Is RERA having an overriding effect on state laws?

The Real Estate Regulatory and Authority (RERA), has always been praised as a progressive provision, but certain state laws are much wide in range.The Real Estate (Regulation and Development) Act, 2016 has received Presidential acceptance on March 25, 2016. It intends to bring more lucidity and security in the market for the customer of residential and commercial projects by introducing a sectoral regulatory mechanism. In any case of inconsistency, section 89 specifically gives it the overriding effect.

Mostly, real estate project are regulated by state government.  State Governments regulate real estate projects under their individual state town and country planning or apartment ownership legislation. Provisions of RERA are in the force since May 1, 2016.

In context to above, we have dissertated briefly the constitutional validity of RERA below. We have compared determined provisions of RERA with state legislation. We also have highlighted some faults in this new legislation for real estate.

 

Constitutional validity

Before being passed by the Parliament, The RERA became an eagerly awaited and hotly contested legislation. It is believed that this Act was legislative delude by the centre in the domain of states.

It is important to discuss that Entry 18 of list 2nd of the seventh schedule of Constitution of India gives the right to states to legislate over inter alia, land, rights in or over land and colonization.

By virtue of Entries 6 and 7 in list 3rd (concurrent list) of the Seventh Schedule of the Constitution dealing with contracts and the transfer of property, The RERA has been enacted by the Centre by the power vested in it. Article 254 of the Constitution specifically provides that central laws will be prevailing over state laws on the subjects in the concurrent list, and both Central Government and State government have the power to legislate on matters under the concurrent list.

According to the above, RERA put an overriding effect on contradictory state laws. The RERA also damages the Maharashtra Housing (Regulation and Development) Act (MHRDA), despite that MHRDA has received Presidential approbation instead of the approval of the Governor.

 

According to Article 254 (2) of the Constitutions tell that state laws under the concurrent list which have received presidential assent. However, the provision of this article gives the full power to centre to amend, alter or to revoke the particular state laws.

Comparison with state legislations

The RERA has been praised as a developmental legislation. It notices concerns; inter alia penalties to be imposed on the promoters, maintenance of licenses, inspection rights, disclosures and an agreement to sell. In the RERA it is required that 70 % of the amount received should be kept in a separate escrow account and draw downs from this account will be linked to the completion of construction.

On contrary to this, MHRDA said that all amount received for a project should be kept in a separate account.  According to MHRDA, the promoter is required to make a full revelation on all transaction from that account.

The state governments do not have the independence to rectify this requirement. To give the necessary acceleration to real estate markets in their individual states, it’s meant to be that, some space should have been given to state governments.

Balance of interests between Buyers and Builders is key to RERA

The highly anticipated Real Estate Regulatory Bill has arrived. Under this bill, the government of India is planning to establish RERA (Real Estate Regulatory Authority). The guidelines in RERA act are promising to uplift the current scenario. It seems that the government has finally found the solution of the ever-present real estate problems in India. Transparency, governance and accountability of builders, their projects and agents make RERA such a special act. However, this RERA India act has gained huge popularity because of its primary obligations to the despaired buyers of this country. Among the various organizations of builders, agents, buyers and authority there is a tension going on over the issue if RERA is biased towards any of them. Owing to such rifts, the central government has maintained that there is a balance between the buyers and the private sector in this bill.

If we take a look on the current real estate market, it makes us certain that something like RERA is the need of the hour. Private builders and agents are suffering due to lack of speed in the market. The heavy investments to make sky-scrapers have shown meagre returns. On the same lines, buyers are also the sufferers. Delayed possession, change in late out plans, heavy interests on delay of payment are some of the constant difficulties faced by the buyers. In all this conundrum, the government also brings a new dimension of problems by delaying many approvals for a project. Hence, it has now become a chain reaction starting from the greed of few people and finishing in the form of a loop discouraging many to buy and invest in reality. RERA thus, becomes a necessity for the bodies so that real estate gives a much desired boom to the Indian economy.

