Reforms to unleash Real Estate industry's potential

At a conference in New Delhi recently, Union Urban Development and Housing Minister M. Venkaiah Naidu said the Government is holding discussions with various ministries on the need for single window clearance and also about giving infrastructure status to the real estate and housing sector. The minister also said the Government will introduce the Real Estate (Development and Regulation) Bill in the coming winter session of Parliament.

Judging by the spate of new policy measures and announcements over the past few months made by the new government at the centre, the minister’s pronouncements raise hope that the government means business and is serious about carrying out reforms in the real estate sector. In fact, some of the issues referred to by the minister have been raised by the industry time and again, and are long overdue.

Take, for instance, issues related to the granting of infrastructure status to the real estate sector, provision of putting in place single window clearance system and the passage of the real estate regulatory bill. The industry has flagged these issues for several years now and has been vociferous in asking the government to take initiatives on these policy fronts.

After all the toing and froing and years of foot-dragging on the matter, it seems that at last the industry may be close to gaining a policy breakthrough. Some of the recent measures and announcements of the government certainly portend good news and better times for the real estate industry. At least, the actions convey a new sense of purpose and resolve on the part of the government to move ahead in carrying out the much-awaited reforms in the real estate sector, which contributes about 6.5% to the national GDP and is a lifeline to several ancillary industries.

Within days of assuming power, the government made a bold vision statement of providing “housing for all” by 2022. Other fairly substantive moves include the programme for establishing 100 smart cities, the recent notification of norms for launching REITs, efforts to bring in more flexible modifications to the new Land Acquisition and Rehabilitation and Resettlement Bill and the easing of norms currently underway for facilitating higher FDI in construction development sector.

The industry is waiting to welcome the roll out of more friendly policies and reforms so as to attract a lot of greenfield investments and new projects. Going ahead, we hope government action on several other fronts such as simplification of approval processes for real estate projects, higher FAR to ease cost pressure for developers and end users, push to sustainable construction, easier norms for real estate funding and the passage of real estate regulatory bill. Some regulatory push may also be in order for incentivising developers who are adapting practices for sustainable developments and affordable housing.

According infrastructure status to the industry will benefit the sector immensely. Taking this step alone would go a long way in resolving the issue of funding for real estate projects, reduce the timeline for project completion and thereby help to cut the overall cost of construction. Infra status for housing would help make projects more price-competitive for the end users and give developers the incentive to push for more sustainable construction and take up affordable housing in a big way.

Similarly, the implementation of the real estate regulatory bill will pave the way for a more attractive and transparent real estate market. The main purpose of the Bill is to safeguard the interest of customers and help developers do business as per stipulated norms. It will also improve market sentiments further and help to reinforce customer faith in the sector.

For example, the provision to launch or market a project only after receiving all necessary approvals will benefit customers and pre-empt projects that don’t have all the approvals in place. Misleading project advertisements will also become passé or risk attracting a penalty equivalent to 10% of the total project cost. Repeat offences could land defaulters in jail, with a full refund of the principal amount along with interest to buyers becoming due. Housing units will also need to be sold as per ‘carpet area’ (which denotes the wall-to-wall area inside a house) instead of the presently popular ‘super built-up area’. Additionally, with developers having to register all projects with the regulatory authority before commencing construction, customers would be able to track the status of every project.

On the whole, the passage of the Bill would be a welcome development for the industry, although the outcome would be even better if it also includes a mechanism for single-window clearance. With over 33 clearances required for a project from different authorities, unwanted delays abound for no fault of developers. Securing such approvals usually takes a minimum of eight months and can even stretch to a few years. Prolonged timelines trigger cost escalations beyond the control of developers, which get eventually passed on to customers.

Another point of concern, from the developer point of view, is the clause stipulating the creation of an escrow account on the part of a developer for each of his project. As per the clause, developers need to park 70% of buyers’ payments to facilitate timely completion. Thereafter, 10% extra could be added to the construction cost and that amount escrowed. Though the intention is commendable, the outcome will be unfair to developers, who would be victimized for delays in approvals over which they have no control.

As a real estate player, we therefor believe that a real estate regulatory bill, which provides for single window clearance as well, would bring about a paradigm change in the functioning of the real estate industry and be a win-win proposition for both developers and customers. While the concept of escrow accounts is sound, the target amount should only be formulated after consulting developers. Blocking the cash flow of developers is not good for the industry or customers because it will impact delivery schedules.

Moreover, construction costs vary across regions. In some cases, 30% may be required for construction, whereas in others it could be more or less. Given that approvals, debt and holding costs are high in realty, blocking 70% in escrow accounts will severely hamstring developers.

Overall, the government’s intention to eliminate ambiguities and introduce transparency through the Bill is creditable. Its implementation will reassure customers and also inspire developers to follow corporate governance guidelines as well as global best practices. As far as some of the reservations that remain about the Bill, the industry is hopeful that the government will, in consultation with all stakeholders, bring about the necessary amendments to ally the apprehensions of the industry. Ultimately, what’s required is a real estate bill addressing the concerns of all stakeholders, not just one section.

About P. Sahel

As Vice Chairman of Lotus Greens, Sahel is responsible for giving directions on overall business strategy and key investments decisions of the firm. Being one of the founding members of Lotus Greens, Sahel has been instrumental in formulating various company policies, setting up systems and processes, and building a strong team of professionals. Prior to Lotus Greens, Sahel worked for more than 16 years in some of India’s largest and most respected real estate companies like Jones Lang LaSalle for 13 years as the Managing Director of the Markets & Solution Development and DLF prior to that. The views expressed are personal

Comment ( 1 )

  1. Shalabh GargOctober 17, 2014 17 // Reply

    The Bill is long pending and would serve to protect the interest of the customer who often get raw deal in property purchase, while developers get unfair advantage. I am hoping reputed developers will support this bill and help implement the clauses.

Leave a reply

Your email address will not be published.

12 − five =