This Article is From Apr 08, 2015

Opinion: Yes, The New Real Estate Bill Helps You - by Manisha Natarajan

Opinion: Yes, The New Real Estate Bill Helps You - by Manisha Natarajan

Manisha Natarajan

(Manisha Natarajan is senior vice president - corporate affairs and senior editor - real estate at NDTV)

The Union Cabinet has cleared the Real Estate Regulatory bill, albeit a somewhat watered down version of the initial bill proposed in 2013. Next, it will be tabled in Parliament.

The bill could not have come at a better time. There is a complete trust deficit today amongst home buyers and the industry is already paying a hefty price, with rapidly falling sales.

Consider this - the average delay in delivering projects across the National Capital Region (NCR) and Mumbai Metropolitan Region (MMR) between 2011 and 2014 has been 30 months and 20 months respectively. Mind you, these are averages and hence mellow the nasty buyer experience by months. In MMR, 2.70 lakh units have been substantially delayed and are still under construction. In NCR that number is 3.80 lakhs and the all India total adds up to 10 lakhs (Source: Propequity).

Home buyers are tired of being shortchanged at every step and are now punishing the industry - they are simply not buying. Inventory overhang, a figure which measures the rate of unit sales in any market, has gone up to a frighteningly high number of 39 months in MMR, and a whopping 56 months for NCR according to Propequity data.

There are two well-established reasons for delays in projects - delays in approvals from the concerned government authorities, and diversion of funds by developers. While the regulator bill does absolutely nothing to streamline the 50-plus approvals required for a housing project, it has also significantly diluted the clause of minimum balance to be maintained by the builder in the escrow account from 70 per cent to 50 per cent. These are from payments collected from the buyers towards completion of a project. In essence, half of the monies collected from the buyers can still be diverted by the builder towards acquiring land and other businesses.

The argument that developers pay upfront for land, and hence need this leeway, does not ring true. 30 per cent of the kitty is enough for developers to cover a large part of the land costs, and if they are allowed to take out 50 per cent, what's their skin in the game? They have recovered most of their investment, and the risk of the project not getting completed now entirely rests with the buyer.

Even with this dilution though, the bill does hold hope for lakhs of frustrated home buyers across the country. The promoters will be mandatorily required to disclose all information of the project, completion time frame, layout plan, land status, status of statutory approvals etc. This leaves very little room for hiding hard facts.

Projects will have to be completed within stipulated timeframe. The Regulator will cancel registration in case developer misses the project completion deadline and buyers will have to be adequately compensated.

That should bring an end to the injustice of a buyer having to cough up 18 per cent per annum penalty if he delays making a payment to the builder, while his compensation is a paltry Rs 5 per square foot for delays by the developer, which works out to less than 3 per cent for a mid-sized home.

There has also been a noteworthy course correction in the one-sided buyer seller agreement which the Competition Commission of India rightly labelled as abusive while examining the case of a prominent builder before it. The current bill makes provision for a model buyer-seller agreement and stipulates that the developer agreements will have to be in line with the model buyer-seller agreement set out by the regulator.

Another area of heartburn for the buyer has been that he or she simply does not get what he or she is paying for. No project is priced on the carpet area, which is the actual living space that the buyer gets from inner wall-to-wall distance inside the house. Today, almost every developer sells projects on the super area which includes pricing for common areas/facilities plus a hefty mark-up. And a frightening reality is that the super-to-carpet area ratio in the industry has been worsening by the year. In Mumbai, you may pay for a flat of 1,000 square feet and get a living space of almost half of that. The ratio is not that bad in other cities, but why leave room for obfuscating? The bill now mandates that the carpet area of the flats be disclosed and homes cannot be sold on super area, a laudable step towards transparency.

A majority of cases pending in consumer courts in Mumbai and the NCR today are builder-related. The Real Estate Regulator bill mandates that the developer cannot make changes to original plans or the structural design, unless he gets the consent of 2/3rds of the customers. This was a big bone of contention for the buyer, and rightfully so.

An interesting addition in the modified bill has been that real estate agents have been made punishable. Stories of brokers misleading buyers are common.

Last but not the least, there is a provision which also allows respite for buyers and investors who are currently stuck with under-construction projects. All projects which have not received their completion certificates will also be covered, once the bill is passed.

The current downturn in India's real estate is a harsh consequence of some of the worst business practices by not just developers, but also state authorities, who use real estate as the best way to earn under-the-table money. Developers who run well-managed and transparent businesses also suffer. The Regulator bill approved by the Union Cabinet must be passed by Parliament, if buyer confidence has to be restored.

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