Increasing consumer activism and a proactive judiciary lay the foundation for Real Estate (Regulation and Development) Act: ICRA
Mumbai, October 24, 2016: In ICRA’s view, while the Real Estate (Regulation & Development) Act, 2016 includes provisions for ensuring timely and orderly delivery of projects, a simultaneous focus on initiatives to facilitate timely execution is also necessary to ensure faster and more effective implementation of the regulation.
‘’Though the Act has various provisions to reduce the malpractices in the sector and in particular address the issues faced both by the buyers and investors, it however does not seek much to facilitate and expedite the project execution,’’ ICRA has opined.
‘’The provisions of RERaD Act hold significant importance for buyers and investors, but problems faced by developers, including multiplicity of approvals and lack of adequate funding avenues, continue to remain unaddressed in the Act’’, says, Shubham Jain, VP, Corporate Sector Ratings at ICRA Ltd.
Some of the prominent benefits likely to ensue from the regulation include elimination of fraudulent developers and agents, facilitation of informed decisions by the buyers, increased standardisation and improved accountability for timely execution as well as appropriate use of customer funds.
In ICRA’s opinion, the recent consumer activism coupled with the pro-active stance by the judiciary is a positive step towards protecting the interest of buyers in the industry. Nevertheless, the implementation of the Real Estate (Regulation and Development) Act 2016 (RERaD Act or The Act or the Regulation) remains critical for restoring the buyers’ and investors’ confidence in the industry in the long run.
Though not a one-stop solution, the RERaD Act addresses a lot of issues plaguing the sector.
Commenting on the Act, Mr. Shubham Jain, Vice President, ICRA, said: “The basic objective of the RERaD Act is to protect the interest of consumers and investors by introducing a regulatory regime to regulate and improve the level of transparency and accountability in the sector. In ICRA’s view, the provisions of the Act hold significant importance for buyers and investors. Some of the prominent benefits likely to ensue from the regulation include elimination of fraudulent developers and agents, facilitation of informed decisions by the buyers, increased standardisation and improved accountability for timely execution as well as appropriate use of customer funds.”
The residential real estate sector has been going through a prolonged slump with subdued demand on account of high real estate prices coupled with weak consumer sentiment and general economic uncertainty. This coupled with supply side constraints like various supply side challenges such as delays in receipt of approvals as well as paucity of manpower and working capital funds, which has led to delays in project execution across micro-markets. The typical project execution cycle, which ranged between 3-4 years, has extended to as much as 6-7 years. Further, the real estate industry has historically been plagued by issues like lack of transparency and accountability
“The opaque nature of the industry coupled with the lack of regulatory bodies thus far has resulted in significant asymmetry of information as well as skewed balance of power between the developers and the buyers” Mr. Shubham Jain, added.
With these issues mounting up, there has been a spate of legal proceedings as well as adverse judgements against developers in the recent past. For home buyers, the delay in getting the possession of the home remains a key concern.
Delay in hand over of the units increases the overall financial burden of the buyers as it results in a higher cost in the form of cost of alternative accommodation for the period of the delay for self-occupied property while bearing the burden of their home loan obligations as well as deferment of the expected income in case of investment property.
Moreover given the quantum of homebuyer’s capital deployed towards booking these units, the financial flexibility available to them is considerably reduced. While the buyers agreement, which is the agreement signed by the buyers while acquiring the unit, typically stipulate strict timelines for payments along with provision of penalty in case of delays in the same, the issue of delays in delivery by the developers is often not addressed in the agreement.
During the past few years, the extent of delays has increased significantly given the paucity of funds available with the developers as well as other above-mentioned issues. Given the inordinate delays in delivery of project, lack of clarity regarding the final completion, coupled with limited bargaining power, increasing number of buyers are seeking legal intervention. In the current fiscal, the National Consumer Disputes Redressal Commission (NCDRC) has come down heavily on prominent developers including entities like DLF Limited, Parsavnath Developers, Supertech Limited, Jaypee Group and Unitech Limited, ordering them to compensate buyers for the delays faced in specific projects. Other reasons for the legal proceeding against developers include changes in project design from the initial promised specifications with the buyers, construction without requisite approvals, fraud and cheating amongst others.
Table 1: Snapshot of Recent Litigations and Orders in Real Estate Sector
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