RERA: An Attempt To Fill The Void

The Real Estate (Development and Regulation) Act, 2016 has become essential to standardise the real estate sector, and clean up the mess of unpredictability.

Through the Real Estate (Development and Regulation) Act 2016, the government intends to standardise the real estate sector, and establish a new benchmark of transparent realty transactions. The attempt is essential and comes when the market is just ripe, especially after flushing out the ‘toxic cash economy’, predominant in the real estate sector, through demonetization. The enforcement of the Act comes into effect from May 1, 2017 throughout India.

Any project with an area of 500 sq.mt or having 8 apartments’ or more needs to be registered with the regulatory authority. The project and promoter details, financial closure information, project amenities, pure carpet area statement, and all municipal approvals must be shared with the State Real Estate Regulatory Authority (RERA). New real estate entrants, planning to launch fresh projects, would face difficulty in complying. This would phase out non-compliant developers and strengthen the market recall of those who comply with RERA. For developers in metros like Mumbai, Delhi, Bangalore, Chennai, Pune, Hyderabad and others, this could be a blessing in disguise if they sense the opportunity. Information of all project details aids the buyer in making a valid decision. Consumers can easily register a complaint with the respective state RERA against an errant developer, furthering the intention of ‘transparency and candour’ and penalising non-adherents.

Many argue that RERA, with its imposition of freezing 70% of the developer’s sale proceeds for a project, is in favour of the government. By this clause, a developer will not be allowed to withdraw 70% of funds, even to repay the indigenous credit borrowed from a private investor. Consistent operating costs could hurt small developers, possibly throwing them out of business, if such discriminative impositions are introduced. Unfinished projects struggling for funds would also have to be registered with RERA, but these projects luckily could be pulled back into life with new creditors.

Residential prices post RERA, could see a marginal drop before they stabilise. This is in anticipation of the phasing out of non-adherent developers and existing ones recalibrating to the new mode of project conception. Demand is always a constant for which the supply adjusts, hence major inventory clearance is expected before new launches resurges. Liquidity could remain a challenge, but project debt could become more affordable and easier for developers complying with the Act. With its intention of establishing transparency and benchmarking, RERA could reduce price volatility, bring in substantial affordability, and increase genuine end user demand. A more stable long term real estate price cycle is expected which can reduce uncertainties and establish stability in the market.

But some issues persist. Although the Centre has drafted the RERA bill applicable to all states, individually, each state is free to modify the Act’s provisions to suit its concerns and prevalent constraints. This provincial freedom to states could encourage sheltering of violators and reducing compliance standards to a marginal extent. The underlying intention of the Act, to establish a standard benchmarking practice of the real estate industry and its affairs, is thus diluted with this freedom. When standardisation of the real estate sector, the most attractive avenue for parking unaccounted income, is attempted through regulation, such leniency of provincial freedom could prove self-contradictory.

The Act could become a benchmark for assessing real estate projects. House prices could see marginal difference between RERA compliant and non-compliant projects. RERA could establish its might in the next three to four years, after the industry participants adjust their conduct with the requirements. The Act shall elevate the ‘factor of trust’ for consumers to deal with genuine developers. If embraced well, massive large scale investments in the future should not be surprising. Future demand and supply aspects could establish a sustainable real estate market, in which transparency is afforded as a necessity, and not a luxury.

 

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