Dr. Rasananda Panda, Dr. Prashanta Chandra Panda and Ms. Shreya Biswas, September 16, 2015 :

Possessing a home of their own, consideration for a safe haven for investment make real estate a big bet for the Indians. Capital and money market is still not very developed and trustworthy for Indian households. They fail to replace the trust associated with property and gold for many. There never have been long spells of gloom in real estate in India as seen in developed world. We find residential and commercial properties to be overpriced and at times stagnant due to economic downturn.

But the market response has been a little faster in commercial property rather than pre-owned or fresh residential property. No clues about alternative asset creations or crawled reactions to market opportunities in other sectors have made this sector quoting a non equilibrium solution. Not getting any adequate income stream owners continue with the assets.

Even subsequently the next generation run it cross subsidized. Having a smooth ride for long term wealth portfolio, sentiments attached to the property has made many Indians a non exit variety in this sector.
Hence unlike in the developed world where there are long bouts of depression and prices remain suppressed for long period, here though the prices in the residential sector might witness some downward pressures especially during economic downturns but never adequate enough to provide liquidity and growth to the market. Let us analyse some of the other pressing problems of this sector.

Real Estate

A FICCI report found that the real estate sector is growing at a rate of 20 percent with 5 to 6 percent contribution to the GDP (www.ficci.com, 2015). The sector has very high forward linkages in the form of not only being the highest employer after agriculture. It also directly impacts the demand in the ancillary sectors like steel, cement, building materials, consumer durables etc. In fact this is a sector that is also known for offering blue collar job, an essential for a country like India where unemployment is still a big challenge.

But despite this high importance and relevance this is also a sector that is riddled with many ills like presence of black money, delayed possessions, increasing number of fraudulent cases, overcharging in the form of charging for the super built up area rather than carpet area etc. In fact a large number of cases in the competition commission and consumer courts are pertaining to the real estate sector.

This indicates the high incidence of dubious activities in this sector. The sector is mostly unregulated to the advantage of builders, commission agents rather than genuine buyers who are mostly searching to buy houses to stay. Even investors of particular category stay avoided knowing very well the higher returns that they ride when growth is visible.

The presence of opaqueness has led to lack of clarity thus seriously impeding the flow of capital and therefore compelling the sector to go back to dubious capital. Hence there is a long pending need for regulation. Sensing the mood the UPA government in 2013 made the first attempt to regularize it by bringing in the Real Estate Regulation bill. It was introduced in the Rajya Sabha in 2013. It is different politics and economics why it never got passed.

Subsequently it was recommended to a select committee. Real Estate Regulation bill had three very important features, the first being establishment of an escrow account i.e. a separate bank account for the money collected from consumers on the pretext of completion of project. The money in this account can be used only for this purpose and not diverted to other causes.

The second is the compulsory registration of all ongoing and future projects with Real Estate Regulatory Authorities (RERA). Even registration of real estate agents was made compulsory. This was done to bring more transparency in the sector and also to make information seeking simpler. The bill also made it compulsory for the developer to charge the consumers only on the basis of carpet area and not super built–up–area.

Finally the third important feature of the bill is the presence of a grievance redressal mechanism as this ensured speedy disposal of disputes. The current BJP led NDA government too accepted the bill in its original form and the cabinet passed it with two major amendments. The first being reducing the amount of money that has to be kept in the escrow account was reduced from 70 percent to 50 percent and also changed the term carpet area to rentable area and the second being to bring the commercial sector also under its ambit thus providing protection to the investors in this sector too.

In the following section we will see how the bill is expected to change the Real Estate scenario.

propertyIs there a need for such a Bill?

According to the then Planning Commission the contribution of the Real Estate Sector in the Indian economy has witnessed a phenomenal growth with the advent of liberalization. This is because of the chain of forward and backward linkage supported by measured response from financial sector.

CREDAI (Confederation of Real Estate Developer’s Association) in the year 2013 had claimed that the contribution of the Real Estate sector in India’s GDP stood at 6.3% and is expected to go up to almost 13% in 2025(www.ficci.com, 2015). Hence its growing importance in the economy can be easily assessed. But in order to keep the tempo of growth going it is essential it should receive adequate finance.

The government too is aware of this and went for 100 percent FDI in 2005 so that not only it receives the much needed finance but also new technologies. However after the initial euphoria of 2007 -2008, the FDI interest in this sector took a nosedive. A look at the figures below reveals this.

FDI                                                                                    Source: Brand Equity

Thus it can be seen that while a peak was noticed in 2009 – 2010 but after that it started falling and in 2013 – 2014 and 2014 – 2015 it fell to an all time low of 5.9 percent and 5.1 percent of the total FDI received by the country. Thus for the last two years this sector has been witnessing a continuous fall. Lack of transparency has been held primarily responsible for this. Or it is limited to urban growth centers in office and commercial spaces.

Real estate contributes significantly to phenomenal construction boom in countries like Singapore and Dubai, via this to their respective economy. It is to be kept in mind that the sector is very well regularized there. On the other hand in India where demand is never a problem because of demographic causes, there is hardly any regulation in favour of streamlining the interests of consumers and players.

In this context Real Estate Regulation bill is seen as a welcome move as it will bring about the much needed regularization in the sector thus making it more transparent. The sector is still plagued with black money which is severely impeding demand as the prices are artificially inflated. The fall in demand which has been almost 40 percent during the first half of the year according to consultancy Knight Frank, has resulted in slow off takes.

