On 1st May 2016, the Government of India passed a revolutionary law, the Real Estate Regulatory Act. Traditionally real estate was perceived as a shady business owing to the experiences people have with dubious real estate brokers. Furthermore, unethical practices reported in the news put the entire real estate fraternity in bad light. The law was implemented at a time when the nation witnessed few real estate developers defaulting their promises to customers.
The legislation, which aimed at making transparent real estate deals, mandates the following:
- All the approvals pertaining to the building have to be obtained by the developer and disclosed before the launch of project sales
- The developer has to promise a completion date with penalty, if defaulting
- The developer shall open an escrow account for every project, to control diversion of funds
- The developer has to guarantee the quality of construction for a period of 5 years after handing over the product to the customer
- The developer shall not collect more than 10 percent of the property cost as advance payment
In reality, this has not benefited the home buyers much. In contrast, developers were forced to invariably increase the prices of homes after the introduction this law. Regulations like obtaining all the approvals before the start of sales, are far-fetched, since the government agencies are themselves infamous for speedy approvals. With labor resource becoming scarce in India and construction technology taking time to catch up, commitment to completing projects on time will require developers to add a risk premium to the prices. Additional price padding will be required for developers to be able to guarantee defect-free construction for a period of five years. Capping the maximum advance payments that can be collected from customers and its protection with the help of an escrow account, will require the developer to increase debt levels. All these barriers have further filtered developers in the market, which has in turn caused the short supply of apartments for sale and the subsequent increase in the prices.
Home buyers are now questioning if the defaulting of a few builders was an issue, serious enough for the government to implement a rule which has now made the entire business of home-buying cumbersome and unaffordable.
Business Management 