If retail housing interests you, three different developments may have caught your attention in recent months:
One, total private equity investments into real estate jumped 62% to Rs. 38,000 crore in 2016, largely helped by Parliament passing both the Real Estate (Regulation and Development) Act and GST, according to real estate consultant firm JLL.
Separately, in October, authorities ordered a controlled implosion to pull down the second tower of a private residential project in Moulivakkam, Chennai, after poor construction quality led to the first tower crumbling, leaving consumers who had invested in the project in a quandary. And thirdly, January saw Tamil Nadu joining Maharashtra, Karnataka, U.P. and Rajasthan in circulating draft rules for a Real Estate Regulatory Authority (RERA) in the respective states.
When a consumer invests in a house, she looks for assurances on four fronts: that the builder has complied with the laws; promises on timeline and delivery are kept; the title deeds are clear; and that construction quality is top-notch. Let’s look at how the new authority offers protection on these counts.
“RERA is meant to protect the interests of the consumer,” said Chitty Babu, CEO, Akshaya Homes. “The builder has to register the project first with the authority before he can sell any unit.” According to Mr. Babu, “The builder will also have to fill in details of a 5-year track record, along with details of earlier project delays.”
An important benefit is that the builder is eligible to receive only 10% of the money as advance before the agreement with the consumer is inked. Further, 70% of payment has to be put into the designated account for the project (like an escrow).
“Not only is a builder required to register every phase of a project separately as a standalone project, he is also not permitted to advertise, book or sell in any form prior to registration with RERA and obtaining the necessary construction approvals,” according to Srinivas Acharya, MD, Sundaram BNP Paribas Home Finance. “Builder details, project details, time of completion of projects should be made available online. Quarterly project-related disclosures should be made available for viewing of the consumer.”
It is tempting to question why new rules would improve prevailing conditions. Take, for example, the obligation to place funds for a project in an account meant only for that project. Earlier too, builders received payments from banks lending to the consumer only after completing construction of a certain number of floors. Weren’t those checks and balances adequate?
“Earlier, with just the super structure being put up, the consumer could be made to pay up 100% of the price even though only 30% of the promoter’s cost has gone into the super structure,” said Vivek Chandy, senior partner and chair, Real Estate Practice at JSA Law. “There was always danger of the money being siphoned off for other projects.” This, the RERA aims to prevent.
Every six months, an audit of the structural strength of the building is to done, certified by both the architect and the structural engineer.
This protects consumers against possibilities of structural defects leading to minor problems or major ones such as the one that led to the Moulivakkam building’s collapse almost two years ago.
Would poor enforcement of the law continue to allow builders a free hand?
Ashutosh Limaye, head of research at JLL, disagreed. He said, “Consumer protection is afforded across all major fronts. If the buyer is not happy with the compliance or progress, he/she can approach the appellate tribunal for relief.”
However, he added, for the Appellate Tribunal to be formed, it may take some more time. “There is a genuine shortfall of judges countrywide.”
Asserting that fear of punishment is critical, Abhishek Goenka, Partner, Direct Tax, PwC, said: “There is criminal liability if the builder does not get audited for quality of construction and by chartered accountants for deployment of funds.” This, he said, certainly afforded consumers a safety net, where deterrence is better than compared with earlier when the builder could get away with no oversight by a third party.
Does RERA apply to ongoing projects or only new ones after the rules are notified?
According to Mr. Goenka, “It is not clear.” The Centre’s rules state that projects under construction would have to comply. While rules notified by Karnataka toe the line, Gujarat’s rules clarify that RERA would be applicable only to projects that are unveiled after the notification, he said. “The question is, what if existing projects are, for example, 80% complete?”
Impetus to insurance
Where RERA appears to take a giant leap is with insurance. Earlier, it was possible that a buyer found out too late that his property belonged not to the seller but another party. Buyers had no way to protect themselves against falsified parent documents or forged signatures.
Under RERA, “the builder is required to provide for title insurance for all new and ongoing projects ” according to Joseph Lonappan, Managing Director-Infrastructure, Marsh India, an insurance brokerage. RERA also requires builders to be liable for all structural defects in the building for a period of 5 years. He has the option to choose coverage under structural defect insurance. Interestingly, neither of these options has been available widely in the market so far.
Title insurance, now offered by players such as Marsh India, is different from most typical insurance.
Mr. Lonappan said, “In insurance, you normally pay the premium and are provided for losses that occur after the purchase of the policy but in title insurance, the policy provides for covering defects that existed till date of purchase of property. The buyer was not aware of the same and discovers it after the purchase. If such a claim occurs, title insurance provides coverage for litigation costs, out of court settlements and for full amounts that the liability is determined for,” he said.
The value of the title insurance, that benefits the allottee, is arrived at using the total value of sale for any project. Significantly, what if your property worth Rs. 60 lakh in 2010 was insured for the same amount but is now valued at Rs. 1 crore? The consumer has the option to increase the value of the insured amount based on the percentage increase in circle rates increased over a period for that project.
But the state of the land records system in the country isn’t exactly on a strong footing. In some instances, it is even difficult to make out which language the title deeds are recorded, attributable to the age of the records or the sheer callousness of the inscribers.
Would insurers wish to cover such unstructured risk? “Insurance is based on law of large numbers where the risk of few is distributed over several policies,” a senior official in an insurance brokerage said. “The pricing achieved given a large scale (as in health insurance) has been amongst the most competitive.” the official said.
Title insurance is mandatory for all projects, under the ActJoseph Lonappan
MD-Infra, Marsh India