Laypersons are often lured and misled by players in the realty industry who put out flashy advertisements on residential projects to impress would-be customers. Indeed, with rising income levels and a lack of housing options customers tend to fall head over heels to buy new residential projects that appear to be enchanting. However, anyone who closely tracks the industry will tell you that most these ads are garnished with false promises.
Developers launch projects and book sales without proper clearances for the land, delay completion of projects for years without paying compensation to buyers, divert funds raised from the sale of properties in a project to launch another plan. These are only some of the irregularities committed by developers.
But now the table could turn as the government is in the final leg to come up with regulations in the sector and an industry befitting caveat emptor (buyers beware) could well become caveat venditor (sellers beware).
The Real Estate Regulatory Bill, that has just been cleared by the union cabinet, will now be sent to the standing committee, which will incorporate inputs from developers and buyers and suggest modifications and changes.
The bill tries to safeguard buyers from unscrupulous builders and gives them access to important information like whether the developer has got all the necessary clearances or not while checking the records of a particular project.
“This Bill hopes to bring in the much needed transparency in the sector which is plagued by a negative image both within the country and in the investor community outside India,” said Rohit Kumar, head - research, property consultancy firm DTZ India.
According to him, the regulation will clear a lot of haze around what constitutes ‘super built up area’ against actual ‘carpet area’ sold by developers. Furthermore, to ensure the funds generated through project booking are safe, 70 per cent of such funds are to be deposited into a separate bank account, ensuring developers do not roll funds for other projects, as is said to be prevalent in the country.
The Bill, which equips buyers with more power, has also made it mandatory for builders to start selling projects only when they have secured all necessary clearances and approvals. Currently, most builders undertake soft launches without getting the necessary approvals.
Builders will have to adhere to announced completion dates, else compensate buyers adequately. Although builder-buyer agreements have a penalty clause if the project is delayed, developers usually add riders to escape compensation for missing project handover deadlines.
Anuj Puri, chairman and country head, Jones Lang LaSalle India, said, “By applying this Bill on all projects over 4,000 square metres in size, the ambit has been kept quite large and it seeks to cover all major private residential developments across the country. By seeking to establish the regulatory authority and the appellate tribunal, the Bill aims to create a dispute-resolution mechanism and provide a specialised forum for hearing disputes related to property matters and address the grievances of consumers who otherwise have had recourse to either a prolonged litigation process in a court of law or consumer courts.”
The Bill also seeks to impose monetary penalties on promoters with repeat offences also liable for a jail term.
On the flip side, the Bill also has some positives for developers. While it aims to hold the developers accountable, it also looks to ensure that the allottees do not default in making payments.
Harvesp Mehta, director of real estate at Motilal Oswal Private Equity Advisors, said, “Developers are not permitted to start marketing (or advertising) the projects before getting all necessary clearances and obtaining the certificate of registration with the authority.”
“The Bill prohibits builders from using pictures of housing projects in foreign countries to lure buyers while advertising a project. They will have to use pictures reflecting the actual project, which will be delivered to home buyers. Any person making advance on the basis of the false information contained in the advertisement or prospectus and sustains any loss or damage, will be compensated by the developers in the manner determined by the authority,” he said.
Another big positive which can flow out from the clarity in the regulation is bringing more serious investors in the sector. The Indian real estate industry is yet to see a meaningful resurgence after a demand slowdown hit the developers in 2008-09, affecting all segments of the market. Developers maintain that the worst is behind them and with the interest rate regime turning soft, a demand uptick seems to be around the corner. But private equity investors are not yet ready for a long-term bet on the sector.
Industry data culled from VCCEdge, the financial research platform of VCCircle, indicated that private equity funding hit a three-year low in 2012, with announced value of deals pegged at just about $1.1 billion across 48 transactions.
In the first five months of the current calendar year the sector saw 24 deals against 26 deals in the same period last year. Although a few large-sized transactions pushed up the value of such deals, the sector is not yet hot for PE investors to ramp up the play.
PE firms who have burnt their fingers due to project delays in the absence of regulations stand to benefit with the regulation in the sector. This could bring in both new PE investors as also help existing investors see through profitable exits from projects. The regulation will also help realty funds raise capital from limited partners (LPs), especially global LPs who have been cautious on betting in India.
(Edited by Joby Puthuparampil Johnson)