Dr.  Rasananda Panda, Dr Prashanta Chandra Panda and Ms. Shreya Biswas, October 4, 2015 : The Real Estate Bill is one of the most important Bills that the Narendra Modi led NDA government has been trying to push through. The Bill is seen as the first attempt by the government to regularize the sector that is largely unregulated. This sector is in news for black money, land mafia, cheating customers etc. The Bill is seen as a one stop solution to all of the problems.

A group of home buyers, who were apparently harassed by developers even after paying the whole amount, had already met the Prime Minister and requested him for the speedy implementation of the Bill. But the important question is whether the Bill can provide real redressal to the victims of unethical builders and real estate developers.

One of the primary reasons behind such skepticism is the role of the government as provided in the Bill.  Though the government has assured of speedy clearance of projects yet, there is no mention of it in the Bill. This clearly indicates that the Bill does not consider the government as a stake holder, when the fact is; it is a very important one, as all crucial approvals come from it. Often delays in getting statutory approvals prolong the project leading to escalation of the overall cost.

Besides, another bone of contention is the reduction in the amount of money in the escrow account from 70 percent to 50 percent, probably under pressure from builders association. 

This has been done primarily to reduce the risk of the builders at the cost of the consumers. The builders do not indulge in Ponzi like activities. Currently there is no such provision to maintain such a type of escrow account.

The builders monopolise the use the consumers’ money for the completion of other project, as per their requirement. There is a need to stop this practice launching new projects with finances from the old one. Or else process goes on as the builder is under the impression that the sector will not witness any slump as country like India that has a huge population will never face demand deficiency.

In 2008, the real estate sector faced crisis following downturn in the economy. Demand slumped and the ponzi type of schemes went bust. Consumers faced inordinate delay in getting their properties. Even in many cases, the projects just did not take off even as the consumers had paid the full price for te properties they had booked. .

Interestingly, the builders too did suffer. Their debts got piled up on their balance sheets. Nevertheless, the middle class consumers burnt their fingers more than anyone. Based on this reality, the Bill brought out the provision of an escrow account aiming to eliminate ponzi type of schemes.

The amendment to the Bill reduced the initial amount to be kept in the escrow account. Earlier it was pegged at the 70% of the total deposits mobilized from the consumers. . However, the select committee of the Rajya Sabha later accepted the demand by the builders to reduce the escrow amount to 50 keeping in view of the land cost which was pegged at 80 percent of the total project cost.

However, while it may be true that land cost could hover around 70-80% or more of the project cost  in metros like Mumbai, Delhi, Chennai, Kolkata, Bangalore etc. and that too for projects launched at prime location. These are usually the projects for high end consumers. For off–prime projects usually located on the periphery of the cities the land cost may be 50 percent or even lower than the total project cost. Hence the ponzi type of activities out of the proceeding from these projects can not be ruled out.

Also since most of these projects are for the mid–segment or lower segment consumers hence the amendment will hit them more. This move is not appreciated as now siphoning off the remaining 50 percent of the amount collected from the consumers has attained legal sanctity. Hence there is a greater chance of siphoning of funds. .

Besides, there is another loophole that needs to be plugged to stop its misuse in the future. The amendment changed the clearly defined carpet area to rentable area. This can create legal mistrusts as the former term is used by National Building Code 2005 while its later version is a code that can be changed by the government without passing through the parliament. This can increase the ambiguity. The builders can easily misuse the clause and make minor alteration without the approval of the buyer. There is also no clear definition regarding minor alteration and how much percentage of alteration will come under its preview. This leaves it open to interpretation.

The builders too on the other hand too are not very happy about the Bill. They are complaining not only about the 50 percent amount collected from the consumers that have to be kept in a separate bank account.

They are also apprehensive about the criminal provision present in the Bill that includes jail term for repeat offenders. But looking at the scenario it is imperative that the criminal provision remain in place as only such type of provision may deter the builders from wrong doing. The financial penalties often prove ineffective since they can always be factored in the cost and passed on to the consumers.

The Parliamentary Committee also corroborates with this view by opining that it is only the criminal provision in the Bill that can weed out irregularities. The builders should also not complain regarding the mandatory maintenance of the escrow account.

By making the Bill applicable in retrospective, it will hasten up those projects that are in the final stages of completion to hasten up since the concerned builder would wish to avoid the hassles of registration. The retrospective nature of the Bill provides protection to those consumers who have already booked their properties. Hence the retrospective nature of the Bill cannot be termed as regressive and as something that will prevent the growth in the sector as over here it absolutely clear that it is the developers that have the upper hand and hence it very simplistic to assume that nature of the  Bill will adversely affect them.

But for the real development of the real estate sector the Bill should be such that it should take care of all the stake holders that include not only the consumers but also builders and brokers. The provisions in the Bill should not be too rigid to stiffen competition.

We can follow disclosure norms like in Dubai and Singapore. Here all the relevant information is digitized and uploaded on the website. The Bill has provision for this. But no such thing exists for its Indian counterpart.

At a time where most of the cities have a large section of migrant population who lives on rent development of a proper rental policy is of utmost importance. This will ensure transparency in the sector and help in easing the liquidity crunch. The pass through status granted to the Real Estate Investment Trusts (REITs) has also been welcomed by the Real Estate Sector. This will help in curbing the black money present in the sector. This will ease the liquidity crunch by allowing developers to monetize their real estate asset and this will attract new investment in the (REITs).

However like the Singapore market the leverage limit of the REITs should be linked to credit rating and those with a higher credit rating should have a higher leverage limit of their total assets.

The Modi government has a vision to provide “Housing for all” by 2022”.  To implement its vision it has allocated Rs. 22,407 crore in the current fiscal year. The Government also has this ambitious plan to develop 100 smart cities. It is more essential that affordable housing should be provided to all.

However, the Bill does not provide any incentive for those working in the affordable housing arena. Profits in these areas are usually low and it is the bottom line and not the top line that drives the business in this sector. Hence some incentive is needed for it so that it can attract more investment.

No doubt the Bill is a positive step but its real strength will be tested when it is implemented. Its effectiveness will face the litmus test with the Bill primarily aiming to ensure transparency, attract  investment, total compliance of all stake holders and boost growth in real estate sector.

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

(You can see the first part titled “Real Estate Regulation Bill – a Cosmetic Exercise?” in Bizodisha.com on September 17, 2015)

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