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IMPACT OF RERA ON INDIAN REAL ESTATE INDUSTRY

The RERA will give the Indian real estate industry its first regulator. The Real Estate Act makes it mandatory for each state and union territory, to form its own regulator and frame the rules that will govern the functioning of the regulator.

How will RERA impact home buyers

Some of the important compliances are:

  • Informing allottees about any minor addition or alteration.
  • Consent of 2/3rd allottees about any other addition or alteration.
  • No launch or advertisement before registration with RERA
  • Consent of 2/3rd allottees for transferring majority rights to 3rd party.
  • Sharing information project plan, layout, government approvals, land title status, sub-contractors.
  • Increased assertion on the timely completion of projects and delivery to the consumer.
  • An increase in the quality of construction due to a defect liability period of five years.
  • Formation of RWA within specified time or 3 months after majority of units have been sold.

The most positive aspect of this Act is that it provides a unified legal regime for the purchase of flats; apartments, etc., and seeks to standardise the practice across the country. Below are certain key highlights of the Act:

Establishment of the regulatory authority: The absence of a proper regulator (like the Securities Exchange Board of India for the capital markets) in the real estate sector, was long felt. The Act establishes Real Estate Regulatory Authority in each state and union territory. Its functions include protection of the interests of the stakeholders, accumulating data at a designated repository and creating a robust grievance redressal system. To prevent time lags, the authority has been mandated to dispose applications within a maximum period of 60 days; and the same may be extended only if a reason is recorded for the delay. Further, the Real Estate Appellate Authority (REAT) shall be the appropriate forum for appeals.

Compulsory registration: According to the central act, every real estate project (where the total area to be developed exceeds 500 sq mtrs or more than 8 apartments is proposed to be developed in any phase), must be registered with its respective state’s RERA. Existing projects where the completion certificate (CC) or occupancy certificate (OC) has not been issued, are also required to comply with the registration requirements under the Act. While applying for registration, promoters are required to provide detailed information on the project e.g. land status, details of the promoter, approvals, schedule of completion, etc. Only when registration is completed and other approvals (construction related) are in place, can the project be marketed.

Reserve account: One of the primary reasons for delay of projects was that funds collected from one project, would invariably be diverted to fund new, different projects. To prevent such a diversion, promoters are now required to park 70% of all project receivables into a separate reserve account. The proceeds of such account can only be used towards land and construction expenses and will be required to be certified by a professional.

Continual disclosures by promoters: After the implementation of the Act, home buyers will be able to monitor the progress of the project on the RERA website since promoters will be required to make periodic submissions to the regulator regarding the progress of the project.

Title representation: Promoters are now required to make a positive warranty on his right title and interest on the land, which can be used later against him by the home buyer, should any title defect be discovered. Additionally, they are required to obtain insurance against the title and construction of the projects, proceeds of which shall go to the allottee upon execution of the agreement of sale.

Standardisation of sale agreement: The Act prescribes a standard model sale agreement to be entered into between promoters and homebuyers. Typically, promoters insert punitive clauses against home buyers which penalised them for any default while similar defaults by the promoter attracted negligible or no penalty. Such penal clauses could well be a thing of the past and home buyers can look forward to more balanced agreements in the future.

Penalty: To ensure that violation of the Act is not taken lightly, stiff monetary penalty (up to 10% of the project cost) and imprisonment has been prescribed against violators.

RERA definition of carpet area 

The area of a property is often calculated in three different ways – carpet area, built-up area and super built-up area. Hence, when it comes to buying a property, this can leads to a lot of disconnect, between what you pay and what you actually get.

Gautam Chatterjee, Maharashtra RERA chairman, explains that “It is now mandatory for the developers of all ongoing projects, to disclose the size of their apartments, on the basis on carpet area (i.e., the area within four walls). This includes usable spaces, like kitchen and toilets. This imparts clarity, which was not the case earlier.”

According to the RERA, carpet area is defined as ‘the net usable floor area of an apartment, excluding the area covered by the external walls, areas under services shafts, exclusive balcony or verandah area and exclusive open terrace area, but includes the area covered by the internal partition walls of the apartment’.

