To Buy Or Not To Buy?
The residential realty market is expected to look up post-RERA and other consumer-friendly provisions, but the loopholes are hurting
The festive season is back with a bang, and it is time for mega purchases - be it couture, appliances, gold or real estate. Buying a home has always been an Indian dream, often considered a good investment, a lifetime asset and part of the social upside. And it could be especially lucrative right now as builders and promoters are sitting on huge inventories and wooing customers with discounts and freebies.
For the past four-five years, the residential real estate market had seen a steep fall in demand as prices touched the sky, so much so that last year, then Reserve Bank of India Governor Raghuram Rajan had called for lowering prices. Next came demonetisation that played a big spoilsport and sales dipped by an average 30 per cent during the October-December quarter compared to the previous one, according to data from real estate research firm PropEquity. But all may not be doom and gloom in this sector as consumer confidence is set to rise post a couple of big-ticket reforms - the recent implementation of Real Estate (Regulation and Development) Act or RERA and the Goods and Services Tax (GST), and the government's unprecedented focus on affordable housing.
RERA puts the onus on developers for timely development, enhanced disclosure norms, and good corporate governance. With strict penalties in place for deadline default, the new regulation is a game changer, making the market more customer-friendly. GST, too, is expected to iron out all anomalies in the supply chain, overall expenditure and additional taxes, thus benefiting under-construction projects (land or ready-to-move-in properties do not come under the new tax regime) and boosting everyone's sentiment in the long run. Developers are also expected to pass on the input tax credit benefit to end users.
"Housing sales are expected to rise during the ongoing festival season due to structural reforms like RERA and GST that have helped firm up buyer sentiment. Developers, too, have progressively adjusted their business approach in the new era of transparency, brought on by these regulations, and are geared up to cater to the pent-up demand for homes," says Anuj Puri, Chairman of Anarock Property Consultants.
Anshuman Magazine, Chairman, India and South East Asia, CBRE, a real estate consultancy, agrees. "As the overall residential market settles into a RERA-compliant environment, and with transparency returning to the segment, we will see consumer confidence improve further in the coming months," he adds.
"Reduction of interest rates on home loans will also add to the current festive mood of homebuying. We anticipate a positive outlook and will encourage homebuyers to explore an immediate purchase or investment," says Rajeeb Dash, Head of Corporate Marketing at Tata Housing Development.
Currently, it is a transition phase, and the mood is cautiously optimistic in spite of a few regulatory loopholes that must be plugged. But if you are ready to get in the game and do some bargain hunting, first take a deep dive into home-buying essentials.
The Regulatory Affairs
RERA not too helpful, yet: When the central Act came into effect on May 1, 2017, homebuyers facing difficulties due to delayed possessions and hence, escalating costs, had high hopes as central RERA would cover new projects as well as ongoing ones where the completion/occupation certificates have not been obtained. Promoters were allowed three months (until July 31) to register their under-construction projects post which only RERA-compliant projects could be in the works. Another mandate was that each state and Union Territory must form its own real estate Regulatory Authority (RA) and notify specific rules and regulations in sync with the central Act. Fast forward to the present and one will find that red-tapism and corrupt practices take a lot of killing.
State-level delays: The real estate sector still in a flux mainly because not all states have complied with these mandates yet. Till date, out of 35 states and Union Territories excluding Jammu and Kashmir, 25 have notified their respective RERA rules. However, not all of them have the necessary infrastructure in place to take things ahead. For instance, Haryana has notified the rules in July 2017 but has not come up with an RERA website yet to facilitate online registration and disclosure of all project-related developments that can be accessed by the public. As of now, the state has received approximately 600 applications out of which only 200 projects have been registered. According to Puri, around 2,100 projects have been registered in Uttar Pradesh till September 15. But the majority of the ongoing projects are yet to be registered there.
Dilution dilemma: Besides procedural delays, some states have also diluted the original provisions of RERA. Although the central Act mandates that all ongoing projects without completion/occupation certificates must be registered under RERA, states have come up with their own definitions of 'ongoing' projects, which favour builders rather than homebuyers.
"In Haryana, the definition has been diluted to exclude projects, which have applied for development licences. Also, projects with part-completion certificates (obtained before the Act was notified) and projects where applications for completion/occupation certificates have been submitted on or before the notification date have been excluded from RERA," says Mrinal Kumar, Partner at law firm Shardul Amarchand Mangaldas.
