RERA: Single-biggest reform for Indian real estate

The Real Estate Regulatory Act (RERA) is undoubtedly a watershed moment for the Indian real estate sector. The real estate markets, as we have known them for the past two decades, would certainly be very different in the next two. Just as the Securities and Exchange Board of India cleaned up an unregulated public market space, ending decades of malpractices, misrepresentation, and misuse of public money and restored investor faith in the functioning of the stock markets, RERA will inspire trust through its provisions and punitive actions. The resulting confidence in the real estate markets will see increased activity by consumers, private & institutional investors and developers alike. As with everything else though, there is no magic wand — the change in market behaviour and mindset will take its own course and will be painful. Marginal developers will consolidate or exit out of the business. Developers who have focused on building a strong foundation in terms of their organisations, have the delivery capability and strong balance sheets will thrive.

The provisions within RERA strike at the root cause of consumer dissatisfaction — misrepresentation on quality, time and misuse of money paid to the developer for other reasons except for the completion of the project. The benefits of the Act include disclosing project timelines, restricting promoters to change plans and designs without the consent of at least 66 per cent of home buyers, and making the carpet area the base for residential transactions. Most importantly, it puts a lot of accountability on the promoters as they will now require all prior permissions before launching the projects. Further, the formation of an escrow account with provision of depositing 70 per cent of sales proceeds would ensure timely completion of projects, thereby benefiting the buyers. It would also restrict the developers from rotating funds into another project. Penalties have been prescribed on developers in case of delays. Not limited to that, it provides for imprisonment of up to 3 years for developers and up to 1 year for agents and buyers in case of violation of the Act. Presently, only 13 states and Union Territories have notified the Act. The ministry also notified that those states which have not notified the rules will face public pressure and people could approach the court and raise the matter legally in case of a delay. The likely dilution of norms for ongoing projects at the state level will certainly leave a question mark over the protection of buyers over the past 3-4 years, who could potentially remain exposed to the markets but outside the regulatory ambit. Some ongoing projects, too, are unlikely to get delivered in the short term due to a mismatch in what is required to complete them compared to what’s left as cash within the system. The Centre looks determined to enforce the Act through the legal course. RERA, therefore, will not just be a paper tiger and will herald in change as its teeth sink in. 

The implementation would certainly face initial glitches as the states prepare themselves for action. In addition, the current government has paid attention to the sector with promising policies that will bring in better corporate governance practices. Some policies measures like foreign direct investment relaxations, real estate investment trusts, goods and services tax, and Digital India should give a push to the government’s idea of urbanisation with initiatives like ‘housing for all by 2020’ and ‘100 smart cities’.

For the past 20 years, the real estate sector had been in the ‘adolescence’ stage of development — bringing in creative ideas, being experimental, identifying its full potential, but taking naïve decisions. However, together, the industry also prepared the grounds for tremendous growth. For any regulation, too, to go through its cycle of implementation, the first phase is predominantly this adolescent stage, which sets the context for growth. RERA's implementation may benefit from this industry experience — put in some hard-work along with creative thinking and focus on ‘be what’s next’ in 20 years from now. Subsequently, the sector will move towards large-scale consolidation in the coming years faster than expected. Though the Act has received mixed reviews from promoters, it will benefit them as well. Smaller, cash-starved developers will look for partnerships with reputed, large developers to unlock co-development potential across the country. In addition, short-term liquidity constraints due to escrow will make it an attractive opportunity for investors. We will observe a trend moving away from dynastic operations of developers, making the sector more organised, transparent and credible. This sets the platform for growth. In the long run, RERA will position the Indian real estate sector at par with that of the developed nations.

The writer is managing director, India, Cushman & Wakefield