After much deliberations, the Real Estate (Regulation and Development) Act, 2016 (RERA) has finally evolved from the Real Estate Bill and came into force on May 1, 2016. RERA is applicable pan-India but the reality is that development in Mumbai and rest of India is on different footing. Mumbai, being 4th or 5th most expensive real estate of the world has a different benchmark and when we equate with rest of India, there will be challenges faced by developers of Mumbai.
RERA is a very stringent legislation and is a major step towards regulating the real estate sector. It aims to enhance consumer protection by facilitating that the consumer gets the product on time as promised, thereby increasing consumer confidence as well as helping to create lasting developer brands strong on quality and timely delivery of their projects. However, implementation of the RERA raises few challenges that need to be addressed to make this law fair and mo re inclined towards reality.
To start with RERA mandates 70% of the amount collected from the buyers in respect to a specific project, should be deposited in an escrow account to cover the cost of construction and land cost and should be used for the earmarked project. This puts an end to a widespread diversion of funds into other projects, and thereby, delaying the project at hand for years. The setback is this provision lacks an insight into the practicality of real estate business. Cost of land including interest cost and approval cost may be significantly higher than the 30% of the amount collected from the buyers which can be freely withdrawn by the Developer. In case of a joint development agreement, which is a usual feature of the development, this issue may not be significant but acquisition of land for construction could be a challenge.
The cost of capital for developers will also go up because they will have to look for equity rather than the structured debt to finance acquisition of land. This is because developers cannot sell homes before they get all the project approvals which means that raising funds by pre-pre-sale probably is not an option now.
Additionally, with respect to withdrawal of funds from escrow account, there is a requirement to issue certificates by an architect, engineer and chartered accountant in proportion to the percentage of completion of project. However, there is no specific format that is prescribed which makes it a bit perplex as each of the professional would be having their own methodology for issuing such certificate which may certainly have a different percentage of completion of project.
Secondly, the responsibility of compliance under RERA is of the “Promoter” and the definition is quite wide to cover not only the developer but inter-alia covers landlord (under the JDA) and private equity investor or strategic investor, if they actively participate in market ing or selling the project.
The big beneficiary of RERA certainly is end-costumer and it is a blessing if the operational functioning of the provisions and dispute resolutions can be done on timely basis. From the regulations it looks like that real estate development will now have to be looked from a perspective of a manufacturing process wherein the processes are to be defined and will become a cost plus profit game rather than multiplication game. Organized developers will survive the next wave of business and certainly consolidation in the sector is envisaged.
(Hemal Mehta is the Partner at Deloitte Haskins & Sells LLP)