Rahul Shah, CEO of Sumer Group, points out that “As per the RERA guidelines, a builder must disclose the exact carpet area, so that a customer knows what he is paying for. However, the act does not make it mandatory for the builders, to sell a flat on the basis of carpet area.”

Impact of RERA on real estate industry

Initially, a lot of work is to be done to get the existing and new project registered. Details such as status of each project executed in last 5 years, promoter details, detailed execution plans, etc., needs to be prepared.

With the advent of RERA, specialised forums such as the State Real Estate Regulatory Authority and the Real Estate Appellate Tribunal, will be established for the resolution of disputes pertaining to home buying and the aggrieved party will have no recourse to other consumer forums and civil courts, on such matters. While the RERA sets the groundwork for fast-tracking dispute resolution, the litmus test for its success, will depend on the timely setting up of these new dispute resolution bodies and how these disputes are resolved expeditiously with a degree of finality.

RERA in states

Maharashtra RERA

The Maharashtra Real Estate Regulatory Authority (MahaRERA) came into existence on May 1, 2017. Builders and real estate agents have been given a 90-day window, to register their new and ongoing projects, with the real estate authority, which ends on July 31, 2017.

Uttar Pradesh RERA

The draft Uttar Pradesh RERA Rules, were notified in October 2016. However, these rules are likely to be revised.

Karnataka RERA

The Karnataka RERA Rules, 2016, was approved by the cabinet on July 5, 2017.

Tamil Nadu RERA

The Tamil Nadu RERA Rules were notified on June 22, 2017. Exclusion/inclusion of projects for registration, will depend on whether they lie within the Chennai Metropolitan Area (CMA) or outside the CMA, among other factors.

 Which projects come under RERA

  • Commercial and residential projects including plotted development.
  • Projects measuring more than 500 sq mts or 8 units.
  • Projects without Completion Certificate, before commencement of the Act.
  • The project is only for the purpose of renovation / repair / re-development which does not involve re-allotment and marketing, advertising, selling or new allotment of any apartments, plot or building in the real estate project, will not come under RERA.
  • Each phase is to be treated as standalone real estate project requiring fresh registration.

How can a builder be RERA compliant 

  • Project registration.
  • Advertisement.
  • Withdrawal – POC method.
  • Website updation/ Disclosures.
  • Carpet area.
  • Alteration in project – approval of 2/3 allottees.
  • Project accounts – Audit.
  • 70% of the funds collected from allottees needs to be deposited in the project account. Withdrawals to cover construction and land cost.
  • Withdrawals to be in proportion to the percentage completion method.
  • Withdrawal to be certified by an engineer, architect, and CA.
  • Provision for RERA to freeze project bank accounts upon non-compliance.
  • Interest on delay will be same for customer and promoter.

What information does a builder need to provide under RERA

  • Number, type and carpet area of apartments.
  • Consent from affected allottees for any major addition or alteration.
  • Quarterly updating of RERA website with details such as unsold inventory and pending approvals.
  • Project completion time frame.
  • No false statements or commitments in advertisement.
  • No arbitrary cancellation of units by promoter.

How to register projects under RERA

  • Authenticated copy of all approvals, commencement certificate, sanctioned plan, layout plan, specification, plan of development work, proposed facilities, Proforma allotment letter, agreement for sale and conveyance deed to be given when
  • Applying for project registration with RERA.
  • Mandatory registration of new and existing projects with RERA before launch.
  • Registration of agents/brokers with RERA.
  • Dispute resolution within 6 months at RERA and RERA appellate tribunals.
  • Separate registration of different phases of a single projects.
  • Developers to share details of projects launched in last 5 years with status and reason for delay with RERA.
  • Timely updating of RERA website.
  • Maximum 1 year extension in case of delay due to no fault of developer.
  • Annual audit of project accounts by a CA.
  • Conveyance deed for common area in favour of RWA.
  • Construction and land title insurance.
  • Project completion time period.

