cases.

“The Urban Land Ceiling Act was passed in 1976 and still I am not sure whether it still has been in practice across the country. The problem is not with the need of the Regulator but the intent with which it has been introduced. It has some provisions that indicate strangulation than actually easing the supply of the housing stocks in a timely manner,” says Hawelia.

It is true that the Regulator Bill does justice to its prime cause of protecting the interest of the consumers through setting up of Regulatory Authorities in each State, mandatory registration of all real estate projects and providing additional avenues for grievances. This will bring in a systematic approach and enhance transparency thereby giving a boost to domestic and foreign investments which will aid growth of the sector.

However, there are many crucial aspects which have either not been addressed or the Bill is silent on it. Moreover, the roll out of the Regulator regime and the response at the State level is very important to make this much-needed mechanism a success. Many rules might be changed or altered at the State level.

More importantly, unless both the demand and supply side falls into the ambit of the Regulator with powers to take quick actions, a regulatory regime will after initial euphoria only add to the confusion than lend image makeover to the business which needs credibility & trust in the first place.

Short-term impact

  • Rise in cost of capital as surplus cash from project sales will be locked in, 
which is typically used as growth capital
  • Adverse impact on margins as increase in cost of projects would have 
limited leeway to pass on given weak market dynamics.
  • Industry consolidation with non-serious players moving out and credible 
developers gaining market share
  • Reduction in project launch in near-term till developers assimilate the 

Long-term gains

  • Lesser execution and fraud risk
  • Better cash flow discipline & cost of capital
  • Safeguard against delay & default
  • Stronger stakeholders’ confidence with homebuyers, investors and financiers knowing what they are paying for

 By: Ravi Sinha


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