RERA: There’s no way home prices will go up anytime soon

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The Real Estate (Regulation and Development) Act, 2016 (RERA), came into force on May 1, 2017. After this those who make their living in the real estate industry have been suggesting that real estate prices will go up in the days to come.

The logic being offered is that this will be because of compliance costs of RERA which the buyers will ultimately have to pay for.

Given that India does not have any data which agglomerates real estate prices at the country level, those connected with the real estate industry can get away with such statements, because no one else has any idea anyway.

Data from PropEquity Research shows that unsold home inventories stood at close to 4.72 lakh units in the top eight cities across India, as on March 31, 2017. These are homes that have been built but not been sold.

During the period January to March 2017, the inventory of unsold homes came down by 3.12 per cent. Despite this fall, the unsold inventory overhang continues to be huge, across the country. Data from PropEquity suggests that overhang is 60 months in Noida, 43 months in Mumbai, 38 months in Chennai and 30 months in Bengaluru.

If this unsold inventory has to be sold, the home-prices cannot go up from where they are, RERA notwithstanding. The fact that so much inventory has accumulated in the first place tells us very clearly that people are not buying homes to begin with. The only reason for this is that homes across urban India are fairly expensive in comparison to the capacity of people to pay.

This is obvious from the rental yield (annual rent divided by the market price of the home). Typically, the rental yield currently varies between 1.5-2 per cent. This basically means that in order to buy a home right now, one has to pay 50 to 67 times the annual rent. This tells us very clearly that it makes more sense to rent a home and at the same time that home-prices are very expensive. Of course, rental housing comes with its own set of issues in India, with insecure landlords being the biggest one.

Data from PropEquity suggests that property prices fell by 1.7 per cent for January to March 2017. This is clearly not enough. If this inventory overhang has to clear, prices need to fall further. What will force the builder’s hand further is that with RERA in place, new launches to raise finance for previously delayed projects or to pay off debt, will not so be easy, anymore.

A careful look at home loan data of 2016-2017 also suggests that home-prices have fallen.

In 2015-2016, only 16.8 per cent of the home loans given by banks were given to the priority sector. A housing loan of up to Rs 28 lakh in a city with a population of 10 lakh or more, which finances the purchase of a home with a price of up to Rs 35 lakh, is categorised as a priority sector housing loan.

In 2016-2017, 23 per cent of the home loans given by banks were given to the priority sector. This basically means that banks are giving out more sub Rs 28 lakh home loans for financing more homes worth less than Rs 35 lakh, than they were in the past.

This basically means that home-prices have either come down or builders are building more of sub Rs 35 lakh homes. Either ways, this is a good trend. It is not so obvious given that no agency agglomerates real estate prices in India at a national level. But the home loan data from banks clearly suggests this.

Last week, Keki Mistry, the bossman at HDFC, the largest housing finance company in the country suggested that given the low interest rates and the time correction of prices that has happened, it is a good time to buy a house.

Of course, for a home loan lender, it is always a good time to buy a house. What does Mistry mean by time correction of prices? He basically means that even though home-prices haven’t fallen much in absolute terms, they have fallen once we adjust for inflation.

It is worth re-stating here that if the builders have to sell off their unsold inventory of homes, they need to cut prices. Even if they manage to hold on to the current prices, they will not be in a position to increase prices, over the next few years. Hence, the time correction of prices is likely to continue. Given this, those who want a home to live-in and are in a position to continue to wait, should do that.

As far as interest rates are concerned, what Mistry forgot to mention is that home loans have a floating rate of interest, which keeps changing. Hence, over the 15-20 year term of a home loan, interest rates can and will vary. And given this, low interest rates initially, does not make much of a difference in the overall scheme of things. What is needed are lower home-prices.

The column originally appeared on business-standard.com  on May 9, 2017

The State of Real Estate, Six Months After Demonetisation: Falling Prices, Desperate Builders & Return of Black Money

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Housing and real estate is one area in India where writing anything is very difficult given the lack of data. Nevertheless, a few inferences can be made from the little data that is available.

In the last edition of the Letter we unveiled the Indian Economic Thermometer (IET). One of the inputs into the IET was retail loan growth. A major constituent of retail loans are housing loans. As of March 2017, housing loans formed around 53 per cent of the total retail loans given by banks.

By tracking the total amount of housing loans given by banks, we can make a few inferences regarding the state of the real estate sector in India. So, let’s take a look at Table 1. It shows the total amount of home loans given by banks during the course of a year, over the last few years.

Table 1:

Total Home Loans (in Rs crore) Increase/Decrease with respect to the previous year
2012-13 59,647
2013-14 81,900 37.3%
2014-15 89,935 9.8%
2015-16 1,18,245 31.5%
2016-17 1,13,323 -4.2%

Source: Centre for Monitoring Indian Economy.