As a result burgeoning cities like Noida that had witnessed construction boom for almost a decade are witnessing slowing demand thus causing in a huge backlog of unsold homes. The builders too on the other hand are plagued by high debt and drying up of finances. This has compelled them to slow down their current projects and delay the launch of new projects thus automatically leading to downsizing of their workforce (Times of India, 2015).

Thousands of workers have been rendered jobless who are now compelled to go back to their farming jobs. This is bound to impact the country’s GDP negatively and at the same time also adversely impact the Prime Minister’s dream of creating jobs and “Housing for all by 2022”. Thus it can be understood how regularization was important as it will not only bring the much needed finance but will also help to prevent artificial inflation of property prices.

For demand to pick up it is essential that the prices must fall to reasonable limits, a fact even acknowledged by the RBI governor (The Times of India, 2015). Thus the bill can be safely called a positive step in the right direction.

The Positives of the Bill

Despite skepticism, looking holistically the bill cannot be written off as another futile exercise that is incapable of bringing about any real change. Through compulsory registration of projects the bill has tried to minimize the risk the consumers are exposed to, by investing their hard earned money in dubious projects and at the same time also deterred the developers from doing the same.

Once the project is registered the developer is required to upload the details of the project with RERAs. Each state will have a RERA for itself. This even applies for the middle men who too have to get themselves registered with RERA. The main purpose for this was to bring in more transparency in the sector.

At the same time this will also make information seeking easier. Moreover while the bill in its original form covered only projects that were based on land 1000 sq. meter and above, the Parliamentary Select Committee recommended that even projects below 1000 sq. meter should be covered under the Act so that even medium and small developers are brought under the bill. Now 500 sq meter projects or eight flats will be covered by the new law (The Economic Times, 2015).

This will help small property buyers that are usually mid level or lower end consumers as most of the time it is they who purchase from not very large developers. Also the Bill does not allow any major alteration of the plan without the approval of two – third of the allottee. This will thus prevent the customers from getting duped due to last minute alteration.

The Bill also through an amendment has brought the commercial sector under it which was not there in the original one that was brought by the UPA government in 2013. Thus the revised bill has regularized the commercial sector too and tried to usher in transparency over there too. This is important as the real estate requirement is now expected grow in the commercial sector. With the economy expected to grow at a rate of 7 to 8 percent per annum it is obvious that the industrial activities will increase leading to an increase in demand for office space.

According to Cushman & Wakefield report the return on investment in the commercial sector will outperform the same in the residential sector as the valuation of the former has corrected a lot since 2008. In fact in the Quarter ended in March 2015 the net absorption in office space grew by 35 percent over the same period last year across eight cities (The Financial Express, 2015).

With the China growth story already taking a hit and India being propped as new driver of world growth it is not unfair to expect that the commercial real estate sector is the next big thing. This is further substantiated by big companies like Foxconn, Honda, Alibaba etc. showing their deep interest in India and planning to set up their manufacturing units in India, it is but natural that the demand for commercial real estate will only escalate. The demand for back – office jobs are also expected to increase and hence office space will be required for them too.

hThough FDI in retail has been put in the back burner yet this setback can easily be offset by the overall growth in the economy. Moreover it is also believed that with the economy in an upswing the demand for professionals like Chartered Accountants (CAs) doctors, lawyers etc. will also increase and so will the demand for smaller units, thus enabling the mid level investors to enter this segment. Hence it can be said that the inclusion of the commercial sector in the bill and thus in the process granting it credibility, is a step in the right direction.

The presence of the grievance redressal mechanism in the bill is another big positive step as this will reduce the time lost in arbitration. Similarly the establishment of RERA is another important step towards regularization. The Parliamentary Committee too on its part ensured that the vulnerability of the state regulator is minimized by adding the provision that its chairman cannot seek private employment once the tenure is complete.

It also accepted the fact that the builders over here enjoyed dominant position and hence they were more likely to make agreements that are heavily skewed in their favor. Hence to protect the consumer against such discriminatory practices the committee recommended that same level of penalty will be imposed on all stake holders in case of a default. It has also tried to be inclusive by bringing the bill in the public domain and asking suggestion from all the stake holders for the amendments in the bill for 10 days before it was again tabled in the Upper House of the parliament (The Economic Times, 2015).

The government too on its part has assured to reform the sector by bringing about speedy clearance in the form of single window clearance. Apart from it the RBI also announced infrastructure status to affordable housing on July 16, 2015, thus allowing the companies involved in them to raise loans through External Commercial Banking (ECB) provided 75 to 90 percent of their units are LIG and EWS (Commonfloor, 2015). This indicated the high importance attached to this sector.

Thus it can be said that by the aforesaid steps the government has no doubt tires to reduce the opaqueness in the sector and in the process bring in more credibility. It has also tried to increase the ease of doing business by reducing the transaction cost for all stakeholders. But despite this the bill has certain lacuna that has caused skepticism amongst all the stakeholders regarding its effectiveness to transform the sector. In the next segment we have tried to look at few of such glaring deficiencies of the bill.

Rasananda Panda is Professor of Economics, Mudra Institute of Communications, Ahmedabad, Prashanta Chandra Panda is currently Professor of Economics, KIIT University, Bhubaneswar and Ms. Shreya Biswas is Research Associate at MICA, Ahmedabad

(To Be Continued)

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2 Comments on "Real Estate Regulation Bill – a Cosmetic Exercise?"

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satish ranjan jena

the builder has made me fruad promish.i am now in very mental harashment want your help

satish ranjan jena

the builder has made me fruad in all the commitement he has made.i am now very mental pressure ,want any solution from yoy.please do some necessery action