Above facts also prove that there can be no base of any business or imbalance in the guidelines of Real Estate Regulatory Act of India. It is actually the opposite because if there is any shift of balance in RERA India provisions then it will be of no use. Given that authority, builders, agents and buyers all are equal participants in the real estate business and its on-going problems, there is no scope of choosing one lobby over another. Big consultancy firms have already given a green signal to RERA as many domestic and foreign investors are taking it as an opportunity to invest in the Indian property market. RERA is made in such a way that its ground rules will be highly influential in ending the traditional structure of real estate industry. The practical implementation of RERA will start from next year where each state will have its own RERA.

As Real Estate Regulatory Authority bites, PE investment returns to fall

Current estimates suggest structured debt investments now command approximately 18%-25% interest cost on residential projects Return on private equity (PE) investments is set to decline as the Real Estate Regulatory Authority (RERA) takes effect, according to industry experts.

Making projects RERA compliant will erode profit projections, forcing PE fund managers to re-calibrate potential income from their investments.

“RERA will put a stop to diversion of funds, expenditures that are often passed on to end users under covert heads will stop so IRRs will temper down along with profitability,” said Sunil Rohokale, CEO and managing director at ASK investment managers.

Current estimates suggest structured debt investments now command approximately 18%-25% interest cost on residential projects. Equity investments, which are more rare at the moment can give 15%-18% return on investments. Of course, the upside of having taken an equity position can also fetch around 30%, depending on market conditions, sector experts said.

Rohokale said while lower profits will mean lower returns for fund managers, there will be more predictable returns so over a period of time, the industry will adjust. “I would prefer the lack of ambiguity and resultant lower risk compared to higher returns.” Rohokale added.

Although ASK has stuck to its core strategy of investing in projects through equity investments of smaller ticket sizes, almost 80% of PE investments made last year was in the form of structured debt or mezzanine financing. This is especially rampant in the residential piece.
Back in 2005-2008 when opportunities were being discovered by PE funds in the first phase, after FDI norms were relaxed, majority of investments made were pure equity transactions. This trend overturned after 2009, when in order to protect their exposure, leading funds started lending through structured debt, which means companies need to repay in regular intervals and exit routes, collateral obligations etc are clearly defined and in favor of funds.

But now, the RERA legislation is expected to once again shift the focus towards equity transactions. “The main reason why PE funds who had made equity investments back in 2005-2006 period burnt their fingers is because projects were either not completed on time or permissions were inadvertently delayed; both these conditions get taken care of by RERA so the perceived risk has to be reassessed,” said Neeraj Bansal, head of real estate at KPMG.

So PE funds will once again be more keen to pump in equity, which is the need of the hour for the debt-heavy sector. In the absence of demand, companies are saddled by high cost of debt.

courtesy: http://www.financialexpress.com/markets/as-real-estate-regulatory-authority-bites-pe-investment-returns-to-fall/341799/#.V6mQbvAdWGw.whatsapp

Are the provisions under RERA 2016 Act sufficient for ongoing projects?

The much maligned real estate sector of India has exploited the home buyers to a large extent. To protect the interest of the buyers, Real Estate Regulatory Authority is being formed. The RERA 2016 bill was passed by the parliament in March 2016. The Ministry of Housing has updated the draft rules for RERA India. Based on ground realities, the ambit of this bill not only focuses on new projects but also on ongoing projects. The ongoing projects which have not yet received the completion certificate from the government, shall now be liable to get the project registered under RERA within three months of time. But the question which arises here is, how certain provisions of the act will match with the ongoing projects.

  • One of the provisions under draft rules mentions that a developer has to maintain an escrow account of 70% for every project. This means that the 70% of money of the project to be developed cannot be used for other purposes. But what if a builder has already received 70-100% from the sale proceeds and only deposits 70% of the money to be received. It isn’t necessary that the cost of the project will be covered in that 70%. The provision should have made it compulsory for the developers to calculate the cost of the project and then deposit the amount.
  • Another provision in draft rules states that the promoter is required to state the date of completion of project to ensure on time delivery, while registering an existing project, a promoter might just issue a completion date as per the date of registry, which in turn leads to delayed possession. The provision should mention that the completion date should be in compliance with the date as promised to the buyers.
  • Another rule in draft explains that a developer needs to define the layout plan of each project and the layout of any project can be changed only with the consent of two-thirds of buyers. In case of existing projects, a developer might have changed the layout plan earlier and gets the latest layout approved under RERA Act.

