Real Estate Market Pre and Post RERA
- 16th Oct 2017
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Article by Tejas Jhaveri
Chief Strategy Officer, PropertyCrow.com
Real Estate has a mix of Small, Medium and Big Time players in the market. Plus its un-organised. It was not even regulated. Hence, it lead to builders flouting delivery timelines and making customers wait for years to get the possession of their Dream Homes, than intimated by the developer at the time of booking.
Lets look at the past history of how the Real Estate Primary/ Under-Construction market used to function without any regulator in place:
1. Aggressive delivery timelines given by the developers at the beginning of the project, which was however understood that the project will delay by atleast 1 year. Gullible buyers weren't able to understand this and hence have to bear with project delays.
2. No proper track of finances of the developers. The practise of putting one projects money into another, lead to the plight of un-wanted expansion of developers into areas not local to their present operations. In simple terms, it means geographical diversification. One needs deep pockets to go for geographical diversification in Real Estate because it needs to adjust and understand each and every states rules and regulations, approval process, local understanding of demand and supply, establishing one own's brand in the area of the project and the list goes on.
3. Not delivering what is promised by the developer at the time of booking. It can be specifications of an apartment or an amenity in the project. This lead to Customer Grievances. The customer was unable to voice this due to legal hassles involved, plus time and money. Secondly, the customer was unable to understand which particular authority he/she should go to, to seek redressal of his/her Grievances. Hence, it lead to court cases and disputes in National Consumer Dispute Redressal Commission (NCDRC).
4. Fly by night operators. Such operators have bought shame to the Real Estate Industry overall. It has lead to distrust among property buyers with regards to genuine developers and agents. Although, it lead to some big developers cash on their brand name in the market, thus giving them pricing power.
5. Agreements in Under-Construction Projects used to be one sided, favouring the developers. Thus the developer used to draft the agreement protecting himself from any legal repercussions/ financial outgo.
6. The Financial terms between the buyers and the developer were if the developer used to delay the project, he would pay peanuts to the buyer. Say 4 to 6 Rs persqft per month depending on the project and the location. If the buyer used to flout the payment schedule given by the developer, he/ she is liable to pay 18% per annum interest on the delayed payment. Sometimes, developers never used to pay buyers for delay or stop the payment midway without delivering the project. If the customer does not used to respond to developers payment request, he/ she did risk losing an apartment and the amount paid to developer.
7. At times, few developers used to give the buyer a time-bound payment schedule rather than construction linked payment schedule. This was one area where the developer used to take in the money without having any requisite progress in place.
Changes post RERA below:
1. Developers have gone for a defensive timeline for projects registered with RERA. The penalty applied on developer for flouting the delivery timeline is upto 10% of estimated/actual project cost or upto 3 years of imprisonment or both. Most states have diluted this rule, thus doing away with imprisonment for the developers.
2. Developers are supposed to keep 70% of buyer's money received for a particular under-construction project in a separate bank account. This should enable developers manage their finances better, enable project completion on time or before the RERA registered deadline.
3. RERA itself has a consumer redressal mechanism in place, which shall help buyers understand the entire procedure of filing a complaint regarding a developer/ project. As of today, I see on the MahaRera website, a good number of customer complaints are in place and the authority is trying to resolve it at the earliest. RERA itself will have 2 levels of complaint escalations post which the buyer can go to High Court and seek redressal of his/her grievances.
4. Fly by night operators will vanish from the market. Implementation of RERA has brought an end to the concept of Pre-Launches in the Real Estate Market. This is because without having the requisite approvals in place and registering with RERA, a developer cannot market or sell the project. So in most of the cases, the developer will launch the project after registering with RERA and having all the requisite approvals in place. Thus bringing an end to the era of pre-launches.
5. No longer Agreements between the buyer and the developer will be one sided. We will see more balanced agreements, thus taking care of interests of both the parties involved.
6. RERA has mandated that the developer shall pay the buyer an interest which is Marginal Cost of funds based Lending Rate (MCLR) of State Bank of India plus 2% in case of delay in project to be handed over to the buyer or in case where the developer does not maintain the project completion timeline as per RERA. The developer is supposed to return the entire payment received from the buyer plus interest component in case the project is delayed beyond the mandated timelines and the buyer wishes to withdraw from the project. Also when the buyer does not pay the instalment on time, the buyer is supposed to pay the developer the same interest (MCLR) of State Bank of India plus 2% to the developer on the amount due. This ensures a level playing field between the developer and the buyer.
7. The developer can only ask for 10% advance payment or before signing the agreement to sale.
The implementation of RERA has led developers to redesign their business models. This has led to a slow down in new launches. In short-term, we can expect a slow down in sales, as buyers will be able to take more informed decisions. It can thus lead to buyer decision making process getting elongated.
If we look back, Real Estate in India have to deal with 3 major jolts in the past 1 year (November 2016 - October 2017):
1. Demonetisation
2. RERA
3. GST
WRITTEN BY
An MBA in Marketing from Alliance University Bangalore, Tejas also has a 2 year hands on experience in Real Estate Residential Sales across affordable, luxury and premium segments. His stint with a leading Real Estate Developer in Bangalore has helped him hone his client-centric skills with a fo... read more
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