How will RERA impact insurance cost for construction and land title

  • Land and approval costs to be meted out of internal accruals as prelaunch concept may end. It may lead to a shift in equity financing from debt financing prevailing currently. The cost of capital may go up as developers may now have to fund the land and approval cost through equity.
  • With frequent delay in obtaining approvals, debt funding may not be an ideal route for developers. With entry in the sector made difficult, the sector may witness consolidation.
  • Strong financial and execution capability is required to launch a project. The development model/agreement may gain prominence.
  • The project launch time may increase since a lot of time will be involved in finalizing finer details before launching a project.
  • Details such as complete drawings, utilities layout, etc., needs to be finalized before project starts.

How will RERA impact real estate agents

Under the Real Estate (Regulation and Development) Act (RERA), real estate agents will need to register themselves, to be able to facilitate a transaction. The broker segment in India, is estimated to be a USD 4 billion industry, with an estimated 5,00,000 to 9,00,000 brokers. However, it has traditionally been unorganised and unregulated.

“It will bring a lot of accountability in the industry and the ones who believe in professional and transparent business, will reap all the benefits. Now, the agents will have a much larger and responsible role to perform, as they will have to disclose all the appropriate information to the customer and even help them chose a RERA-compliant developer,” says Sam Chopra, founder and chairman of RE/MAX India.

With RERA in force, brokers cannot promise any amenities or services that are not mentioned in the documents. Moreover, they will have to provide all information and documents to the home buyers, at the time of booking. Consequently, RERA is likely to filter out the inexperienced, unprofessional, fly-by-night operators, as brokers not following the guidelines will face hefty penalty or jail or both.

How can brokers become RERA compliant

  1. Section 3: Promoter cannot advertise, book, sell or offer for sale, without registration with RERA.
  2. Section 9:
  1. Section 10:
  • No agent can sell a project not registered.
  • Maintain books and records.
  • Not be involved in unfair trade practices.
    • Make an incorrect statement – oral, written, visual.
    • Represent that services are of a particular standard.
    • Represent that the promoter or himself has approval or affiliation which such promoter or himself does not have.
    • Permit publication of advertisement in newspaper or otherwise of services not intended to be offered.
  • Agent needs to facilitate possession of all documents to the allottee at the time of booking.

When and how should you file a complaint under RERA?

Digbijoy Bhowmik, head of policy, RICS, explains, “Complaints can be filed under Section 31 of the Real Estate (Regulation and Development) Act, 2016, either with the Real Estate Regulatory Authority or the adjudicating officer. Such complaints may be against promoters, allottees and/or real estate agents. Most state government rules, made appurtenant to the RERA, have laid out the procedure and form, in which such applications can be made. In the case of Chandigarh UT or Uttar Pradesh, for instance, these are placed as Form ‘M’ or Form ‘N’ (common with most other states and union territories).”

A complaint under the RERA, is required to be in the form prescribed under the respective states’ rules. The complaint can be filed with respect to a project registered under RERA, within the prescribed time limit, for violation or contravention of provisions of the act or the rules or regulations framed under RERA.

“For cases pending before the NCDRC or other consumer fora, the complainants/ allottees can withdraw the case and approach the authority under the RERA. Other offences (except complaints under Section 12, 14, 18 and 19) can be filed before the RERA authority,” explains Ajay Monga, partner at SNG & Partners law firm.

Source: Housing News

 

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Realty Market in India

Introduction

The real estate sector is one of the most globally recognized sectors. In India, real estate is the second largest employer after agriculture and is slated to grow at 30 per cent over the next decade. The real estate sector comprises four sub sectors - housing, retail, hospitality, and commercial. The growth of this sector is well complemented by the growth of the corporate environment and the demand for office space as well as urban and semi-urban accommodations. The construction industry ranks third among the 14 major sectors in terms of direct, indirect and induced effects in all sectors of the economy.

It is also expected that this sector will incur more non-resident Indian (NRI) investments in both the short term and the long term. Bengaluru is expected to be the most favoured property investment destination for NRIs, followed by Ahmedabad, Pune, Chennai, Goa, Delhi and Dehradun.

