Parliament has passed the Real Estate Regulatory Act, 2016 (RERA), which is intended to protect homebuyers. 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.
- Kerala real estate rules line up tough penalties for errant developers
- Mumbai: Home buyers protest against Mehul Choksi for failure to hand over flats
- Builders bank on Akshaya Tritiya for boost in flat sales
- ‘Flat buyers are more confident because of RERA’
- ‘State has highest project registrations under RERA’
- Bombay HC says RERA crucial for developing incomplete projects, upholds validity
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. Often, obtaining an NOC is dependent on meeting the needs of the authorities as well. As a result, the RERA could very well increase the disputes between developers and authorities, which would in turn increase the cost of compliance and the cost of the project. Over time, such costs would get built into the project cost, thus increasing the price of property.
Every business depends on cash flow to ensure smooth functioning. Even a kirana store runs on credit from suppliers and often has to give credit to consumers. 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.