Table 1 makes for a very interesting reading. For the first time in five years, the total amount of home loans given by banks during the course of a year, has fallen. The total amount of home loans given out in 2016-2017 was around 4.2 per cent lower than the total amount of loans given out in 2015-2016. This is another data point that shows the largely moribund state of the real estate sector in India.

One point that needs to be kept in mind is the fact that home loans are also given out by housing finance companies. The trouble is that regular data on the home loans given by housing finance companies is not available. And this is ironical because housing finance companies are regulated by the National Housing Bank(NHB), which is a 100 per cent subsidiary of the Reserve Bank of India(RBI). It is worth asking that when the RBI can put out month on month data on loans given by banks, what is stopping the NHB?

The latest data I could find on this front was as of March 31, 2015 and that is really not of much help more than two years later, given that we are trying to look at the current state of home loans. In 2014-2015, housing finance companies gave out home loans worth Rs 75,488 crore. During the same year, banks gave out home loans amounting to Rs 89,935 crore. This means that in 2014-2015, housing finance companies gave out around 45.6 per cent of the total home loans. In an ideal world, this data should not be ignored. But given that we don’t have access to it, there is nothing really that we can do about it.

Getting back to the point. Let’s get into a little more detail into the home loans given by scheduled commercial banks during 2016-2017. Let’s look at March 2017. During the course of the month, banks gave out total home loans of Rs 39,952 crore. This basically means that 35.3 per cent of the total home loans given out during the course of the year, got disbursed during one month, which happens to be the last month of the financial year.

What is happening here? Before March 2017, Rs 18,900 crore worth of home loans were disbursed in September 2016. This amounted to 17 per cent of the total home loans disbursed during the course of the year. Hence, between the two months, more than half of the home loans disbursed during the year, were disbursed.

It is well known that builders have got a huge amount of unsold inventory with them. This inventory has been in various stages of construction. At the same time, the builders have been trying to sell this inventory for a while now, by offering a better price as well as goodies on the side.

As some of this inventory has achieved completion stage, it has become slightly attractive for homebuyers given that people prefer buying finished homes these days in comparison to under-construction ones. Also, with builders wanting to show good year end numbers they have gone easy on the price in the month of March 2017, is what bankers tell me.

There is another phenomenon at work. These days people don’t apply for a home loan just at the point of time short-listing and buying a home. They apply for it in advance and get the loan sanctioned but not disbursed. The moment they get a good price for a home, they get the loan disbursed. That is another explanation for a jump in home loan numbers in March 2017.

Also, once people buy a ready to move in new home, there is activity in the secondary home market as well. They may want to sell the homes they were living in, and that also leads to more people taking on home loans. This phenomenon is likely to play out more in the coming months, if the basic assertion I am making turns out to be correct.

Another point mentioning here is that between November 2016 and February 2017, banks barely gave out any home loans. During the period, the banks gave out home loans worth Rs 8,851 crore. In March 2017, they gave out total home loans of Rs 39,952 crore, which was 4.5 times the home loans given out in the previous four months.

A major reason why people weren’t taking on home loans between November 2016 and February 2017 was demonetisation. There simply wasn’t enough currency going around. With this, the real estate transactions came to a standstill because without currency it wasn’t possible to fulfil the black part of the real estate transaction. Those who owned homes(builders and investors) were not ready to sell homes, without being paid for a certain part of the price, in black.

By March 2017, nearly three-fourths of the demonetised currency was replaced.

This basically means that by March 2017, there was enough currency in the financial system for the black part of the real estate transactions to start happening all over again. Also, the Rs 2,000 note makes this even more convenient.

This availability of currency ensured that the black part of any real estate transaction could be easily paid, which had become difficult between November 2016 and January 2017. Once the black transactions became possible, real estate started getting bought and sold again, and this in turn ensured that home loans started to be disbursed again.

Between builders desperate to end the financial year on a good note and currency finding its way back to the financial system, people started taking on home loans again. The interesting question is whether this revival in home loans will continue. For that we will have to wait for the home loan data of April 2017.

The big question here is that are real estate prices falling? If you listen to what the real estate industry has been saying you would feel that real estate prices have either not been falling or will not fall more.

Ashutosh Limaye, Head-Research & REIS, JLL India, told ET Now thatprices have come down but by and large prices are holding.” Or as Getamber Anand told Moneycontrol.com:  “I feel prices in most markets have bottomed out and stabilised with little or no margin for further reduction.”

Let’s look at some data to see if this is true. As I mentioned earlier, real estate data is not easy to get. The simple way to figure out whether prices are going up or down or are flat, would be to look at the prices at which deals are happening. But given that there is no such data at an agglomerated level, one has to try and look at this in a slightly different way.

