India's real estate sector: Can RERA become a Sebi?

Image: Amlan Mathur/ Shutterstock.com

The Real Estate (Regulation Development Act) or RERA has come into effect from today (May 1, 2017). The idea is to regulate the real estate market and help buyers who are often cheated by promoters by either delaying projects or sometimes not delivering the projects at all.

The RERA is a welcome step. RERA is expected to build in the accountability, transparency and efficiency in the real estate market. Real estate developers will now have to deposit 70 percent of the money collected from real estate investors (or buyers) into a separate bank account for new and ongoing projects. All the projects will be registered with the regulator.

In case of delays, developers will have to pay in interest of 2 percent above the State Bank of India (SBI) marginal cost of lending rate (MCLR) to the buyers. On the other hand even the buyers, in case of delay of payments will have to bear a similar cost.  Since the developers will be monitored very closely, the number of delays in real projects should ideally fall. But what really needs to see is if the RERA can be as effective as the capital markets regulator, Sebi.

The real estate business in India operates on the principle of “Buyer Beware”. This means that the buyer is completely responsible for his decisions to invest into a real estate property. This is different from the equity markets where the “Buyer Beware” principle still holds the ground but there is Sebi, the regulator that keeps a watchful eye on all the participants of the equity market to allow for fairness and see to it that no single party gets to dominate a deal.

Sebi also punishes promoters who are accused of insider trading. Sebi has put a careful risk management process that benefits both the end customer as well as the capital market broker.

In the mid-1990s the capital market broker was a deal maker and then he started to give value added services to his customer and eventually became their financial advisor.  The most successful capital market brokers who have lasted over the past 20 years – through various stock market peaks and troughs are those who cared for the long term benefits of their customer and they were the ones who had advised their customers from staying away from the dotcom boom of 2000 or the infrastructure boom of 2007.

Today the real estate broker does not give any value added services to the customer and does not care for the long term benefits of the buyer. This hopefully will change now.

“The unorganised world of real estate broking in India would see a new paradigm with the implementation of RERA 2016. From being merely a facilitator between buyers and sellers, brokers will now have to adopt a bigger advisory role attached with responsibility for projects and disclosures,” says Shishir Baijal, chairman and managing director, Knight Frank India.

“The survival of broking firms will depend on how they inculcate a corporate culture in dealing with both the stakeholders. It is good that brokers have been brought within the ambit of RERA and any deviation would invite penal actions. Although there would be teething problems the move will see the emergence of a new consolidated broking fraternity”, Baijal adds.

In the real estate market we have seen that the seller of real estate properties always had an unfair advantage over the buyer. The seller could collect the money from the buyer and depending upon the real estate company or the market situation, deliver or not deliver the project on time.

In many cases there were project delays and cost escalations which were all borne by the buyer. Court cases took a long time and in general the defaulting real estate developer would figure out a way to survive.

Today there are only eight states and five union territories that have notified the rules under RERA. But to be a very effective market regulator RERA will need to have all the states having similar rules under its authority. But having similar rules will be difficult because the stamp duties paid in different states varies from each other.  That is also the reason why RERA may not be like the Sebi, which regulates a market that has the same rules of trading across India.

But the RERA is one of the best things that has happened to the real estate sector – which is highly illiquid -- and it will now make real estate a serious asset class for investors. There will be many products that will be launched in the near future with real estate as an underlying asset.

“The implementation of the RERA-2016, is widely expected to increase transparency and accountability in the real estate sector, while improving its ability to attract institutional capital.  This augurs well for all stakeholders with a long-term vision for the sector, including developers, investors, agents and consumers.   The real estate sector might witness the beginnings of a fresh uptrend, driven by improving consumer sentiment in anticipation of higher transparency and efficiency, renewed confidence in the economy, and lower home loan rates”, says Sunil Sharma, vice president (CRM and Marketing) at Mahindra Lifespaces.