Recap 2013: Regulatory bulldozer whirrs for real estate sector; REIT cometh too

Gone are the days when small and even large property developers were said to deal with payments by counting sacks filled with cash, or aren't they? The real estate sector has for long been like the Wild West and a hub of moving black money within the country.

The Indian government kicked up some dust this year by passing the Real Estate (Regulation and Development) Bill which seeks to rein in the developers and bring in some rules. Although, it’s too early to say if the regulation will be able to bell the cat, it certainly has put some ground rules for those who provide what is invariably the most expensive purchase of a general consumer in his or her lifetime.

It is the first time that the central government has taken steps to provide for specialised regulation and enforcement which includes both curative and preventive measures, with powers to enforce specific performance, not available under the consumer laws. The bill also keeps in check sale transactions norms in the sector by coming up with uniform definitions on assets which were earlier taken for granted by the developers.

Anuj Puri, chairman and country head for property consultants Jones Lang LaSalle India, says “Schemes such as prelaunch (selling apartments without obtaining all necessary approvals) and 80:20 (20 per cent booking advance and remaining 80 per cent after possession) were targeted to ensure adherence to best practices.”

Not surprisingly, the regulatory bill was vehemently opposed by developers as it raised concerns over funding of projects.

Besides the regulatory bill, the government also cleared the land acquisition bill or the Land Acquisition, Resettlement & Rehabilitation (LARR) Bill, which did not find many happy takers as it will increase the cost outgo during land acquisition process for developers.

Anshuman Magazine, chairman & managing director of another property consultancy CBRE South Asia Pvt Ltd, says, “The clearance of the land acquisition bill is likely to make the process of land purchase more expensive and time consuming. In principle, it is meant to promote transparency and clarity in land titling, while protecting landholders. Owing to rising costs, and associated risks, more developers are likely to opt for joint development projects going forward.”

Puri echoes similar sentiments but cautions that no reform is without its unique drawbacks, flaws or limitations.

“Both the bills have clauses or bye-laws that threaten to further escalate prices in a market craving for absorption numbers. While the regulatory bill raised developers’ funding concerns by proposing to ban the practice of pre-launches, the land acquisition bill rendered the process of acquiring land costlier and more time-consuming,” he said.

If all the new laws were not good enough, the Indian central bank also served a googly by banning lenders from giving upfront pay-out to developers and asked them to stick to construction linked disbursals from loans availed by consumers.

As government expedited its process on clearing some of the key bills which would strengthen and regularise land acquisition and sale process in the country, securities market regulator Securities and Exchange Board of India (SEBI) also stepped up its game by introducing draft regulations for real estate investment trusts (REITs), which seek to build an alternative funding source for the sector.

At present, firms go overseas, for instance Singapore, to set up REITs to invest in Indian real estate. Experts indicate that the regulation will formally come into play in the coming year.

Ambar Maheshwari, head of capital transactions at JLL, said, “REITs will open up avenues for investors to participate in commercial asset class. The major issue for investors is taxation which includes capital gains tax. Also this avenue will open up huge revenues for information technology companies which hold huge real estate assets on their books.”

Developers can sign off the year with a mixed feeling. While the regulations could force them to change the way they did business and make them more accountable to their customers, they also get a new source of funding.

Neeraj Gulati, managing director, Assotech Realty Pvt Ltd, says, “Year 2013 was eventful for the sector with the regulations and considering REIT funding as a major breakthrough for developers as most of the projects were stalled due to liquidity crunch.”

(Edited by Joby Puthuparampil Johnson)

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