Every bank has to carry out what the RBI calls priority sector lending. What kind of lending gets categorised as priority sector lending in case of home loans? As per a RBI circular dated April 23, 2015, a priority sector housing loan is defined as: “Loans to individuals up to Rs 28 lakh in metropolitan centres (with population of ten lakh and above) and loans up to Rs 20 lakh in other centres for purchase/construction of a dwelling unit per family provided the overall cost of the dwelling unit in the metropolitan centre and at other centres should not exceed Rs 35 lakh and Rs 25 lakh respectively.”

This is how priority sector home loans continue to be defined. Hence, housing loans of up to Rs 28 lakh in a city with a population of Rs 10 lakh or more, and financing the purchase of a home with a price of up to Rs 35 lakh, is categorised as a priority sector housing loan. In other centres, a priority sector housing loan is a loan of up to Rs 20 lakh used to finance the purchase of a house with a price of up to Rs 25 lakh.

Let’s look at Table 2. It shows the priority sector loans as a proportion of total home loans given by banks.

Table 2:

Total Home Loans (in Rs Crore) Priority Sector Home Loans (in Rs Crore) Proportion
2012-13 59,647 1,349 2.3%
2013-14 81,900 34,800 42.5%
2014-15 89,935 20,386 22.7%
2015-16 1,18,245 19,890 16.8%
2016-17 1,13,323 26,082 23.0%

Source: Centre for Monitoring Indian Economy.

What does Table 2 tell us? We are interested only in the years 2015-2016 and 2016-2017, when the definition of priority sector housing loans was the same. What we can see is that in 2016-2017, nearly 23 per cent of the loans given out were priority sector home loans. In 2015-2016, this figure was at just 16.8 per cent. In absolute terms, 31.1 per cent more priority sector home loans were disbursed in 2016-2017 than in 2015-2016.

What does this mean? It means that banks have financed more homes with an official registered price of Rs 35 lakh or lower in metropolitan cities and Rs 25 lakh or lower in other centres. We use the term official registered price, simply because a black component always gets paid in cash, over and above the official price.

With banks financing more homes of Rs 35 lakh or lower in metropolitan cities and Rs 25 lakh or lower in other centres, it basically means that either prices have come down or more homes have been built in that segment (which builders like to call affordable housing). Hence, more homes have become available in the sub-Rs 35 lakh segment in the metropolitan centres and in the sub-Rs 25 lakh segment, in other centres.

In fact, in the month of March 2017, when the maximum amount of home loans were given out in comparison to any other month during the last financial year, 28 per cent of the loans were priority sector home loans.

Given this, home loan data does suggest that home prices have fallen. Of course, there is no way of figuring out to what extent have the prices fallen. The answer would be different for different parts of the country.

But how does all this work at a personal level? One technique of driving down the price is to keep talking to the representative of the builder over a period of time, keep him interested and keep driving down the price. Of course, this needs a lot of patience and depends on how desperate the builder is to sell what he has already built.

The column originally appeared on Equitymaster on May 10, 2017

Mr Mistry, When It Comes to Buying a Home, the Price is More Important Than the Interest Rate

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Keki Mistry, the bossman at HDFC, India’s leading housing finance company, recently told The Economic Times, India’s leading business newspaper: “In my view, it is the best time to buy property. First, by virtue of the fact that interest rates are significantly low. Since 2008, we have not seen rates as low as this. I don’t believe rates will go down any further. Second, property prices haven’t gone up in recent times so one would believe there is time correction of prices.”

Asking Mistry if it’s the right time to buy a home is like asking Nandan Nilekani about the privacy concerns around Aadhaar. Or asking RBI governor Urjit Patel if demonetisation has been a success. Or asking me, if freelance writers should be paid more.

The answers in all the three cases will be a definite yes. Mistry is in the business of giving out home loans. And for him, it is always the right to give out home loans, as long as he takes a margin of safety into account and lends out only a certain portion of the price of the home being financed through a home loan.

Nevertheless, it is important to try and understand what Mistry is really saying here. The first point he makes that interest rates are low, and he doesn’t really see them going down anymore. Mistry might be right about this. Interest rates have been low because of the deluge of money that has come into banks because of demonetisation.

Mistry further says that home prices haven’t gone up in recent times and there has been a time correction of prices. And hence, this is the right time to buy property.

What does Mistry mean by a time correction of prices? Let’s say that a home was selling at Rs 50 lakh in a suburb of a big metropolitan city a few years back. Even today, it is going at the same price. Meanwhile, the price of every other thing has gone up. Once we factor in this inflation, the home has seen a time correction of prices, given that the purchasing power of Rs 50 lakh today is really not the same as the purchasing power of Rs 50 lakh, a few years back.

