DAWN OF NEW ERA OF TRANSPARENCY

Real Estate Regulatory Act has created a super buzz in the real estate market and industry. Everyone related to the industry whether its buyer, developer, local bodies, industry associations, etc are discussing the impact of this law and the way it will change this industry forever.

While there are many words used for this law like “Strict”, “Stringent”, “Draconian”, “Progressive”, “Consumer Friendly”, “Futuristic”, etc., I will describe this law in one sentence and i.e “A superb visionary Law which will usher in the era of transparency in real estate, though drafted badly”.

Sometimes we should keep aside the errors of drafting, short sightedness of the law, impractical expectations from developer, unreasonable penalties, no regulation for government bodies, no rules regarding timely approvals and absence of equilibrium & instead keep our focus on the positive developments that will happen because of RERA. In today’s discussion we will do that in a simplified manner to create better understanding under two categories i.e. buyer and developer.

Benefits to Buyer

Transparency: Biggest benefit of this law for the buyers. All developers will have to register their ongoing projects Where the area of land proposed to be developed exceed 500 square meters and the number of apartments proposed to be developed exceeds eight with the authority and provide all the legal documents, construction timeline, details of amenities and facilities offered, details of common areas, promoter company details and its background, details of previous completed projects, etc. prior to advertisement, marketing, booking, selling, offering for sale, inviting persons to purchase in any manner. The developer will also update the details on the website of RERA at the time of registration and then quarterly. Quarterly updates will be related to construction, sales and inventory.

Timely Delivery: As the promoter will be required to provide the date of completion of the project in the agreement, promoter will be under obligation to fulfil the commitment. Also as there will be quarterly updates on the RERA website regarding the construction stage of the project, there will be closer monitoring of the construction speed and thus timely possession. The chances of timely possession will also improve because of the fact that 70% of the sale proceeds from the project will have to kept in a designated escrow account and such amount can only be used for the project development. As 70% is a huge sum and there will no diversion of funds from one project to another, construction speed will improve considerably leading to timely delivery. The RERA law provides for stringent penalties like payment of interest for delayed construction period and full refund with interest in case of delays and if customer opts for full refund instead of delayed possession. Such strict norms will motivate the developer for speedy construction and adhering to the construction timeline.

Secured Transaction: The buyer/customer will no longer need a lawyer or chartered accountant or be one himself before entering into real estate transactions as all the ongoing and future projects Where the area of land proposed to be developed exceed 500 square meters and the number of apartments proposed to be developed exceeds eight, will be registered with RERA. Due diligence of legal title, promoter background, drafts of agreement and deed, maps approval, necessary certifications, NOC’s, etc. will be done by RERA authority before issuing registration certificate. The buyer before entering into transaction will take the registration code from the developer and enter that code on the website of RERA. Once right code is entered, the website will provide all information and documents as required by the buyer for taking an informed decision for buying the property.

Also the decision by central government to bring all real estate agents under the ambit of RERA is absolutely right and beneficial for the buyers. As in maximum transaction brokers are involved, there mandatory registration with the authority and regulation of their businesses as well provides further impetus to the government target of providing an environment where one can buy the property without any risk.

Product Quality: There will be a huge uplift in the quality of construction in India. Promoters will be liable for any structural defect or other defects in workmanship, quality or any provision of services noticed within a period of five years by the allottee from the date of handing over possession. The developers will make sure that buildings that are constructed adheres to best quality norms and that they sustain for long term and do not develop any structural or other defects. Also the promoter has to make sure that project is developed in accordance with the plans and structural designs and specifications as approved by the competent authorities. Promoter will not be able to make any major change in the project without written consent of two-third allottees after disclosure.

Benefits to Developer

Timely Payment: The RERA law makes it absolutely clear that all the buyers will have to adhere to the payment plan as decided mutually with promoter. Today one of the biggest problem faced by developers is that even after completing construction as per schedule, buyers don’t pay their instalments according to the decided plan and this leads to liquidity crunch and eventual delay in project completion. With clear guidelines regarding timely payment and right to the developer to charge interest in case of delays will nudge the buyer to pay his dues on time. Also in case buyer does not follow the ruling of the RERA authority and does not clear his dues, there are strict provisions for imposition of penalty and imprisonment for one year as well. We must understand and realize that both timely delivery and payment are the essence and soul of real estate transaction.

Clarity in Rules: Once all sections of RERA are notified and authority is established in every state, developers will be sure about the rules and regulations they have to follow. This law clearly states that No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which the Authority or the adjudicating officer or the Appellate Tribunal is empowered by or under this Act to determine and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act. Also once the authority issues registration certificate for the project, the buyer can be rest assured that all the documents of promoter/Project are proper and legally correct. This confidence in buyer about legality of any project will increase the number of transactions for RERA compliant projects. The developer also knows from the day one that what are his duties, responsibilities and the consequence he has to face in scenario where regulations are not complied with.

Ease of Project Finance: Develop and Promoters who adheres to RERA law and whose projects are registered with RERA will enjoy premium over the others. Banks/NBFC’s/ will be much more comfortable in financing a RERA registered project compared to one which is not registered. As the number of developers and projects will drastically reduce over time because of such stricter laws and raised regulatory bars, banks and NBFC’s will compete fiercely to provide finance to the serious promoters. Also the risk of banks will reduce quite a bit as RERA authority will be issuing registration certificate to a project only after complete due diligence thus reduction in risk premium. Project financing will be done at discounted rates and at faster speed for RERA compliant projects. FDI flood gates will also open as foreign investors will be comfortable and happy to invest with transparent and law compliant developers.

Stability and Trust: One thing which is sure is that number of players in the market will go downhill over next few years. Companies whose main business is real estate, who are serious about their business, wish to comply with laws & act in transparent manner and whose bread and butter is real estate business will only remain in this market. As the bar is raised to such high level and strict laws are imposed, people entering into any industry to make quick money through unlawful means goes down dramatically. The companies who remain in the business for long term after RERA will be stable and will enjoy trust of the buyer. One thing we must remember is that “Trust” is the most important factor for success of any business. Promoters who will have that stability and buyers trust will enjoy premium for their product resulting in better bottom line over coming years. Though costs will increase in short term and instability will be there for some time because of new and evolving law, in long term a massive uptick in real estate business is on the cards.

Different people have different understanding of the law and every law evolves because of the interpretations done by the judicial authorities, but the law stays. This law is here to stay and it’s better that developers tighten their belts and business practices and become law complaint as soon as possible.

At the end, I have one prediction to make and that is “Over next five years, a massive boom in real estate industry will unfold. This boom will be something not heard and seen before. Companies operating in this industry will be viewed with respect and valued at levels never seen before.”

 

 

Written By

Hitesh Dhanuka

Chartered Accountant

Director, Dhanuka Group