Something to build on

Real estate was overdue for buyer-friendly regulation

The Real Estate (Regulation and Development) Bill, cleared by the Cabinet, should bring a much-needed discipline into the market. Real-estate developers have either slammed the Bill outright or have welcomed it cautiously. That's understandable. The free run they have enjoyed for several years will come to an end once the sector is properly regulated. The market for residential real estate is the hotbed for business malpractices. That's because the demand is far ahead of the supply, and for most Indians a house remains the most important purchase of their lives. This has converted it into a seller's market with all the fraudulent accompaniments.

Builders don't hesitate to launch products even before they have secured clearances. There is no way hapless buyers can find out about the clearances. And when the project gets delayed, they have to pay the price. The definitions of super area, carpet area, covered area and built-up area are open to interpretation. Builders change them frequently to suit their convenience. The sale-purchase agreements between builders and buyers are a nightmare. For example, most builders now include a clause in the agreement where they promise to pay money to buyers in case there is a delay, but there are escape clauses tucked away in the fine print and projects are delayed with impunity. Cost escalation is another ploy to fleece buyers. There is total opacity about them; buyers just receive notices for extra money, without any proper justification. Brokers too have a free run. Many promise incentives to buyers once they receive their payments from the builder; such money seldom reaches the buyers. The sector has been in dire need of regulation for a while.

The real-estate market in India has unusual dynamics. A builder doesn't wait for the project to get completed before selling it; instead, he sells the houses even before the first shovel hits the ground, collects the money and uses it to construct the houses. There is, of course, no way to monitor this money. Some builders use the money to buy more land and launch new projects. This is particularly true of markets like Noida and Greater Noida in Uttar Pradesh where a builder is required to pay only 10 per cent of the cost of land upfront and the rest in instalments over several years, albeit with interest. The landscape in these areas is dotted with such serial builders.

The Bill will hopefully put a lid on these unsavoury practices. It says that a builder cannot launch a product without all clearances; there need to be standard definitions of super area, carpet area et cetera; there should be a model sale-purchase agreement; and all brokers need to register with the regulator. Also, builders now need to keep 70 per cent of the money collected from sale in an escrow account, so that the money is used for developing the project and is not diverted elsewhere. The Bill also provides for stiff penalties on builders who violate its provisions. This has irked builders; what they don't realise is that it will help them in the long run by making their projects more bankable. Meanwhile, buyers can heave a sigh of relief.