Given this time correction of prices, buyers should not wait any further and buy homes. This is basically what Mistry is saying.

The trouble is this makes little sense. As always there are several nuances that are involved here. First and foremost, there is the black part of that needs to be paid while buying homes across most parts of the country. It is difficult to generalise the proportion that needs to be paid in black, given that rates vary across the country. But let’s say around 20 per cent of the price of the home is to be paid in black. This works out to Rs 10 lakh (20 per cent of Rs 50 lakh).

Hence, the official price of the home works out to Rs 40 lakh (Rs 50 lakh minus Rs 10 lakh). A housing finance institution like HDFC will not finance the entire thing. HDFC’s average loan to value ratio at the origination of the home loan is 64 per cent. In this case that would mean a loan of Rs 25.6 lakh. (64 per cent of Rs 40 lakh). This is roughly around the average home loan size of HDFC at Rs 25.7 lakh.

Hence, HDFC will finance around Rs 25.6 lakh of the cost of the home of Rs 50 lakh. The buyer has to finance the remaining Rs 24.6 lakh. This basically means that the buyer needs to finance nearly half of the cost of the home. And that is the real equation that the buyer needs to take a look at.

This basically means whether the buyer has Rs 25 lakh of savings which he can use to buy a home of Rs 50 lakh. If he has the money he can buy the home. If he doesn’t, he can’t, irrespective of where the interest rate on the home loan is.

What about the low interest rate that Mistry was talking about? How much difference does it make? The EMI on a loan of Rs 25.6 lakh at 10 per cent per year for a period of 20 years would work out to Rs 24,801. This would have been the case a on a new home loan, a few years back. Now at 8.5 per cent interest, the EMI would work out to Rs 22,303 per month or around 10 per cent lower.

Hence, the lower EMI does help. But the basic question still remains; whether the prospective buyer has a savings of around Rs 25 lakh. Actually, the savings need to be more once we take brokerage, the cost of moving, making the home liveable enough, etc., into account. But for the ease of calculation we will leave all that out and just concentrate on the price of the house.

Now compare this scenario to where the price of the home over the last few years has fallen by 20 per cent and is currently going at Rs 40 lakh. Assuming a 20 per cent black part, the official price of the home works out to Rs 32 lakh. Of this HDFC would lend around Rs 20.5 lakh (64 per cent of Rs 32 lakh). Hence, the buyer would need around Rs 20 lakh to get the deal going.

This meant that anyone with savings of around Rs 20 lakh could carry out the transaction and buy the home. This requires Rs 5 lakh lower savings than the earlier example. In this situation, the prospective buyer is more likely to buy than the earlier one.

The point is similar to the one I have often made in the past, if people need to start buying homes again, the home prices need to come down. Lower interest rates just don’t help enough. And this is something Mistry needs to understand.

To conclude, it is safe to say that if 20 per cent of the price of a home being bought needs to be paid in black, then the buyer needs to have half of the price of the house as savings. Only then can he go ahead with the transaction and buy the home.

The column originally appeared in Equitymaster  on May 9, 2017

RERA is Not a Fairy Tale That It is Being Made Out to Be

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Fairy tales have happy endings.

The Real Estate (Regulation and Development) Act, 2016, or RERA for short, which came into effect from May 1, 2017, was supposed to be a fairy tale.

A fairy tale that would end all the trouble that homebuyers have while buying a house.

It would be put the big bad builders in their proper place.

But RERA is turning out to be like a bad art movie from the 1980s, where the system would inevitably crush the spirit of the hero, and win. (If you want to precisely know what I mean here try watching a movie called Paar).

This is what seems to be happening with RERA. Allow me to explain.

RERA is a central Act. But land is a state subject. Any real estate project needs land. Given this, state governments have the right to frame the operational rules for RERA.

And this has given them an opportunity to dilute the key provisions of RERA. This they have done with full impunity.

Before we get into the details, let’s try and understand why an Act like RERA was required in the first place.

Let’s say you want to buy a product. Let it be any product. It could be something as simple as an eraser for your child (I wonder if children still use erasers) or something a little more complicated like an air conditioner.

What do you do when you want to buy an eraser? You head to the local stationery shop, you pay the price of the eraser and you get the eraser.

What do you do when you want to buy an air conditioner? You head to a shop selling whitegoods and choose the air conditioner you want, given your budget, brand preferences, the preferences of your family and the space you have to install it.

The retailer doesn’t hand over the air conditioner to you immediately, like is the case with the eraser. (And that would be stupid given that how would you carry the air conditioner back to your house). So, the next day, the retailer delivers the AC at your house. In a few hours, a couple of people come and install it. And we are done.

