Developments on three different counts may have caught your attention in recent months if the real estate sector interests you:
One, total private equity investments into real estate jumped 62% to Rs 38,000 crore in 2016, largely helped by Parliament passing legislation on the Real Estate (Regulation and Development) Bill and the GST, according to a report by real estate consultant firm JLL; two, October saw the legally authorised implosion of the second tower of a private residential project in Moulivakkam, Chennai (poor construction quality led to the first tower crumbling, leaving consumers who had invested in the project in a quandary); and three, January saw Tamil Nadu follow the likes of Maharashtra, Karnataka, U.P and Rajasthan, circulate draft rules for the Real Estate Regulations Act (RERA) enacted by the Centre last year.
All of these are linked, directly or indirectly to the RERA.
When a consumer invests in a house, she looks for assurances on four fronts: that the builder has complied with the laws; the builder keeps his promises on timeline and delivery; the title deeds are clear; and that construction quality leaves nothing to be desired. RERA offers protection to the consumer, at varying levels, on all these counts.
Applicability of RERA
RERA requires any project that has 8 dwelling units or is at least 500 sq m in area to be registered with the regulatory authority. On registering with the authority for every project, the builder gets a login and password using which he goes on to fill in details of the project. This is meant for the end-consumer to review and evaluate. Significantly, registration details have to include those of the architect, agents and structural consultants involved in the construction. Registration details will also have to include clearances obtained, such as highway- and environment-clearances.
“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.” This allows some insight for the consumer into the antecedents of the builder, Mr. Babu said.
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.”
Another step forward is that a builder is permitted to sell units only based on carpet area. Mr. Acharya explains this as “net usable floor area of an apartment, excluding the area covered by the external walls, areas under services shafts, exclusive of balcony or verandah area and exclusive of open terrace area, but includes the area covered by the internal partition walls of the apartment.”
Any better?
It is tempting to question why all these rules better prevailing conditions. Take, for example, the obligation to place funds for a project in an account meant only for that project. Earlier too, builders took payment from banks lending to the consumer after completing construction of a certain number of floors. Aren’t those adequate checks and balances?
“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 prevents.
Structural fitness
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 crumbling of the Moulivakkam building close to two years ago.
All of this begs the question: isn’t enforcement of law key to the success of the legislation? RERA is only another piece of legislation. Consumer interests were intended to be protected earlier in various forms. But blatant flouting of rules, coupled with poor enforcement led to nightmares for consumers – from inordinate delays to poor construction quality to lack of clear title deeds.
“Consumer protection is afforded across all major fronts; compliance, clear title deeds and quality of construction,” said Ashutosh Limaye, head, research, JLL. “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 country-wide.”
Agreeing with Mr. Limaye, 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 presented a better scenario for the consumer compared with earlier when the builder could get away with no oversight by a third party.
Confusion prevails
Between the Act passed by the Centre and the rules that have to be notified by the State governments, as real estate has been a State subject, there are still gaps that the industry perceives to be too large to ignore.
For instance, take the applicability of RERA to projects that have commenced construction. According to Mr. Goenka, “It is not clear if RERA applies to projects under construction.” Is it even possible for projects under construction to comply with retrospective legislation, he asks. “The Centre’s rules say that projects under construction would have to comply. While Karnataka’s rules follow the same line, rules formulated by Gujarat clarify that RERA would be applicable only to projects that are unveiled after the notification.” The question is, what if existing projects are, for example, 80% complete? “Would they also have to comply?”
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.
To protect consumers against risk of such loss 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, a leading insurance brokerage. In addition, RERA requires the promoters to be liable for all structural defects in the building for a period of 5 years. The insurance market offers a solution to protect this risk by way of a structural defect insurance cover. This insurance cover would provide for covering the costs related to correcting structural defects discovered within the first five years of the project. Interestingly, neither of these options has been available widely in the market and are amongst new products that most large insurance companies are working towards to help promoters pass these risks to insurance markets as is a practice in many countries globally.
Title insurance, now a new offering by insurance brokers such as Marsh India, is different from most typical insurance covers. 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 existing defects that existed the Title till date of purchase of property but the buyer is not aware of the same and are discovered after the purchase of the property. Thus the defect in Title could have happened at any point in the past but was not discovered in the due diligence of the buyer and 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. This is a welcome step even for promoters/consumers/lenders who earlier relied entirely on lawyers for verifying documents, but if there were defects that were missed out, this would result to a loss to the buyer generally without any recourse. With Title Insurance, the allottees in projects approved by RERA will have benefit of this insurance.”
The value of the title insurance for a new developer is arrived at using the total value of sale that is anticipated for any project. The benefit of this insurance per RERA has to be passed to each allotee when the agreement of sale is entered into. 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 the period of years for that project.
Title Insurance will bring a greater degree of certainty into entire real estate sector transactions and it is expected will usher greater degree of confidence into lenders, private equity real estate funds and even end consumers all of which would help develop the sector with greater accountability.
State of records
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.
That is one reason that title insurance hasn’t matured in India, of its own accord. Even if RERA has mandated title insurance, it is a moot point whether it would serve its purpose. An insurance provider typically covers for risk after ensuring that the proposer has taken adequate steps to avoid those risks. If the land records system isn’t up to standard, then the risk still remains for the insurer. Could this mean a steep rise in premia charged by insurers compared with other policies they sell?
“Insurance is based on law of large numbers where the risk of few is distributed over several policies for that class of business,” a senior official in an insurance brokerage said. He referred to the country’s experience in the recent past where demand had been created by the government in case of Agriculture Insurance, States’ Health insurance for people below poverty line and the like. “The pricing achieved given such a large scale has been amongst the most competitive and likewise is expected of title insurance.”
He added that title insurance would not only offer risk protection but would hence result in expedited real estate sales. “Title insurance purchased by a property seller may eliminate the need for the buyer to undertake expensive legal due diligence on each property, thus simplifying and expediting real estate sales and increasing liquidity in the real estate markets.”
