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India’s Real Estate Sector: Can RERA Become a SEBI?

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Real Estate Sector

With property developers to be monitored, delays in real projects expected to fall

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 a case of delays, developers will have to pay in the 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 a 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.

Source: Fobes India

Regulations

373 Maharashtra Cities To Fall Under PMAY Scheme

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The state of Maharashtra has added 232 cities to the existing 142 which makes it 373 cities under the Pradhan Mantri Awas Yojana Scheme (PMAY).

The officials at the housing department feel that this step will aid the government take up more projects under the PMAY scheme.

Sachin Kulkarni, Builder shared his concerns over the lack of coordination between the department in executing PMAY projects. He said, “This is a good sign. However, the PMO’s seriousness in promoting HFA is diluted by the time it reaches the authorities. Apart from collecting application from interested beneficiaries, nothing has moved on the ground in urban centres. I hope that this initiative moves on fast track”.

Maharashtra CM Devendra Fadnavis recently states that the in order to create more housing stock the state’s Slum Rehabilitation Authority scheme be brought under PMAY so that it can receive the subsidy to create more affordable housing. He clearly mentioned that the government intends to create more housing stock and it was taking various initiatives and making policy changes for it.

Also Read- Affordable Housing To Get A Boost With PMAY’s Scope To Be Extended To Private Lands

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Real Estate Sector May Fall Under GST What Does It Mean For Buyers?

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One after the other the real estate sector has witnessed massive policy and law changes in its systems. Nonetheless, the tide has not passed yet. The GST council will take up a proposal to bring it under the uniform nationwide levy.

As the industry is still recovering from the RERA Act, the finance minister, Arun Jaitley said that there is a strong case to include real estate in the new indirect tax regime. He said this last week and also mentioned that GST Council will discuss it in November.

At present, the home buyers are paying 12 percent GST on under-construction properties. This percentage includes two taxes which are stamp duty and registration. The rate of which varies in each state but GST will make them uniform.

Santosh Dalvi, KPMG India partner (indirect tax) said, “If the entire real estate is brought under GST, they would have to abolish the stamp duty and we don’t know how the government plans to compensate the states for their loss.”

The stamp duty with registration and GST comes to approximately 18 percent for under construction properties. He further said, “So, it’s important to look at what rate it will be taxed at. We can then look at consumer prices”.

While agreeing, Bipin Sapra, EY partner (indirect tax), added, “It’s going to be a test for the government”.

Developers also pay taxes on raw materials. However, unlike other businesses, they don’t get any tax refunds through input credit. GST taxes every stage of the business activity to better compliance and compensates for it by permitting refunds.

Anuj Puri, Anarock Property Consultants chairman, said “By including real estate under GST, builders can get a fair amount of input credit, helping bring down costs,” He added that it would make homes cheaper for buyers.

According to Sapra, it will depend on the tax rate applicable.

Niranjan Hiranandani, co-founder of Hiranandani Group said, “Real estate under GST ambit means consumers will only have to pay one final tax.” He stated that with the commencement of RERA it brings transparency and GST would reduce the burden in terms of taxes payable while buying the home. He concluded, “Not only will this create positive sentiment but it should also boost actual sales”.

Also Read: Affordable Housing Is The Changing Face Of Indian Real Estate

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Home Buyers Will Be Covered Against Builders Who Are Going Bankrupt

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In a move to protect home buyers from builders declaring their bankruptcy, the Insolvency & Bankruptcy Board of India (IBBI) has amended rules which make it necessary for any company to showcase how they have dealt with interests of all stakeholders. This is directed towards companies like Jaypee Infratech and some of the entities of Amrapali Group.

The regulator has informed about the revised rules last week. This will ensure that banks and other creditors do not get away by protecting their interests at the expense of others who are impacted by the action.  Banks are part of the creditors’ committee. They become an important decision-making body after a company is admitted for bankruptcy.

An expert bankruptcy lawyer said, “The change in the rules has plugged a gap as flat buyers are of the view that there is nothing to protect their interests.”

According to the new law that was enacted last year intends to speed up the resolution process in a period of 180 days, with a possible extension of 90 days. This will be done by appointing insolvency resolution professionals who will take charge of the company’s operations and prepare a plan. As per the law, an information memorandum will be finalized if the creditor’s committee is willing to take applications from other interested companies to take over the company.

The insolvency experts say that the law providing for the plan binds corporate debtor (the company) and its members, employees, guarantors, and creditors, other stakeholders involved in the resolution plan. However, there are no obligations mentioned in the rule to give any treatment to the stakeholders other than the financial creditors (banks) and operational creditors, which includes vendors and others who may have dues.

The National Company Law Tribunal, based on the comfort provided by the revised rules, will choose the final resolution plan based on bids that are received. The lawyer further said, “The tribunal will not clear the resolution plan without giving notice to all stakeholders and the flat buyers can raise objections at that point of time.”

Also Read: Tanvi Group Fail To Deliver Homes And Declare Bankruptcy

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