What is the point I am trying to make here? When you buy a particular product from the market that is exactly what you get. I mean there is no chance of your buying an air conditioner of one and a half tonnes and the retailer delivering a one tonne air conditioner.

In the odd case that this happens, it is bound to be some mistake at the retailer’s end and will be soon corrected.

Along the same lines, when you buy an eraser, the stationery shop doesn’t insist on selling you a pencil sharpener or a ball pen for that matter.

At the cost of repeating, you get what you want and what you have paid for and not something else.

But when it comes to buying a home in India things don’t work in the same way.

Imagine you paid for a three-bedroom hall kitchen in a society which is supposed to have a swimming pool, a club house, a lot of greenery and what not.

The way things work in India, your chances of getting what has been advertised and what has been paid for, are very low.

In fact, in many cases, the size of the apartment gets smaller. In many cases, the number of floors goes up. In the original plan the number of floors planned were ten. By the time, the building gets built, it has fifteen floors.

And in such cases, no is bothered about the fact that the foundation was originally dug for ten floors and now 15 floors have been built on it.

In some cases, the builder does not deliver on time. This leads to the homebuyer who had bought the home with the idea of living in it, having to continue paying a rent and at the same time paying the EMI on the home loan that has funded the home.

In some cases, the builder simply takes money from the buyers and disappears.

Considering all these points, a homebuyer in India considers himself lucky if he gets a home at the end of the promised period, at all.

So what if it’s slightly smaller. So what if it doesn’t have the facilities that it was originally supposed to have. So what if the drawing room gets seepage after the first rains.

An Indian homebuyer can adjust with all this and more.

The RERA was supposed to help the homebuyer on such fronts. It essentially has four key provisions:

a) 70 per cent of the money collected for a home project by the builder is supposed to be held in a separate bank account. Further, the money can be used only for the project and can be withdrawn according to what proportion of the project has been completed. This has been done to ensure that the builder spends a bulk of the money for the project he has raised money for and not spend it on other things, as builders are wont to do.

b) RERA recommends a fine for the builder which can extend up to 10 per cent of the cost of the project and/or a prison of up to three years, if the provisions of the Act are not followed.

c) The builder needs to treat any structural defects in the project arising within five years of him handing over possession to the buyer, free of charge.

d) RERA includes ongoing projects within the Act as well, by defining an ongoing project as a project “for which the completion certificate has not been issued” on the date of commencement of the Act. This provision was put in to ensure that many projects which have been endlessly delayed over the years, come under the Act. And in the process the Act offers help to the harried buyers.

All these provisions have been diluted by the state governments in the operational guidelines of RERA that have been notified. Take a look at Table 1.

Table 1:

States Definition of on – going projects Penelties for non – compliance Payment Schedule Norms for escrow withdrawal Clause for structural defects
Andra Pradesh Diluted Diluted In line In line In line
Bihar In line Diluted Lacks clarity In line In line
Gujrat Lacks clarity Lacks clarity Lacks clarity Lacks clarity Lacks clarity
Kerala Diluted In line In line Diluted Diluted
Madhya Pradesh In line Diluted Lacks clarity Lacks clarity Lacks clarity
Maharashtra In line Diluted With conditions In line In line
Odisha In line Diluted Lacks clarity In line In line
Rajasthan In line Diluted In line In line Lacks clarity
Uttar Pradesh Diluted Diluted Lacks clarity In line Lacks clarity
Andaman and Nicobar Islands In line
Chandigarh In line
Dadra and Nagar Haveli In line
Daman and Diu In line
Lakshadweep In line
National Capital Territory Delhi In line

Source: Crisil ResearchThe conclusion that one can draw from Table 1 is that if you want to fully benefit from RERA you need to be a homebuyer in a union territory.

The interesting thing is that around two-thirds of the states still haven’t notified the operational guidelines of RERA as yet. This tells us how serious state governments are about implementing RERA.

To conclude, RERA hits at the heart of the basic problem with state level politics in India. The state level politics thrives on the nexus between builders and politicians. In some states builders are politicians and politicians are builders. It is difficult to differentiate between the two.

The trouble is that against whom the rules are being made are also the ones deciding on the rules. Hence, it is not surprising that the rules have been diluted or they lack clarity in comparison to the RERA Act of the central government.

But this is real life. And real life is not a fairy tale.

The column originally appeared on Equitymaster on May 4, 2017

RERA: With state govts diluting key provisions, can the Act protect buyers at all?

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The Real Estate (Regulation and Development) Act, 2016, or RERA for short, has come into effect from May 1, 2017.

In large sections of the media, the RERA is being projected as a saviour for the home buyers. But will it turn out to be like that?

Will builders stop taking home buyers for a ride?