A coherence needs to be created between the rules for existing and new projects to harness the right benefits of RERA and bring transparency in this unregulated sector.

RERA- A Blessing for the Real Estate Industry

RERA 2016 Act aims to protect the interest of the property buyers. The rules and regulations under RERA India aims to bring transparency and bridge the gap between buyers and sellers. Under the Act, it is mandatory for all the realty establishments to register with Real Estate Regulatory Authority, if the construction work exceeds 500 sq. m for launching a project or if a developer wish to define the skyline of a place.

The much cherished bill further brings relief to the buyers as promoters will now have to disclose the price based on carpet area. The carpet area will include spaces like kitchen, washrooms, etc. to let buyers know what all they are paying for. The layout of any project can be altered only after seeking consent from two-third of buyers.

Things have been made more stringent for promoters as they will have to ensure that the project is delivered on time. In case of delayed possession, developers might face penalty or imprisonment or both. The law seeks to vanquish all the discrepancies in the realty sector.

While bill addresses the issues of buyers but have left a gap while addressing the issues of promoters. Developers often have to take various NOCs for a project from the agencies. Many a times there is a delay from the end of these government agencies which makes developers incapable of completing the project on time.

RERA is also expected to increase the foreign inflow capital with greater transparency and liquidity. RERA is a blessing for the long messed up industry.

The Hits and Misses of RERA for Buyers and Developers/Builders

For Consumers – The buyers of real estate market have a high hope from the policy of RERA. They must understand that no policy is perfect and since real estate’s vertex is so huge, any strategy will have some few open ends. But, the good news is that when the states will be implanting them, it would try to fill in the minor gaps of the plan.

Hits

Misses

• Strictness on timely possession of projects to the buyers.

  • Approvals under RERA is not subjected to timelines which may badly affect the buyer too due to his indirect dependency on the approval.

• The minimum amount a developer has to keep in the project’s account is 50% of the money collected from the buyers.

• Strict and transparent features of RERA may reduce competition leading to an escalation of prices.

• The defect liability period of five years will increase the quality of construction.

• Time gone in taking previous approvals will hinder builders to offer new projects. This will limit the option for the buyers.

• Impartial builder – buyer agreements for sale.

• Various dispute settlement forums and RERA Appellate Tribunal will bring fair and faster dispute redressal system.

• Transparency will increase and buyer won’t get influenced by false carpet area ads as carpet area will become the base for sale.

• Better controlled agent system will bring efficiency in the market.

• High perceptibility to the builder’s past and his track record.

For Developers/Builders – The government is tightening the screws in the real estate. Although RERA is making some ground rules for the builders, the complexities of the current and past deeds of real estate in India makes it a lot harder than it seems on papers to bring a cent percent transparent policy which is applicable in every situation.

                                     Hits                                        Misses

• Good chance to omit the casual operators who are the major defaulters.

• Multiple approvals lists may delay the possession, deterring the potential of RERA.

• The involvement of government is less and the entire process is easy, which makes it quite affective for the builders.

• No facility to get a fixed number of approvals which will get approved by the single window clearance.

• Due to the visibility in the works of the developers, government and buyers can segregate the good ones from the defaulters.

• Due to an escrow account, there would be an increase in reliance on the external capital.

• Reduction in the fund costs will lead to high investment in the sector.

• Unhealthy influence of joint-venture engagements.

Making a conclusion out of these facts would be injustice to the efforts made by the policy makers. The thing is, even though the policy has missed on some complex issues which will only be settled once each individual state specifies certain broad terms, it will still be considered as one of the most affective policies to come in India.