The Real Estate (Regulation and Development) Act, 2016, is an effort to improve customers’ confidence in the real estate sector. It is an initiative to protect customers’ interests, promote fair play in real estate transactions, and ensure timely execution of projects.

Real estate transactions are often complex and involve legal formalities that buyers may not understand until too late. Let’s take an example. Mr. A purchased an apartment in 2012 from a reputed builder, who was supposed to hand it over in 2015. Mr. A has still not got possession and continues to stay in a rented apartment, resulting in mounting expenses. The commitment given by the builder was flawed as he did not specify a possession date or talk about compensation for delay in possession. However, customers are charged for delay in payment to the builder. Mr. A now feels trapped, not knowing what to do and who to approach.

This is the story of most customers—they do not know what a transparent agreement should contain and how to safeguard their interests as buyers.

The real estate Act will lead to transparency in the sector. Developers as well as real estate brokers will have to register themselves, disclose project details, and will not be able to launch projects without proper approvals. Moreover, they will not be able to change plans without the consent of at least two-thirds of buyers.

Builders will also have to deposit at least 70% of the sale proceeds in a separate account to meet construction cost of the particular project, compared with the earlier proposal for 50% or less.

The agreement with customers will also have to be more transparent than what it has been. It will have to include clauses such as:

• Advance money of not over 10% before entering into a sale agreement.

• Possession date, specifications of the property, construction schedule, and compensation to be paid to buyers for default or delay, which should be the same as that charged to buyers for delayed payment from their side.

• Liability of builders for structural defects for five years (instead of the earlier two years) and clearly defined carpet area, which means customers must know precisely how much space they are going to get for the price paid.

The real estate sector is facing issues related to liquidity, huge debts, and delays in project completion. But ultimately, it is the customers that bear the brunt due to increased pricing.

It is hoped that the situation will change once the Act is implemented, and more investors are attracted to the sector, which will, in turn, improve customer confidence, and give the sector a much-needed growth impetus. It will also bring in more confidence among global investors, providing better access to structured capital, which is in short supply now.

The Act will have positive consequences for the sector in terms of transparency, accountability, and avenues for grievance redressal, which will mean lower litigation cost for buyers. It will also ensure that only serious players will remain in the sector leading to greater transparency in the sector.

These changes are much needed. Around 30% of the projects are delayed, with maximum delay being in the mid and premium segments. The affordable segment witnesses less delay as it has stringent timelines and tends to keep tenure low to control costs. This is based on an analysis of over 445 projects covering 236 developers in over 59 cities, and more than 290 million sq. ft of construction space in various segments rated by Crisil Real Estate Star Ratings.

There are multiple reasons for such delays—funds being diverted by developers, lack of funding options, and slow sales. Implementation of the Act will bring project delays under control as funds will not be diverted, more funding avenues will be available for builders at a lesser cost, customer confidence will improve in the sector and home buying process will be easier to follow.

Ultimately, it will be a win-win situation for developers as well as customers in the long term, which will restore much-needed trust, transparency, and growth. This will have a positive effect on the country’s economy as well.

The Act has been formulated. Now it has to be seen how soon states start implementing it.

Sudhir Nair, director, Crisil Real Estate Ratings.

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