Will home buyers get the same home and facilities, which had been advertised, and which had been paid for?

Will the home buyers ever come to know what is the exact size of the home that they are paying for?

Will a builder still manage to not finish the project and disappear with the money he had taken from home buyers?

Will builders stop demanding black money?

The RERA is expected to make things better for the prospective home buyer, at least in theory. But in practice it’s off to a bad start.

While RERA is a central Act, land is a state subject. The Indian constitution divides legislative actions into three lists: a) union list b) state list c) concurrent list, on which both the state governments and the union government can legislate. Land is a state subject. Construction of homes requires land. And given this, the different state governments need to come up with the operational rules to implement RERA.

And this is where the entire idea of RERA protecting the interest of the home buyers seems to be going for a toss. First and foremost, even though the Act has come into effect from May 1, 2017, many state governments are yet to notify the operational rules in order to implement RERA.

A Crisil Research note titled Most states miss RERA deadline and dated May 2, 2017, points out: “Despite continuous monitoring and follow up by the Ministry of Urban Development and Housing, Government of India, only nine states (Andhra Pradesh, Bihar, Gujarat, Kerala, Madhya Pradesh, Maharashtra, Odisha, Rajasthan, and Uttar Pradesh) and six union territories (Andaman and Nicobar Islands, Chandigarh, Dadra and Nagar Haveli, Daman and Diu, Lakshadweep, and National Capital Territory of Delhi) have notified their respective Real Estate (Regulation and Development) Rules, 2017.”

Given that Union Territories are largely in control of the union government, it isn’t surprising that the operational rules are in place. But only around one-third of the states have notified the operational rules of RERA. And this in itself shows how serious state governments are about implementing RERA.

Further, even those states which have passed operational guidelines have diluted the Act in the process. As per the RERA, an ongoing project  is basically a project “for which the completion certificate has not been issued” on the date of commencement of the Act. This basically makes sure that many home projects which are work-in-process come under the Act.

Several states have diluted this definition. Crisil Research points out: “Andhra Pradesh, Kerala and Uttar Pradesh have altered this definition in their notified rules.” In case of Gujarat, the operational rules do not mention any definition of an ongoing project.

The operational rules of the Haryana government also dilute the definition by stating that projects which have applied for a part completion certificate or an occupancy certificate will not come under the RERA, if the certificate is granted. This has led to many builders rushing to get an occupancy certificate to ensure that their project does not come under the Act.

As a newsreport in The Economic Times points out: “Developers in Haryana are making use of the window provided by the draft state RERA rule, published on Friday [April 28, 2017], to get out of the ambit of the regulatory authority. On the first working day after the draft rule was announced, over 50 applications were submitted with the department of town and country planning (DTCP), seeking occupation certificates (OC).” In the days to come, many more applications are expected to be submitted. This has basically made a mockery of what RERA was trying to achieve.

There are other dilutions that have been made as well. As Crisil Research points out: “According to the central legislation, the model sale agreement is required to specify 10% advance payment, or charge an application fee from buyers, while entering into a written agreement for sale. In addition, in case of any structural defects arising within five years of handing over the possession of project to buyers, developers will be liable to rectify such defects without further charge. However, there is no clarity on these clauses in most states’ RERA notifications.”

Another important clause in RERA is the escrow account clause. As the Act states: “seventy per cent of the amounts realised for the real estate project from the allottees, from time to time, shall be deposited in a separate account to be maintained in a scheduled bank to cover the cost of construction and the land cost and shall be used only for that purpose.”

Hence, 70 per cent of the money taken from the home buyers by the builder needs to be maintained in a separate escrow account and needs to be used only for the purpose of building the homes. Also, this money needs to withdrawn in proportion to the percentage of completion of the project.

This is a key clause in RERA and was put in to stop the builders from raising money for a project and then using it for other things like completing an earlier project or paying off debt that was due.

The operational guidelines of many states are not clear on this. Like the operational guidelines of Gujarat, do not mention the norms for withdrawal of money from the escrow account of the project. The operational guidelines of Kerala state that “70% (or less, as notified by the government) of the amount realised by developers to be deposited in a separate account.” There is no clarity on withdrawal of money from the escrow account. This is true even for the guidelines issued by Madhya Pradesh.

Over and above this, RERA recommends imprisonment and fines for non-compliance with the Act. Several states have diluted this as well. Long story short—while the idea behind the RERA might have been noble to protect the buyers from the builders, but the state governments have managed to dilute that core purpose to a large extent.

The column originally appeared on Firstpost on May 3, 2017.

