Understanding regulations

This year, the government churned out one of the most awaited initiatives to regulate the unorganised housing sector through the Real Estate Regulatory and Authority (RERA) Act. The implementation of the Act is a promise to improve India’s accountability and transparency score. While RERA has been generally termed as ‘safeguarding home-buyers’ interest’, it is actually a boon for developers in this country to re-establish their credibility.

What it means to developers

Small-time developers will find it hard to sustain as they will be under the vigilant scanners — be it the regulators or the home buyers. The industry will witness an increase in the joint development agreements and mergers and acquisitions because the Act will ease the stress in finances of the companies by giving an impetus to investors to bring in funds into a more organised sector.

RERA has the ability to bring about a change in the sales model in the residential sector. At present, developers are dependent on funds from home buyers at the pre-launch/launch stage. A good regulation and transparency due to the new law will help the developers to ensure timely construction.

Additionally, it will limit debt and diversion of funds for other projects. Developers across the country now need to deposit 70% of the buyer collections in a separate escrow account dedicated to fund land and construction costs for the specific project. This move is certain to enhance the liquidity for developers, and the subsequent financial clarity would encourage renewed interest in the sector from PE funds, apart from end-users.

In the coming years, it will be exciting to see how the RERA Act will pave the way for a new paradigm shift in the real estate industry. However, implementation is the key, and the Government needs to ensure that the hurdles regarding approvals are considerably minimised. Certain requirements, such as single-window clearance and time-bound approvals will boost the ease of doing business for developers.

For home buyers
From the point of view of potential home buyers, the entire process is a holistic
investment, where it is also considered to be an asset creation for the next generation. There is always the underlying fear of fraudulent activities accompanying such a transaction. If there were any defaults by the builders, buyers would knock on  the doors of consumer forums and civil courts. But the RERA Act stipulates setting up of various bodies like the Central Advisory Council (which will deal with the implementation of the Act and other policy questions), an Appellate Tribunal (to adjudicate cases within 60 days), and a state-level Real Estate Registration Authority (RERA) for registration of all projects.

As mentioned earlier, to safeguard the home buyers’ interest, the Act stipulates that 70% of the amount paid by the buyers be kept aside in a separate account by the developers. These funds can only be used for construction purposes and the developers are not allowed to invest this money in any other projects. Also, in case the deadline given by the builder is not met, the buyers are entitled to a certain amount of interest from the builders – the motive here is to compensate for the interest that buyers are paying on home loans.

Foreign investments
Foreign developers and investors will now regain their confidence and stimulate their interest in India to invest in residential and commercial property. Global investors are making selective investments in India’s real estate market, either directly or through joint ventures. Global PE funds are showing more muscle to invest in Indian real estate post the RERA Act initiative.

The Bill ensures the protection of consumers’ interests and protects them from fraud. This will impart a lot of confidence to NRIs to invest and will help them make much better and quick decisions. The future of the real estate industry on the  whole, will depend on faster implementation of projects and delivery as per schedule, while enabling momentum in demand. Although the Act only comes into force by March 2017, we all should realise that setting up a functional regulatory authority with judicial officers and an appellate tribunal is essential for its smooth operation.

(The author is chairman & managing director, Mantri Developers Pvt Ltd)