Uttar Pradesh, too, has excluded projects falling under the following four categories: 1) Where development is complete and application for completion/occupation certificate has been filed; 2) Where development has been completed, and sale/lease deeds for 60 per cent apartments/plots have been executed; 3) Where common areas have been handed over to resident welfare associations and 4) Where services (like installation of power or sewage) have been handed over to local authorities.
The Maharashtra government has also changed the definition of sanctioned plans under RERA. As per central RERA, all approved plans, starting from the original [at the time of booking] to the latest modified will have to be submitted by developers at the time of RERA registration. "But according to Maharashtra RERA, only the 'last' sanctioned plan needs to be registered," points out Kumar. Both Haryana and Uttar Pradesh have not specified which plans need to be submitted, adds Kumar.
Another major deviation involves the separate account that a developer must maintain for each project where 70 per cent of the money raised from the allottees will have to be deposited. The aim is to prevent any fund siphoning or misuse. But contrary to the original provision, "Maharashtra RERA says that 70 per cent of only the future receivables (post RERA) from projects should be deposited," explains Kumar. As the state does not take into account the money already raised, it will be difficult to earmark or safeguard funds for ongoing projects. Uttar Pradesh RERA has no clarity on it either.
Resenting such dilution, several groups of homebuyers from Haryana and Uttar Pradesh have approached the High Courts of the respective states and the Supreme Court and the High Courts have taken cognizance of the petitions filed. In August 2017, the central government filed an application in the Supreme Court to club all the petitions against RERA in different states. The apex court has transferred all pending cases across various High Courts to Bombay High Court. The Supreme Court, on September 19, 2017, directed the Bombay High Court to decide all matters relating to RERA within two months.
Deadline stretch: Under RERA, builders are required to provide completion dates while registering projects and they have to pay substantial penalties in case of a delay. To escape such stipulations, many developers are now extending completion dates by three-four or even more years while registering their ongoing projects. Take, for example, KSL Empress Heights in Andheri East, Mumbai. Earlier, the proposed date of completion was December 2019 as mentioned in its RERA registration form, but now it has been shifted to December 2024. Similarly, Ajmera Treon in Andheri West has revised its delivery date from September 2018 to December 2023. So, homebuyers will have to wait longer and will not be eligible for compensation as developers only pay if they miss RERA deadlines.
It follows the government's laxity with regulations that allow builders to provide completion dates as per their convenience. All these can prolong the plight of the existing homebuyers, who could be struggling with both rent and EMIs in spite of RERA and at times, because of the leeway it has given in these cases. After all, a developer is only bound to meet the deadline mentioned in the RERA registration form and all earlier commitments could easily be ignored without incurring any penalty.
"The government should have ideally made legislations stating the stipulated time a project should have taken, given the size of the project, with a leeway of around six months, instead of leaving it completely to the developers," says Pankaj Kapoor, Managing Director of Liases Foras, a Mumbai-based real estate research and analytics firm.
"In view of the strict penalty provisions prescribed under the RERA, developers would like to be conservative in their estimates on when they will be able to deliver the projects, keeping a margin for potential delays in obtaining government approvals," says Gaurav Karnik, Partner and National Leader, Real Estate Practice, E&Y.
Clean-up on the cards: India's real estate industry has long been known as a fragmented and opaque market. So, it is not surprising that some gray areas still exist during the transition phase while RERA finds its feet. The government should address these at the earliest as these could derail the confidence-building process. In the long run, however, the new reforms are bound to shake things up, opening the field for those who have efficiency, financial muscle and consumer-centric best practices. A paradigm shift like that will help protect buyers' interest and bring them back to the market.
"Developers with strong financial balance sheets are trying to accommodate the new environment created by RERA by improving their standards of corporate governance, focussing on customer centricity, and exploring institutional funding, better project planning and overall compliance. However, the road ahead for small and financially weaker builders will be a tough one. It is expected that the industry would become leaner as a result of multiple consolidations," Puri of Anarock observes.
"Developers who are honest and have nothing to hide will continue to survive the market. Those involved in fraudulent practices would soon be out," says Vikram Goel, Chief Executive of HDFC Realty.