 

 

Why The Real Estate Act Will Remain Ineffective Until The Builder-Politician Nexus Is Broken

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In the first half of Vidhu Vinod Chopra’s 1994 release “1942: A Love Story,” there are a series of characters saying: “Shubhankar Da aane waale hain (Brother Shubhankar is about to come)”. The movie is based around the freedom struggle and the hope every time the lines are said is that the man called Shubhankar will come and set everything right.

Shubhbankar, played by Jackie Shroff, does come, just before the interval shot. Things become messier after his arrival, though eventually, like in all good Hindi films, everybody lives happily ever after.

Dear Reader, you must be wondering why am I talking about a 23-year-old movie which everyone has forgotten about by now, except for its marvellous songs composed by RD Burman.

Well, The Real Estate (Regulation and Development) Act, 2016, or RERA for short, has come into effect from May 1, 2017.

And it is expected to play the role of Shubhankar in the real estate sector in India. It is expected to come and set everything alright, at least that is the impression that has been given by many real estate experts in the media. But how correct is that?

RERA is basically a central Act. Given this, state governments do not need to pass separate Acts in order to implement it. But land is a state subject and given this the rules needed to implement the Act, need to be formulated and notified by the state governments. Many states are yet to come up with these rules.

As rating agency ICRA points out in a research note: “Except Uttar Pradesh, Gujarat, Madhya Pradesh, Maharashtra, Andhra Pradesh, Orissa, Bihar and the Union Territories, most have missed the deadline to notify its rules under the… Act.”

This tells us how serious the various state governments are about implementing the Act. Over and above this, the RERA mandates that every state set up its own real estate regulator. It so happens that Madhya Pradesh, Maharashtra and Rajasthan, are the only states up until now to have set up a real estate regulator. “Certain other states have set up interim regulatory authorities (as permitted under the Act),” ICRA further points out.

Also, as a newsreport in the Mint points out, Maharashtra is the only state that has set up a website where the real estate developers can register to set up new projects under the RERA.

Given that most states haven’t gotten around to setting up the real estate regulator and a website, this is something that will take time as they go around meeting the physical infrastructure and human resources requirements of the regulator as well as the website. And given this, RERA will not actually be implemented across large parts of the country, for some time to come.

Also, states which have formulated the rules to implement the RERA have diluted them in comparison to the rules framed by the union government. Take the case of Gujarat. Only projects launched on or after November 1, 2016, come under the aegis of the Act.

On the other hand, the central government Act defines ongoing projects as projects “for which the completion certificate has not been issued” on the date of commencement of the Act. This essentially allows many projects which are still work in progress not to come under the RERA.

Haryana, another state ruled by a BJP government, has done something along similar lines to help keep ongoing projects outside the ambit of the RERA. Projects which have applied for a part completion certificate or an occupancy certificate will not come under the RERA, if the certificate is granted. This, as was the case in Gujarat, is another ploy to get around the central government Act’s definition of an ongoing project.

In Maharashtra, a new nomenclature called proposed plans has been introduced and proposed plans instead of sanctioned plans can be submitted to the regulator. In the case of RERA only the term sanctioned plans has been used and only sanctioned plans can be submitted to the regulator.

As per the RERA any changes made to the sanctioned plans needs the written consent of allottees in the project. As the bare Act points out: “Any other alterations or additions in the sanctioned plans, layout plans and specifications of the buildings or the common areas within the project without the previous written consent of at least two-thirds of the allottees, other than the promoter, who have agreed to take apartments in such building.”

In case of Maharasthra, the usage of the term proposed plan is basically being seen as a way of getting around the written consent of the two-thirds of the allottees, if the builder goes around making changes to the project.

Over and above this, the Maharashtra rules point out that a phase of a project “may consist of a building or a wing of the building in case of building with multiple wings or defined number of floors in a multi-storeyed building/wing”. This has again been done to give flexibility to the builder to operate in the way he wants to, without following the letter and spirit of RERA. It allows the builders to keep developing projects on a piecemeal basis, something that they excel at.

In Delhi, the rules allow the builder to give details of only those legal cases where courts have already given a deicision. He does not have to provide details of cases which are still on. This directly contradicts Section 4.2 (b) of RERA which essentially states that the builder needs to provide: “a brief detail of the projects launched by him, in the past five years, whether already completed or being developed, as the case may be, including the current status of the said projects, any delay in its completion, details of cases pending, details of type of land and payments pending.”

In the time to come more such dilutions will keep coming out. The trouble right now is that operational rules of all states are not available in English and hence, it’s difficult to get a pan India perspective.

So, the question is why are state governments diluting the implementation of the RERA? The simple answer lies in the fact that there is a nexus between the builders and the state governments. Currently, the regulations governing the real estate sector vary from state to state and are inherently complicated. Given this, anyone wanting to be even a marginally serious player in the real estate business, needs to be in the good books of local politicians. This also explains why there are no pan India real estate companies. Forget pan India, there are no real estate companies which operate through an entire state.

