Real Estate Bill-2016: Triggers ripple impact in realty sector

By Jeet Singh

Real Estate Bill 2016
The news of the clearance of Real Estate Regulatory Bill-2016 in both houses of Parliament cheered players across segments in the construction and real estate sector. The move will not just destined to bottom out recession from the country's realty sector but also expected to have a ripple impact on the entire economic scenario. As the bill commits to put in place a single-window clearance mechanism for all approvals, buoyancy is expected to trickle down both in the residential and commercial segments in the medium-to-long term basis largely spurred by lower interest rates and higher consumer confidence. The Act provides unwavering protection to home buyers by facilitating timely completion of projects with greater transparency during the entire project completion period. Moreover, government's commitment to boost the housing sector by launching multiple countrywide programs will further add to the momentum in the construction and realty sector. In its entirety, it will turn out to be a game changer as the increased construction activities will result in higher demand for building materials like cement, steel, logistics and allied products and services, which in turn will spur job generation and push the pace of economic activities leading to higher GDP growth.

As a matter of fact, the approval of the Bill has already set the realty sector on the roll as the builders have started speeding up the construction activities on projects that are under construction especially those delayed are being fast tracked. Bill seeks to protect the rights of home buyers, mandates registration of projects, including those that have not got completion or occupancy certificates. Under the new norms, registration will require builders to set aside funds collected from buyers and pay interest in case of delays but the registration of projects may still be about 15-18 months away providing enough time for those projects that are currently 60-70% complete as currently out of 17,000 projects under construction across top 27 cities, 56% are currently 60% complete. Commenting on the development, managing director of the Mumbai-based Hiranandani group, Niranjan Hiranandani, said, that the Bill would be an additional reason to complete construction quickly as registering existing projects might delay them further and that builders want to use this time to complete existing projects as quickly as possible to avoid penalties and other punitive measures laid down in the new legislation.

The moment projects under construction got registered with the regulator, they need to follow the same rules as new projects. Developers have to deposit 70% of the amount collected from buyers in a separate account to cover the cost of construction, including land. In addition, developers will also have to pay the same interest rate for any delays on their part as buyers do as and when their payments to builders are delayed. The national president of the Confederation of Real Estate Developers Associations of India, Getamber Anand, said that the quest of developers will be to complete existing projects in the window available to them, provided everything else falls into place, notably completion certificates and other post completion approvals that local authorities have to provide. As per new norms, promoters will be required to register projects with the regulatory authorities disclosing project information including details of promoter, project schedule of implementation, layout plan, land status, status of approvals and agreements. In addition, they are also required to give details of real estate agents, contractors, architects, structural engineers and so on ensuring complete transparency, accountability, scheduled execution and commissioning of the projects.

Contrary to the common view, developers are also apprehensive that the registration of under construction projects could lead to delays and are also concerned that the new provision of setting aside 70% of the funds collected from customers will strain their already stretched liquidity position. However, experts opined that the language of the law is not retrospective but prospective and the attempt is to only bring transparency and order into the entire functioning of this otherwise unorganised sector. Partner at law firm Seth Dua & Associates, Vasanth Rajasekaran, said the intention is to give freedom to builders according to their business plans and security to buyers as it seeks to harmonise the interest of both sides. This means that after depositing the funds, the amount spent on buying land can be withdrawn by the builder proportionately and the remainder has to be used for the construction of the project in question. The money that hasn't gone into the separate account remains with the builder. Property experts opined that the provision will push builders to pay by cheque for land buys and the move has been aimed at reducing the flow of black money in the real estate sector.

The Bill makes it mandatory that the government must establish the Real Estate Regulatory Authority within one year of the Act coming into force. Once the authority is in place, portions of Bill dealing with registration of real estate projects and real estate agents and the functioning and duties of promoters will be notified. It also makes mandatory to dispose of complaints at both appellate tribunals and regulatory authorities within 60 days thereby setting up a time line for the resolution of disputes. On this score, the Bill has set a deadline and has also laid down provisions for imprisonment up to three years for promoters and up to one year for real estate agents and buyers in case of any violation of orders of the appellate tribunals or monetary penalties or both. Even in case of delays, the Bill has sought to end the asymmetry which was in favour of developers. According to the new provisions, both consumer and developer will have to pay the same interest rate for any delay on their parts. Since the pricing of housing units has been a grey area, the Bill looks to clearly define the carpet area and states that this will form the basis for purchase of a house, as such it will eliminate the scope for malpractices in transactions.

On its part, the regulator will maintain records of all projects, promoters and agents. It will also monitor compliance of rules on an ongoing basis as developers have to provide updates on progress, besides the regulator will also maintain a database on violators. Under the provision, there will an easy access to the names of promoters, details of the project for which registration has been revoked along with related reasons. And as real estate comes under the purview of state governments, individual states are responsible for setting up the Regulatory Authority at state levels. For resolving disputes, an Appellate Tribunal will be set up to resolve disputes in shorter time-frames. This will be in addition to existing options such as consumer courts. Also, the options for appeals in courts will be limited as other authorities will not be allowed to entertain cases covered under the Bill. The Appellate Tribunal will be headed by a sitting or retired Judge of the High Court with powers to impose punishments such as penalties or cancel registration. Builders can be fined up to 5 per cent of the project cost for wrong or non-disclosure of information and that the buyer will have the right to demand refund with interest as well as compensation for default by the developer and lastly, if there are quality concerns after taking possession, the developer has the obligation to rectify them to the utter satisfaction of the home buyers.

Similarly, commercial real estate has also been brought under the ambit of the Bill and projects under construction are also required to be registered with the Regulatory Authority. The norms for registration of projects, has been brought down to plot area of 500 sq. m or 8 apartments as against 4,000 sq. m proposed in the draft Bill in 2013 and 1,000 sq. m or 12 apartments. Real estate developers are pinning their hopes on the passage of the Real Estate (Regulation and Development) Bill and expect sentiment to perk up in the market. As a matter of fact, they expect that schemes such as smart cities, Atal Mission for Rejuvenation and Urban Transformation, housing for all by 2022 will further boost business prospects and that easing and simplification of foreign direct investment (FDI) rules in the construction sector will also create a ripple effect on the realty sector this year itself. Managing Director, SARE Homes, Vineet Relia said that the smart cities mission is going to be a future growth driver for the sector and the player hopes that the government seed funding can leverage further investment into the sector.

According to the Managing Director, India, Cushman & Wakefield, Sanjay Dutt, the year 2016 is likely to begin on a cheerful note on the back of reforms and increased investor confidence as lax FDI norms and the introduction of real estate investment trusts (REITs) will bring in transparency and enhance investor confidence further in the coming years, he said. Summing up the emerging scenario in the realty sector, Chief Economist & National Director, Research, Knight Frank India, Samantak Das, said that while supernormal appreciation in real estate is a thing of the past, overall growth in the country's real estate sector could hover between 7 and 14 per cent ahead of the launch of the second edition of its Residential Investment Advisory Report 2016 recently. Activity in the office space is also expected to intensify with supply likely to see an upward trend as the commercial sector is also likely to witness net absorption of office space of approximately 30-32 million sq ft, higher than the last year's levels, he added.

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