Top 5 limitations of Real Estate Act, 2016

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With recently-implemented Real Estate (Regulation and Development) Act (RERA) 2016 being a hot topic of discussion in the real estate sector, several misses of the Act have also come to the surface. 99acres.com takes a look at the key limitations of RERA and how it will impact the overall real estate sector.

Benefiting property buyers and developers at large, RERA comprises legions of provisions which abide to the pre-set promises. But as no policy is perfect, RERA too, has its own set of shortcomings which make the implementation of the law questionable. Absence of single-window clearance, non-notification of the law by several states, and dilution of the norms are few of the points which have created expectation gaps and likely to further impact homebuyer-developer equation.

Industry stalwarts anticipate that if the inadequacies of the Act are not addressed in time, it would cast a severe impact on the realty stakeholders, especially the homebuyers, who were showcased as the prime beneficiaries of the Act.

Let us take a look at the shortcomings of RERA:

Multiple approvals

RERA compliantIn a bid to make a project RERA-compliant, developers have to now register all their ongoing and newly launched projects under the Act. The provisions also bar pre-launches in the absence of necessary approvals, and if the project is developed in phases, it is mandatory to abide by registration norms for each phase. Fundamentally, in the absence of single-window clearance, a developer now has to avail a plethora of approvals which is anticipated to hinder project completion. For instance, in Delhi, developers need approximately 41 permissions from the government within a period of 60 days. Now, with several projects already in place, seeking approvals within the stipulated time seems difficult. As a result, timely deliveries would again be a far-fetched dream for developers and homebuyers.

Besides, the revolutionary law also does not encapsulate government authorities involved in the approval process, which implies that if the approvals are not streamlined in time, projects delays and cost escalations are likely to be unavoidable.

Debt blow to developers

The escrow account provision under RERA, which requires developers to keep aside 70 percent of the advance payments from the customers for a specific project and prohibits diversion of funds to other investment ventures, is expected to take a toll on the debt levels of real estate developers. RERA poses many challenges before developers in terms of cash flow, which would raise the debt levels of the builder community. Developers will now have to depend on external capital which will mount their financial burden, given the subdued sale dynamics and weak home buying sentiment. Besides, a constraint on pre-launches, the most sought after way for developers to raise funds for initial expenses and land acquisitions, further aggravates the problem.

According to BSE Realty Index, real estate companies reported a combined debt of Rs 52,598 crore as of September 2016, about 7.3 percent higher than a year ago. These companies had an average of 0.8 times debt to their total equity in September 2016, and with the current regulatory provisions, the figures are anticipated to swell up further.

Fewer housing options

Time spent in availing several approvals at various levels will deter new launches in the market. This will limit the number of opportunities for property buyers, providing only a few to choose from. With restricted alternatives, demand is likely to outstrip supply in the forthcoming quarters which would push property rates up. RERA norms might infuse transparency but prices are likely to escalate further owing to curtailed competition.

Implementation delay and dilution of norms

rohit poddar quoteWhile the Ministry of Housing and Urban Poverty Alleviation (MHUPA) had urged States and Union Territories to notify under the law by May 1, 2017, the failure to do so despite several reminders by the Central government to the states indicates the laxity of the States and UTs.

“In addition to the slackened approach of the state authorities, incongruity in the implementation of the norms at the state and Centre has also not gone down well with realty stakeholders. For instance, it is not clear whether RERA applies to under-construction units as well. Whilst the central rules state that these would apply to under-construction units, some state norms say otherwise, avers Surendra Hiranandani, Chairman & Managing Director, House of Hiranandani.

Deterrent to joint ventures

While on one hand, RERA focuses on Joint Ventures (JVs), on the other hand, it seems to dissuade an alliance between land owner and developers by terming the land holders as the promoters.

With the paucity of funds to acquire land, developers will now have to rely more on JV) with land owners. However, RERA appears to dissuade JVs between developers and land owners by terming the latter as promoters. Now, many landlords would be sceptical of taking responsibility of the project and, hence, will be hesitant to tie up with developers. This will further restrict the supply of land or make it more expensive through higher upfront payments.

 


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