Thursday, August 17, 2017

The House That Built Me

Parliament has passed the Real Estate Regulatory Act, 2016 (RERA), which is intended to protect homebuyers. The RERA aims at bringing cheer to the buyers of property, by providing a framework for reducing conflict with developers, and creates a regulatory authority for this sector.
The good news: India’s cabinet has cleared a much-delayed real estate regulation Bill that is expected to help consumers move towards an accountable, transparent and fair deals in a sector notorious for delays, shortchanging, overpricing and worse.
The bad news: It still leaves room open for unforeseen problems of the kind we have witnessed this year in the floods that have ravaged Chennai.
As parliament gears to consider the Bill, perhaps it may be wise for lawmakers to see how approvals wrongly granted before a project takes off create huge long-term problems, for buyers and cities as a whole. It is better to be forewarned and forearmed.
There is no doubt the Bill passed for parliamentary consideration is a step in the right direction in an industry where builders are known to take the money from unsuspecting (usually middle class) buyers and then making them pay in so many ways – in time lost due to delays, higher interest payments on home loans, missed quality specifications and other aspects that violate the letter or spirit of purchase agreements.
However, it’s likely to enhance the regulatory burden and increase the cost of capital and compliance.
The buyers, particularly at the lower end of the spectrum, may actually end up paying the price. The RERA aims at bringing cheer to the buyers of property, by providing a framework for reducing conflict with developers, and creates a regulatory authority for this sector.
Property developers are not exactly cheering the law because of a sense of unease due to a possible increase in the cost of capital, especially since this industry is already facing a liquidity crunch and mounting inventories.
The RERA seems to be recalibrating the balance in favour of the buyers of properties, particularly apartments. While the Land Acquisition, Rehabilitation and Resettlement Act, 2013 (LARR) and RERA reflect the changes in political perception due to rising social concerns and protests, what both laws fail to recognise is the root of the problem — over-regulation.
Although land and real estate are bought and sold all the time, India doesn’t have a functioning market for land and real estate. The high prices in real estate are a reflection of an artificial scarcity caused by over-regulation, as well as bad regulations, by multiple agencies. The builder-babu-politician nexus is a corollary of this distorted environment.
Yet, one of the key justifications for the RERA is that the real-estate sector is unorganised and unregulated. To rectify the alleged problem, a new round of registrations, regulations and clearances are being created.
While there are strict penalties, including imprisonment, for developers if they slip up, there is hardly any provision to make the various government authorities, entrusted to oversee and enforce regulations, more accountable. This will create problems. For example, there are clauses for delays in securing various NOCs. Anyone who has had to get an NOC from a government agency knows it’s not just dependent on whether all criteria have been met.
The RERA’s requirement — that 70 per cent of capital from a particular project be restricted for use only for that project — is well-intentioned but may have little economic merit. The law is likely to raise the cost of capital.
The RERA also lays out a dispute settlement mechanism. But given the experience of consumer courts, it’s only a matter of time before the new mechanism gets as clogged as some of the others. The fact is that regulators and regulations can hardly be a substitute for a vibrant and dynamic market. The experience of regulatory overload can also be seen in other sectors, such as banking, electricity, etc.
All these sectors are plagued by stressed corporate balance sheets and poor quality of service to consumers. In any case, the RERA is to watch over primarily new properties entering the market. But this is dwarfed by the number of second or older generation properties that exchange hands annually. Building smart cities will require rapid improvements in land and property records, drastic reduction in regulatory bottlenecks and transaction costs (including taxes, fees and duties) and, most crucially, empowering local bodies to provide basic services and decide on land-use.
Contrast the logjam in the real-estate sector with the success of India’s IT sector, which is largely due to the relatively light hand of government, including tax holidays. If the real-estate sector was really unregulated and free, it could have been a global force by now, quite like the IT sector.
 The Act is tailor-made to protect consumers in the real estate sector. One of the most beneficial features of the Act is the disclosure of the project details and the time schedule for construction. This will bring in much needed transparency and accountability in the real estate sector.
However It is argued that the RERA, which strives to protect consumers interest will actually harm competition in real estate sector and ultimately harm consumers’ interest. 

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