The politicians also see real estate to be a cash cow which helps them generate money to fight elections as well as enrich themselves. This explains why regulations governing the sector continue to be complicated. In many states, the politicians are builders themselves though they have other individuals fronting for them. In such a scenario expecting the RERA to be implemented properly is nothing but day dreaming. For politicians, it makes sense if RERA is not implemented in letter and spirit. Given that politicians benefit from builders, a diluted RERA is their way of a quid pro quo.

If RERA has to be implemented properly the nexus between the politicians and the builders at the state level needs to be broken. And for that to happen, one of the first things that state governments need to do is get rid of change in land usage regulations that are currently in force. Only once this happens will things start to roll.

To conclude, Shubhankar Da may have been effective in 1942—A Love Story, RERA in its current form will become yet another regulation which won’t achieve much.

The column originally appeared on The Huffington Post on May 3, 2017

Now that RERA is a reality, should you buy an under-construction property?

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The Real Estate (Regulation and Development) Act, 2016, or RERA for short, has come into effect from May 1, 2017.

With this happening, the question on everybody’s lips is, should we buy an under-construction property? If you plan to buy a home to live in, an under-construction property makes sense because it comes cheaper than a finished one. If you plan to buy home as an investment, given that an under-construction property is cheaper, the returns are always better, depending how early in the construction stage you make the investment.

But that it the theoretical part of it. It comes with the assumption that the builder will deliver the property for which you have paid, and he will deliver it on time. The problem is that this does not always turn out to be the case. Many people in the Delhi National Capital Territory region and other parts of the country, have found this out in the last few years.

In the process, they have ended up paying EMIs on the home loans they had taken to fund their home purchase and the rent on the home in which they continue to live in. The homes they had hoped to live in are nowhere in sight.

But all this happened in era when there was no RERA. Now we have RERA. The real estate sector in the country up until now had next to no regulation from the point of view of the buyer. Buying a house required a lot of leap of faith and prayers at the same time.

The RERA essentially has these five basic purposes: a) to make sure that home that has been bought is delivered on time. b) to make sure what has been promised has been delivered with respect to the actual size of the house, the facilities etc. c) to make sure that the money taken from the buyer is used to build what has been promised and is not diverted to something else, as many builders tend to do. They tend to raise money for one project and then use it to finance another project. d) to make sure that the many permissions required to build a housing project are in place. e) to make sure that if any changes are made to the project, they have the approval of the majority of the buyers.

RERA also makes it mandatory for state governments to set up a real estate regulator. As the Act states that: “Any aggrieved person may file a complaint with the Authority [i.e., the real estate regulator of a particular state] or the adjudicating officer, as the case may be, for any violation or contravention of the provisions of this Act.”

What this basically means that if the builder takes the buyer for a ride, he can approach the real estate regulator and hope to set things right. This is precisely why there have been a flood of acche din articles in the media saying how RERA is going to save the day for real estate buyers.

There are multiple problems here:

a) While RERA is a central Act, land is a state subject. Hence, states are allowed to make the operational rules to implement RERA. Given the nexus that prevails between state level politicians and builders, state governments have already started diluting the basic spirit of RERA. In particular, an effort is being made to ensure that the ongoing projects are not brought under the ambit of RERA. This basically means that many buyers who are currently in trouble will not be able to benefit from this Act.

b) Only three states (Maharashtra, Rajasthan and Madhya Pradesh) have set up regulators up until now. Hence, the process of setting up a regulator is going to take some time.

c) It is important to understand that regulators don’t start becoming effective from day one. Take the case of the Securities and Exchange Board of India, the stock market regulator. It was set up in 1992 and in 1994 the vanishing companies scam, one of the biggest stock market scams, happened. This was followed by the Ketan Parekh scam in 1999-2000. Hence, it takes time for regulators to mature.

d) Also, it is important to know that the regulators don’t necessarily bat for the consumers. The Insurance Regulatory and Development Authority(IRDA) of India, the insurance regulator, for a very long time, turned a blind eye to all the misselling carried out by the insurance companies. It kept clearing investment plans which worked well for the insurance agents but not for the consumers who had bought them. The point being whether real estate regulators bat for the consumers or the builders, remains to be seen. Also, this is something that may vary from state to state.

To conclude, there are many practical things which continue to remain unclear as of now. Hence, if you are looking to buy a home to live in, it makes sense to still buy a fully finished one, rather than something which is under-construction. This may mean compromising on the size or the location, perhaps, but what you will get in return is peace of mind. And nothing is more important than that.

The column originally appeared on Business Standard The column originally appeared on Business Standard online on May 3, 2017.