India's rank in the Global House Price Index has jumped 13* spots to reach the ninth position among 55 international markets, on the back of increasing prices in mainstream residential sector.

Market Size

The Indian real estate market is expected to touch US$ 180 billion by 2020. Housing sector is expected to contribute around 11 per cent to India’s GDP by 2020. In the period FY2008-2020, the market size of this sector is expected to increase at a Compound Annual Growth Rate (CAGR) of 11.2 per cent. Retail, hospitality and commercial real estate are also growing significantly, providing the much-needed infrastructure for India's growing needs.

Private equity and debt investments in India's real estate sector grew 12 per cent year-on-year to US$ 4.18 billion across 79 transactions in 2017. In 2017, M&A deals worth US$ 3.26 billion were made in India’s real estate sector. Private equity investments in Indian retail assets increased 15 per cent in CY 2017 to reach US$ 800 million. India is expected to witness an upward rise in the number of real estate deals in 2018, on the back of policy changes that have made the market more transparent.

Sectors such as IT and ITeS, retail, consulting and e-commerce have registered high demand for office space in recent times. The office space absorption in 2017 across the top eight cities amounted to 18 million square feet (msf) as of September 2017. Private equity inflows in office and IT/ITES real estate have grown 150 per cent between 2014 and 2017 backed by a strong attraction towards office sector. In 2017, new retail space of 6.4 million has finished and supply of around 20 mn sq ft is expected in 2019.

Investments/Developments

The Indian real estate sector has witnessed high growth in recent times with the rise in demand for office as well as residential spaces. Private equity investments in real estate are estimated to grow to US$ 100 billion by 2026 with tier 1 and 2 cities being the prime beneficiaries. India stood third in the US Green Building Council's (USGBC) ranking of the top 10 countries for Leadership in Energy and Environmental Design (LEED) certified buildings, with over 752 LEED-certified projects across 20.28 million gross square meters of space. According to data released by Department of Industrial Policy and Promotion (DIPP), the construction development sector in India has received Foreign Direct Investment (FDI) equity inflows to the tune of US$ 24.67 billion in the period April 2000-December 2017.

Some of the major investments in this sector are as follows:

  • In February 2018, DLF bought 11.76 acres of land for Rs 15 billion (US$ 231.7 million) for its expansion in Gurugram, Haryana.
  • In February 2018, Japanese conglomerate Sumitomo Corporation announced its US$ 2 billion partnership with Krishna Group to develop real estate projects in the country.
  • KKR India Asset Finance Pvt Ltd has invested over US$ 500 million in residential real estate projects in India in 2017, taking its total investments in real estate projects in India to US$ 1 billion.

Government Initiatives

The Government of India along with the governments of the respective states has taken several initiatives to encourage the development in the sector. The Smart City Project, where there is a plan to build 100 smart cities, is a prime opportunity for the real estate companies. Below are some of the other major Government Initiatives:

  • In February 2018, creation of National Urban Housing Fund was approved with an outlay of Rs 60,000 crore (US$ 9.27 billion).
  • Under the Pradhan Mantri Awas Yojana (PMAY) Urban 1,427,486 houses have been sanctioned in 2017-18. In March 2018, construction of additional 3,21,567 affordable houses was sanctioned under the scheme. 

Road Ahead

The Securities and Exchange Board of India (SEBI) has given its approval for the Real Estate Investment Trust (REIT) platform which will help in allowing all kinds of investors to invest in the Indian real estate market. It would create an opportunity worth Rs 1.25 trillion (US$ 19.65 billion) in the Indian market over the years. Responding to an increasingly well-informed consumer base and, bearing in mind the aspect of globalisation, Indian real estate developers have shifted gears and accepted fresh challenges. The most marked change has been the shift from family owned businesses to that of professionally managed ones. Real estate developers, in meeting the growing need for managing multiple projects across cities, are also investing in centralised processes to source material and organise manpower and hiring qualified professionals in areas like project management, architecture and engineering.

The growing flow of FDI into Indian real estate is encouraging increased transparency. Developers, in order to attract funding, have revamped their accounting and management systems to meet due diligence standards.

Source: IBEF

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