The Ministry of Housing and Urban Poverty Alleviation wherein the government has notified the major sections of Real Estate (Regulation and Development) Act, 2016 (RERA) which shall come into force w.e.f. 1st May, 2017. While the deadline for the RERA implementation is almost there, many of the State Governments are still under the process to notify their versions of rules and bring in legislation for the same. Implementation of RERA is important as it is seen that regulators play a key role in removing unscrupulous players, promoting fair and healthy competition and instill confidence in buyers, all of which ensure the growth of real estate.

“The much-awaited Real Estate Act has come into force from May 1st, 2017 but only 13 states and Union Territories have so far notified rules under the Act. The Real Estate (Regulation and Development) Bill, 2016 was passed by Parliament in March last year and all the 92 sections of the Act come into effect from May 1. ”

All sections in the Act have now been notified and states can now appoint both the regulatory and the appellate authorities. While the deadline was on May 01, only a handful of states have so far notified their versions of RERA. The main intention behind RERA is to increase transparency and bring in standardization into real estate industry and amongst various stakeholders including buyers, developers, brokers and investors.

Benefits under RERA –

–        RERA will make it mandatory for all commercial and residential real estate projects where the land area is over 500 sq. mt or eight apartments to be registered with the regulator before launching of these projects. Under RERA, builders and agents will have to register themselves with the regulator

–        Developers will be able to sell projects only after the necessary clearances are obtained.

–        To enable informed decisions by buyers, Real Estate Regulatory Authorities will ensure publication on their websites information relating to profile and track record of promoters, details of litigations, advertisement and prospectus issued about the project, details of apartments, plots and garages, registered agents and consultants, development plan, financial details of the promoters, status of approvals and projects etc.

–        RERA seeks to impose strict regulations on the promoter and ensure that construction is completed on time.

–        More clarity provided for Carpet Area. It has now been clearly defined in the bill to include usable spaces like kitchen and toilets.

–        Developer to put 70% of the money collected from a buyer in a separate account to meet the construction cost of the project for which the monies are being collected.

–        A developers’ liability to repair structural defects has been increased to 5 years from the earlier 2 years.

–        To enable quick settlement of disputes under RERA, each state to setup appellate tribunals to solve disputes between buyer and builder within 120 days.

–        The buyer will pay only for the carpet area (area with walls). The builder can’t charge for the super built-up-Area, as is the practice at present.

The builders will also benefit from the RERA, as it proposes to impose penalty on allottee for not paying dues on time. With this the builders are also given an opportunity to approach the regulator in case there is any issue with the buyer. At the same time heavy penalties are also being imposed if builders do not honour their commitment or fail to register themselves with the regulator. In short, RERA will ensure that fly by night developers go out of business while only those survive and flourish who have the ability to develop and deliver while acting under the rules of engagement defined by RERA. However, as a fallout of such, the prices of real estate may increase for the buyer because to launch a project, a developer will have to provide for the land as well as all permissions before launching a project as opposed to what has been the norm so far.

RERA may lead to fewer new launches initially as the industry adjusts to it. However established brands who were already in conformity would not be impacted and will benefit from healthier competition. As the trust deficit in the sector reduces, projects of reputed developers may experience increased demand. Thus a developer who manages an efficient development cycle and builds trust with the customer, will create a solid differentiator in the market place.

From the perspective of the home buyers, the RERA regime will instill more confidence in the mind of homebuyers with respect to three key elements: First, product, which includes specifications of apartment, building and overall project; Second, price i.e. total amount payable, timing of payment, and penalty for both buyer and developer due to delay; and last, completion time for delivery of apartment and project. From the perspective of real estate developers, meticulous and complete planning with regards to the product design, approvals and resources before launch of any project will become mandatory and a key differentiator for success under RERA.

There will be a strong requirement for developers to tie up the required finances before they start sales of units, and this is where institutional capital will play a key role. The amount of housing required in India is so huge that formal funding of the industry will grow many folds in next few years. Private Equity players, NBFCs and banks will have higher confidence to provide capital to developers since all the necessary permits will be in place and completion of a project in committed time period will become a norm rather than exception. The implementation of RERA would require thorough reassessment of risk viz. business, regulatory, market and operational amongst the developer fraternity. This may result in lower cost of equity as well as debt for real estate developers.

“RERA has been enacted primarily to bring in transparency and efficiency in the real estate market by making the environment conducive towards buyers. The Act brings in a number of parameters to control and streamline real estate projects.”

While RERA is being hailed as signifying the dawn of a new era for the Indian real estate sector and a possible panacea to all that ails the real estate industry,  there are still a number of lacunae which may need to be addressed soon, viz., what happens to banks and lenders’ charge on the 70% collection in the designated account?; what kind of cover would the investors look at now that at least 70% of the cash flows in the projects are being held back and can be utilized only for the project construction?; What happens to the delays which are beyond the control of the developers – e.g., government regulatory bodies not giving permissions et al?; What happens when the government is implementing a project through its own agencies like DDA, HUDA, MHADA?; how will the regulatory body, appointed by the government adjudicate when the government itself is a party to the dispute? And many more such questions

RERA Regime:

RERA has come into effect with an assurance to protect the right of consumers.. It is basically a consumer – centric act where the government has tried to portray consumer as the king. Nonetheless, the real estate developers have also welcomed the implementation of the Act, saying it will bring a paradigm shift in the way the Indian real estate sector functions. This move of the government has brought in the legislation to protect home buyers and encourage genuine private players.

RERA, being a central Act, does not need to be passed separately by states. However, land being a state matter, various operational rules and clauses for implementing the Act are to be formulated and notified by state governments. Each state has to appoint regulatory authorities to oversee implementation of the Act.

Since land is a State subject under the Constitution, even after the Centre enacts the legislation, State governments will have to ratify them. States will have to set up the Real Estate Regulatory Authority’s (RERA) and the Real Estate Appellate Tribunals and have only a maximum of a year from the coming into effect of the Act to do so.

The states and UTs that have notified the rules are Uttar Pradesh, Gujarat, Odisha, Andhra Pradesh, Maharashtra, Madhya Pradesh and Bihar. The housing ministry had last year notified the rules for five UTs—Andaman and Nicobar Islands, Chandigarh, Dadra and Nagar Haveli, Daman and Diu, and Lakshadweep, while the urban development ministry came out with such rules for the National Capital Region of Delhi.

“While the federal law is a an umbrella guideline, each state has the right to enact its own regulations staying within the parameters of the federal law. A few states and UTs have circulated their draft with only Maharashtra leading the states with its own version of RERA already notifies.”

So far, only 13 states and Union territories have notified the new rules, of which only three states—Maharashtra, Madhya Pradesh and Rajasthan—have appointed a housing regulator. Besides, none of the states apart from Maharashtra has set up a website where developers and brokers can register or apply for new projects under the new Act.

Eventually the benefit of any statute is contingent on its effective implementation. Despite a model set of rules, only a few States have notified their rules. The onus is now on States to formulate rules and establish the regulatory authorities on time. There shouldn’t be just paper compliance, by designating an existing authority to take additional charge as the real estate regulator, as that would affect the timeliness prescribed under the Act.

In brief, the new legislation is a welcome enactment. It will go a long way in assisting developers and customers. More importantly, it will ease the burden on innocent home buyers who put their life’s savings into a real estate investment in the hope of having a roof over their head but often find their dreams come tumbling down.