At a time of legislative logjam, it is an achievement of sorts that the government has managed to push through the Real Estate (Regulation and Development) Bill in the Rajya Sabha last week, which could lead to systemic changes in India’s real estate sector. Over the last two decades, even as India opened up its economy and ensured oversight across industries, realty was one of the rare sectors that remained outside any regulatory domain despite the impact on millions of home-buyers in major metros and other cities and towns in India. The bill marks a good beginning in a sector intrinsically prone to market failures. This is for two reasons — for one, there is a time gap between payment and delivery when it comes to housing. There is also an information asymmetry, as the seller has far more information than the buyer. There is a compelling case, therefore, for regulation marked by full disclosures to help buyers make informed choices, and penalties to deter those violating agreements.
The bill proposes to address many concerns of home-buyers. It makes it mandatory for both developers and real estate agents to register with regulatory authorities across states for both commercial and residential projects that cover 500 sq m or more and provide all information such as government approvals, layout plans and land title to the regulator, penalises the developer for delays in projects, bars sales of property on the basis of super built area and defines carpet area, which will help a buyer know what she is getting. It lays down a rule that at least 70 per cent of the money collected from home-buyers be kept in an escrow account to meet land and construction costs. There are provisions, too, that are aimed at protecting the interests of buyers, such as making it mandatory for two-thirds of buyers to approve any change in project plans, to punish developers for misleading claims or advertisements and deficiency in service after selling apartments.
Much of this is welcome from the perspective of boosting the confidence of home-buyers and increasing transparency. But the challenges are two-fold. One, the success of this reform in a sector known for dubious funds will hinge on the initiative and political will of states, which are likely to see this as an encroachment by the Centre on their turf — land being a state subject. Tamil Nadu is a case in point.
Two, unless this is accompanied by changes in the approval process at the level of civic bodies and other agencies, there will be little headway even if a law is enacted. That’s why it is important to incentivise states to promote this regulation and other structural changes. Maharashtra has already kicked off one. The transformational impact of this reform cannot be underestimated given the potential to raise quality standards in construction and the boost it could provide to the sector besides higher revenues to the government both at the federal and state levels. India’s realty sector is the last of the sectors where political patronage is still high and the neta-builder-criminal nexus has posed major challenges to law enforcement agencies across the country. Having got over the first hurdle, it is important for the government to ensure that the new regulator in-the-making is not only empowered but also credible. There is much to be gained economically, and politically too, by doing that.