Real Estate Bill: Why it is not a win-win for buyers

Kankana Roy ChoudhuryFrom a stormy start to near washout, the monsoon session of Parliament has been under the weather. This has left the fate of 11 pending bills hang in balance. According to media reports, one of the bills, which was slated to be presented and was even expected to get passed in the Lower House, was the Real Estate Regulatory Bill (Bill).The Bill, approved by the Union Cabinet in April, is said to give homebuyers several reasons to cheer, if it gets passed. For one, it is pegged to help in easing their concerns on delay in delivery and change in project layout. Besides, it has also been termed beneficial for developers on better transparency and accountability, which may help in improving the institutional funds flow into the sector. However, a lack of clarity around these “reform measures” has left many questions unanswered. We take a look at them.What the Bill saysThe Bill deals with a host of issues -- from appointing a real estate regulator for each state that will settle dispute and impose compensation, to having all housing and commercial projects compulsorily registered with the regulator, without which a developer cannot advertise or launch projects. It also makes it mandatory for builders to maintain an escrow account wherein 50% of the customers’ advance money will be deposited, this too within 15 days of receiving the money.The mandate may curb fund diversion and ensure better completion records, however, is not foolproof. Besides, fund diversion is not the only reason for delay in projects. The Bill must also cover government bodies, including civic authorities, making them accountable.The Bill has prohibited property sale on the basis of super area and the developers will be asked to advertise the carpet area. This could see a spurt in prices (per square feet) as most developers maintain a loading percentage (the difference between super built up and liveable area) ranging from 20% to 40%, which acts as a cushion for them. Once that is gone, they are bound to increase rates. To avoid this, the bill should consider coming up with a price determination process, wherein a builder/developer cannot quote above the specified rates. The bill addresses another key issue that has kept buyers worried for long. According to it, buyers can claim refund with interest and compensation if promoters fail to deliver projects on time. This may sound great, but is difficult to follow. Will buyers benefit?Let’s take a look at the table below to understand how much a buyer stands to gain in case he is refunded his total amount. We haven’t taken into account the compensation as it still lacks clarity. All figures in RsThe interest component forms a major chunk of the EMI in the initial years and hence is a major factor for an investor’s decision-making process. As seen in the table, for a loan of Rs 16 lakh, assuming the property possession period to be three years, the client has expended a total EMI of Rs. 5.94 lakh, out of which Rs 5.16 lakh went towards the interest payout. In case of a refund, he stands to lose the opportunity cost on the down payment (Rs 4 lakh) made. The customer could have earned up to Rs 1.2 lakh had he invested the amount somewhere else. Thus, the total loss incurred by a customer in case of surrendering the property, would amount to around Rs 6.4 lakh. While there is no clarity on the compensation provided, it seems distantly probable to be offsetting this loss incurred on the loan amount (to compensate the loss the developer will have to shell out approximately 30% of the total loan amount to a client). Another aspect to the same is that, given the price appreciation, the client now stands to lose in terms of not being able to afford a property of the same size.Thus, even though the Real Estate Regulatory Bill is the step in the right direction, the government should put effort to bring in more clarity to make it really work for customers and developers alike. The writer is Content Head at BigDecisions.com