Decoding the real estate Bill
Will the strained builder-buyer relationship change after the legislation is implemented?
Jul 09, 2013
Source : Business Standard

 

MUMBAI: The Bill suggests 10 per cent of the project cost as penalty for first-time offenders. Repeat offenders could get a jail term of up to three years.

Once builders start marketing (after receiving all approvals), they will only be allowed to use real pictures of the projects and not computer-generated visuals, which could mislead buyers.

While quick approvals are required, the Bill doesn't elaborate on the process to get these and which authorities to approach. This could be a problem area, with developers passing the buck to the authorities, saying they take time in giving approval.

"The law should be comprehensive and give role clarity to the authorities as well," adds Harish.

According to Samantak Das, chief economist and director (research), Knight Frank India, if the builder takes too long to launch projects due to delay in approvals, it could push up property prices as escalation costs are passed on to the home buyer.

Ask for clearly defined areas
The Bill directs developers to sell their properties only on the basis of the 'carpet area' of the property. Concepts like 'super area' and 'super built-up area' are not allowed.

Carpet area is the net usable floor area of a residential unit. Developers try to sell flats based on the 'super built-up area', which also takes into account common areas such as the lobby, lift shaft and stairs.

With this, buyers will get clarity on the actual livable area they will get on receiving possession of the flat. Also, buyers will know the actual usable area.

Most developers show the property construction plan with all dimensions but don't give the usable floor space. Experts say there still could be ambiguity over the actual definition and measurement standards for carpet area. Definitions in laws can be subjective and different developers can interpret the definition differently and calculate based on their own assumption.
 

Project capital to be maintained
The Bill mandates 70 per cent or less, as notified by the appropriate state government, of the funds raised for a project be deposited in a separate account. Till now, builders were supposed to put at least 70 per cent of buyers' advances in a bank account earmarked for a particular project. With this amendment, the minimum threshold of 70 per cent is gone and no new minimum threshold is given.

Developers are also required to keep 70 per cent of the money realised from sales into an escrow account towards construction costs, which cannot be used for anything else.

This will ensure developers do not divert funds meant for a particular project to other projects. The Bill also protects buyers' interest against project delays by asking developers to refund the amount paid, along with interest, in the event of a delay. Both factors are expected to ensure timely completion of projects and handover of units to buyers.

"Given the intention behind this provision (addressing project delays), the 70 per cent threshold might not be appropriate in all cases. Hence, a lower limit which considers the cost of construction till completion would serve the purpose," says Das of Knight Frank.

Usually, developers need 30-40 per cent of the cash collected for construction. So, if a lower limit than 70 per cent is not set, it will hit the viability and feasibility of the project," says Dutt of Cushman & Wakefield.

And, if a developer maintains a lower amount, it means it will have that much less money to finish the project, thus impacting the buyers. "Diluting from 70 per cent to 70 per cent and less has given decision power in the hands of the state regulator. This could lead to higher red tape in the sector," says Tejas Sheth of Emkay Global Financial Services.

And more benefits
The Bill has also proposed agents and brokers be registered. This might be difficult to implement, considering the number of brokers operating. It could be implemented in the metros but will be quite a task in smaller towns.

The Bill says the developer should repair any defects that might show up within a year of house possession. It also prohibits builders from taking any deposit or advance prior to entering into a sale agreement.

Sheth of Emkay Global Financial Services says the current Bill requires a lot more clarity and doesn't address many loopholes. It doesn't say which law the state regulator is to follow when the State and the Centre's respective Bills are at crossroads.

The Bill doesn't clarify the difference in definition of a project and its phases, as well as the time frame within which common amenities should be assigned to customers.

No official pre-launches, registration of agents would curb investor money in the sector when combined with the one per cent tax deduction at source clause introduced in Union Budget, Sheth adds.

On the whole, the Bill seeks to make the entire builder-buyer transaction more transparent. Now, implementation will be key.

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