May 17, 2017 01:30 PM IST | Source:

RERA: It's not a panacea for all evils

This act is not a panacea for all evils. It’s a good start but we should hope and expect more clarifications and amendments in the future. The Act needs more detailing and provisions need to be more robust.

RERA: It's not a panacea for all evils

Vivek Dahiya

A CFO of developer firm recently remarked in a conversation, “At this rate, if so many developers are put behind bars, who would construct and complete their projects? The statement was made in jest but it made me think. Real estate is going through the biggest transformation in the history of independent India. Will the ugly caterpillar undergo metamorphosis or will RERA further complicate an ever-changing business environment?

Changes that have already taken place

The biggest change visible now, unsurprisingly, is in the mindset of developers across India. Based on how developers are weathering the storm, five broad changes have taken place:

1. Focus on completion: Most developers are now in the process of completing their ongoing projects. The clear objective is to avoid a “criminal liability” before worrying about a potential “civil liability”.

2. Change in business plans: Several developers have decided to stop developing residential projects. This is based on their assumption that B2C business in the new legislative environment would be more risky.

3. Change in company strategy: Many builders have decided to focus on their strengths. If it was land aggregation and not development or marketing, they have gone back to only acquiring land and making it developable.

4. No new acquisition: Barring a few exceptions in each city/ region, most developers are currently unwilling to look at acquiring new projects/ lands.

5. Making business processes RERA compliant: Besides registering with Real Estate Regulatory Authority (RERA), developers have to provide quarterly updates online, marketing material etc.

Waning problems 

This legislation, unless it’s implemented in a diluted form at the state level, will ensure that the industry evolves for the better.

1. During the past decades, it was observed that, anyone with surplus capital could become a developer. The only entry barrier was capital. The modus operandi was to buy land, appoint an architect and start construction. Those days are over.

2. Worst of the crop became property agents. The joke was, if you can’t do anything in life, you can at least become an agent. Hopefully, there would be greater regard for law going forward.

3. Ad-hoc initiatives to licence agents was aimed at creating a new source of revenue for the government or track agents in case of fraud. None of those actions bore fruit. A lot more needs to be done to improve this segment of the industry.

Reality check

This act is not a panacea for all evils. It’s a good start but we should hope and expect for more clarifications and amendments in the future. The Act needs more detailing and provisions need to be more robust.

Buyers are better protected now but litigation in India, I fear, will tread the same path it has in other legal processes. It would take a while for the RERA to be set up and populated. The Real Estate Appellate Tribunal (REAT) will take even longer to establish. So we are a fair distance away from the Act getting fully implemented.

This Act, like most others, sets the ground rules.

Apartment applies to residential, commercial, shop, showroom or godown. However, institutional and industrial land-use buildings which are also used for commercial purposes don’t find a mention. As hotels are also not mentioned in the Act, would hotel properties that have serviced apartments (and are sold to buyers) be brought under the purview of the Act?

The allottee does not include a person to whom property is given on rent. That would include commercial occupiers. It leaves some questions unanswered.

Will underwriters who have been fairly active in North India, but not covered in the Act, be considered as a promoter, allottee or an agent?

Basic definitions that would govern all

Carpet area and common areas have been defined. I believe the definitions for these can still be further refined.

Internal and external development works are fairly comprehensively elaborated.

Estimated cost of real estate project include land cost, taxes, cess, development and other charges. But do “other charges” include statuary payments such as EDC/ IDC? Unfortunately, the word “development” does not specify it to be the cost of construction till the project is ready to receive an occupancy certificate/ or handed-over.

A promoter is a person who “constructs or causes to be constructed”. So, one can assume that professional firms that undertake development management would also qualify as a promoter. What about land owners who get into joint development agreements? A financial institution (Public/ Private Bank, NBFC, PE Fund, HF’s, AIF Funds etc) through equity or debt, "causes the project to be constructed". Would they also be classified as a promoter? If yes, in which mode of funding?

As a final point, even government bodies undertaking construction are covered by the Act. We look forward to them complying with the Act’s regulations.

Insecurity and hope have set in amongst the developer community at large. Reprieve and hope have been kindled amongst the new and old buyers. Patience is called for. Churning of oceans has just begun.

(The author is founder and CEO at GenReal)
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