Fineprint: Real estate Bill loopholes and why realtors are fuming

The devil is in the detail. To spot it,you need time. Same is the case with the Real EstateRegulation & Development Bill 2013. After the initial euphoria over the win-win bill, now experts and stakeholders have started taking note of the gaping holes in the bill.

The Bill, which is aimed ensuring buyer protection in the housing space, guided by a state level regulator and a tribunal,has been cleared by the Union Cabinet. This, however, is just the first hurdle and actual implementation at the ground level will take much longer.

The bill would next be tabled in both the houses of Parliament and then referred to the parliamentary standingcommittee, before it becomes an Act.

What are the loopholes

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[caption id=“attachment_851519” align=“alignleft” width=“380”] The Bill, which is aimed ensuring buyer protection in the housing space, guided by a state level regulator and a tribunal, has been cleared by the Union Cabinet. Reuters[/caption]

Brokerage Emkay Global believes that while the Bill is in the right direction it lacks implementation clarity and doesn’t address loopholes like phasing of projects for customer advances, curbing of money laundering, etc.

Currently most developers pre-launch projects and utilise the advance from the sale towards getting approvals as well as financing other projects. However, once the bill becomes an act, developers will not be able to pre-sell any project without getting the project approvals first and registering the same with the government authority. They will have to deploy capital from other source than customer advances.

Pre-launch activities enable developers to accelerate cash flows and complete acquisition of land without having to finance the land acquisition through equity.

But there’s a loophole here too.

“The Company can always pre-launch and take advances and show it as short term debt. Later convert the same in customer advances at the time of launch. All the pre-launchesare done on understanding and trust between the parties,” said Emkay Global Financial Services.

“While there would be no official pre-launch the manner it is done currently, developers may look for structured arrangements within closed circles to obtain funding,” brokerage Edel Property noted.

Secondly, the bill has sought compulsory deposit of 70 percent or lower of the funds received from allottees in a separate bank account to ensure that the developer cannot utilise the capital generated from one project, unless it is completed, to finance the capital requirement of other projects.

Further, the clause of full refund in case of delay in projects would put pressure on developers for a timely completion.

While this will lead to lower availability of liquidity and strain developers’ finances, it must be noted that the draft bill had proposed a deposit of 70 percent, but the revised bill has brought this down to 70 percent or lower.

“There is missing clarity on the definition of the project, as the industry phases out asingle project. Can the developer utilise advances of phase 1 towards approvals of phase 2 and not deliver the common amenities, is not clear,” Emkay pointed out.

Also, the bill seeks mandatory registration of real estate agents with the regulator to curb money laundering. transactions but at the same time does not address the repercussions if information supplied by the agent is false.

“Also, there is nodifferentiation between a role of agent or a consumer played by the same person,” Emkay noted.

Why are developers cribbing

Retaining amounts realised from customers and placing them in banks likely to affect the cash flows for projects and thereby the financials of developers.

Developers will also be barred from collecting any money from buyers before completing all necessary permits to start construction on the project. While it is to be clearly defined what a written agreement is (whether it has to be a registered agreement with normal stamp duty or otherwise), the clause could cause aversion of investor demand who are looking to buy and sell back the property at a later date, Edel Property noted.

“In its zeal to curb a small section of erring developers, the government is punishing the whole industry. The bill makes it mandatory for a developer to obtain all clearances before commencing a project, but it does not take into account the inordinate delays in project approvals on the part of government bodies and local authorities,” saidVimal Shah, President, MCHI-CREDAI.

In other words, if investors’ money is curbed, builders have nowhere to run.

Little wonder that realtors are now crying foul and terming the Bill as a “breeding ground for corruption”.

Realtors apex body CREDAI Chairman Lalit Kumar Jain has expressed fear that the bill could encourage corruption instead of curtailing the social menace.

“Our fear is that those with expertise to handle political influencers will only survive, thus leaving the all important industry in the hands of corrupt people,” Jain said.

He demanded that the regulator should cover all stakeholders like defaulting customers, the approving authorities and financial institutions that fund projects.

“How can anyone blame the developer if a project is held up due to approval delays or funds for that matter?” he asked.

He even termed the mandatory deposit of 70 percent of the cost in an escrow account as impractical.

“The construction cost of the project varies in different markets. For instance, in micro markets as in prime areas, the cost of construction may be around 30% where as in suburban areas it could be a high at 80% of the entire cost elements. The provision should be based on the ratio of the extent of the construction cost so as to ensure timely completion of projects, and prevent fund diversion,” he said in a statement.

More pain for buyers in the short term

While the bill is sure to benefit buyers in the long term by holding erring developers responsible, it could increase property prices in the short term as developers will now have to wait for all approvals and clearance before they can pre-sell any apartments in the pre-launch period. Also, disqualification of a shoddy builder could stall construction in all half-done projects and hurt genuine buyers.