The Model Real Estate (Regulation of Development) Act, first proposed in September, was not passed in the winter session of Parliament as planned. This Bill—aimed at greater transparency and customer protection—will erect several hurdles for property developers.
These hurdles will be in the form of additional licencing norms and strictures on garnering advances from buyers.
We have outlined the contentious sections of the proposed Model Real Estate Act and studied its potential affect on both the end consumers and developers.
Chapter II, section 3: Prohibits development of land into a colony or construction of apartments for marketing without registration. This step would usher in greater transparency on property transactions for the end consumer. For developers/promoters, mandatory registration of projects is a move reminiscent of the “licence raj”.
The key concern here is whether licencing would occur at the Centre or the state level. Licencing at the Centre level could prove detrimental as state authorities are better placed to handle local demands. The provision will prove especially tough on small developers given its inflationary effect on project cost.
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Chapter II, section 4: Mandatory registration by a regulatory authority before each project launch; 36-month licence period; bank guarantee from developers. These steps would safeguard the consumer from false developer claims regarding carpet area, built-up area and flat development plan as developers would be required to proffer these details to the registration authority before the launch. Prices, however, may increase due to the bank guarantee clause.
For developers, the section introduces yet another level of government scrutiny to an already cumbersome clearance process.
At present, developers are required to garner an astounding 52 approvals from various regulatory authorities for project clearance—this section only adds to the stockpile.
Moreover, the licence will be granted for just 36 months, while the various government clearances typically take 12-24 months to come through. We believe a one-time registration process for each builder would prove much more efficacious than individual project licencing.
This section would also require developers to submit a bank guarantee for 5% of the estimated cost of development works to the competent authority. This would increase costs for developers and, in turn, be passed on to buyers.
Chapter III, section 7: Disallows the issue of advertisements or prospectuses inviting advances or deposits. This could have a negative effect on the end consumers since the absence of advertisements would leave buyers in the dark about the new projects. Also, without advertisements, developers would be unable to garner eyeballs for their projects and could, hence, witness a substantial decline in pre-launch sales.
Chapter III, section 10: No deposit or advances to be taken by promoters without first entering into an agreement of sale. This will prevent any discrepancies in the sale agreement, thereby protecting the interests of end users. It will also discourage investors and buyers from entering the market (and fuelling price speculation) as the agreement will involve additional costs in the form of stamp duty.
This is a definite negative for developers as investors may choose to stay away from projects due to the potentially lower returns.