RERA – A Game Changer in the Real Estate

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TOPIC: General Studies 2

• Structure, organization and functioning of the Executive and the Judiciary Ministries and Departments of the Government;
• Government policies and interventions for development in various sectors and issues arising out of their design and implementation.
• Statutory, regulatory and various quasi-judicial bodies

The essential Real Estate Regulatory Authority (RERA) had come into force with the kind of framework which entails accountability on the real estate developer. The RERA act provides for homebuyers and also for the overall sector to have a website which will display all the projects having clearances as well as the details of the project developers. The homebuyers will get clear information about the project details on a regular basis plus all the real estate agents also would be registered. So basically every project developer will have to register the projects which they are developing with the RERA act first and then only they can sell the projects.

It is seen as a game changer as it will not only change the whole pattern in which mistreats were done in the real estate sector but also it will provide the cushion to the homebuyers which is required when life earning is spent into buying a home. At present, this act is implemented by 15 states and 7 union territories.

Importance and problems in real estate

Real estate is widely considered to be a major asset class. However, it has been traditionally distressed with opaque practices, information asymmetry, and a poor regulatory framework in India. One of the frequently cited reasons for the current slowdown in residential sector is the trust deficit between customers and developers. It takes years for the developers to deliver on their commitments. Hence, the Real Estate (Regulation and Development) Act 2016, aimed at bringing in transparency and redefining the engagement between various stakeholders, was brought into enforcement.

RERA is a great act from the customer point of view and for all the new projects.  The new buyers will get their house on time or in case of any delay, there will be proper compensation to it to an extent to not suffer any loss by buyers. For the new projects it’s a great development but for the on- going projects there are some issues and RERA is also practically not in the position to sort them out better than this. This is because the new timelines are being given for the existing project to complete the project. This makes the buyer wait longer for their possessions due to abnormally new long deadlines given for completion of projects.

As per RERA, all the sale agreement that has been signed between buyer and seller has to be sent to it. If the developer fails to deliver on the commitments and the projects are delayed beyond maximum possible deadlines, then the developer have to pay the penalty and the buyer can approach to the authority.

Thus, RERA will enforce

• Rigorous project planning and management– Increased disclosure level for project registration would prompt developers to make realistic commitments on project specification, amenities and delivery timelines to avoid stiff penalties on default.
• Conservative project finance structures– RERA would require new projects to have all approvals before a launch. This would lead to larger gestation period prior to a project launch.
• Efficient project cost control mechanism– Post sale and last minute product price escalations by developers on frivolous grounds would be history. This will encourage developers to establish strong cost and delay control mechanisms within their project management and monitoring systems.
• Increased participation by institutional players– institutional players have burnt their fingers badly due to lack of governance and execution efficiency. Their past experiences have until now forced them to either stay away or invest through extremely conservative debt structures
• Cheaper capital pricing by institutions– RERA would reduce the risk perception significantly due to its stringent disclosures and penal provisions

The customers, including home buyers will at least now know the credentials of project developer, the credentials of real estate agents and will be well equipped with the information which is required before getting into buying of any project.

Proper regulation

Earlier, the reasons for non-completion of projects were

• Project announced/begun without proper clearances.
• Diversion of funds from one project to any other area or in some other project

Now, there has to be regular updation of progress of construction by the developer. With such information, the chances of misleading the buyer is very low because authorities are involved and giving assurance to the buyers that it will protect their interest.

The law provides that 70% of the sales proceeds will have to be deposited in a separate bank account which will be monitored by authority and the developer will use that money only for the construction of the project. Also, periodically they will have to put on the website all the information regarding how much money of that has been used for the construction purpose. Thus, if money is not diverted then the chances of projects getting completed on time are high.

Also, for the first time, the authority has been given the power to jail developer in its business case where he has not been able to fulfil its promises. So there is enough power and enough provisions made in the act to implement or to enforce the developer to complete the project.

Way forward

The centre should push those states who have not implemented RERA as yet to bring RERA authority in their states. Simultaneously, they should also help other 15 states which have launched RERA, to perfect their website and provide all the information which has to be given under the RERA act. The transformative impact of RERA would lie in the intent and speed at which various state government implement the regulation.

Proper implementation of RERA will lead to revival of real estate sector. The transformation in business practices with RERA being a catalytic force would ensure that only serious and strong players remain within the sector.

The level-playing field created between various stakeholders would provide much-needed confidence to investors and home buyers to take a relook at the sector and make informed investment decisions.

Connecting the dots:

• What in your opinion is the importance of RERA act for growth of Indian economy and society?