Major Asset Classes
Luxury versus affordable: If the regulatory transformation across the sector seems a bit slow and, therefore, disheartening, the variety of properties on offer will cheer you up. Those looking for luxury homes and ready-to-move-in properties at that are in luck. As the sale of luxury housing has taken a major hit due to prices going north, most of the developers are offering heavy discounts and loads of freebies to push sales and clear their inventories. Besides 12 per cent GST waiver(not applicable to completed projects), some are offering high-end cars to those booking penthouses and luxury cars to would-be villa owners. Some also offer 12 months' assured rent on these properties. Other freebies include white goods, modular kitchens, free maintenance and assured rent for a year or two, no floor-rise charges and so on.
Tata Housing has come out with a festive offer called Move In India across seven of it projects where homebuyers are allowed to move in by paying 20 per cent of the property value. The rest 80 per cent has to be paid over a span of two years. For investors in these projects, the company is offering an assured rental income for 24 months.
Unlike the sluggish luxury market, major developers are banking on affordable and mid-segment properties for sales to peak. The recent trend in new launches shows that demand for affordable housing for ticket sizes varying between Rs 5 lakh and Rs 40 lakh is steadily growing. During the first half of CY2017, the top cities (Bengaluru, Chennai, Hyderabad, Mumbai, Delhi-NCR, Pune and Kolkata) recorded more than 60 per cent of the total residential units supply in the affordable segment as per Anarock. It also adds that the share of this segment has increased more than 16 per cent compared to the second half of CY2016.
What has led to this growth is a plethora of government's incentives, including public-private partnerships, raising the budget allocation from Rs 15,000 crore to Rs 23,000 crore under the Pradhan Mantri Awas Yojana (PMAY) scheme, increasing the time limit for project completion and providing infrastructure status to the segment along with tax breaks. Developers who build affordable homes do not have to pay taxes on their profits for five years starting 2016 instead of three years. Home loan interest rates are almost at a decade-low - most financial institutions are offering housing loans at 8.35 per cent - and interest concessions under PMAY scheme are further driving demand.
"In the affordable segment, the interest rate comes down to around 3.5 per cent after considering the subsidy. So, it is a good time for a buyer to make a purchase," says Kapoor of Liases Foras.
"Overall demand for housing loan has been subdued, but we have seen a growth of around 35 per cent in the affordable segment on a year-on-year basis. The average ticket size of these loans is around Rs 25 lakh," says Sachin Chaudhary, Chief Operating Officer, Indiabulls Housing Finance.
Will affordable housing grow: The biggest issue is the cost of the land, especially in the cities. So, developers are now moving towards the periphery, the suburbs and satellite towns. But the surrounding physical and social infrastructure is not adequate to support these projects. Connectivity to the main city is another issue. All of these, if not addressed, could soon see a drop in demand for such projects and discourage private developers from entering the segment.
"For the segment to see traction in the long run, and for private developers to seriously consider such projects, the government would need to focus on enhancing the social and physical infrastructure around such new projects," says Magazine of CBRE.
The government is making some efforts though, to address the issue of land scarcity within the city. "To resolve the stumbling block of land scarcity, the Union Government has recently identified vast tracts of surplus land belonging to eight sick public sector enterprises (PSUs) for low-cost housing in urban areas. The government is planning to either sell or lease out these land tracts to private developers for affordable housing projects. These PSUs have more than 2,500 acres of land in their possession," says Puri of Anarock.
Go Bargain Hunting
With unsold inventories piling up and prices subdued for quite some time, it is undoubtedly a buyer's market. So, it makes sense to do some bargain hunting and find the best possible deal. "Today developers are sitting on large inventories and are willing to give the best price to customers. So, if you are planning to buy a house for self-use and you have a requirement, go ahead and start looking. Visit the site, talk to the developer. All serious buyers can get good deals from developers. To avoid any risk of delay, one should look at projects which are near completion," says Sudhir Pai, Chief Executive at property search portal Magicbricks.com.
In case you can pay, opt for a ready-to-move-in or nearly completed property as there is no construction risk. Before making any commitment, also check out the completion/occupancy certificate (RERA registration not required if it is received before May 1, 2017). However, supply is limited here and you may have to go for an ongoing project. In such a case, make sure that the project is registered under RERA and check out the project registration number.
"For any potential homebuyer, it is advisable to do the necessary due diligence of the project, check on the developer profile and track record, and all other related aspects before going ahead. It is also advisable to know the RERA rules of the state," says Magazine of CBRE.
Finally, do a thorough research regarding pricing and bargain hard. Check the prices in both primary and secondary markets. If you are in a primary market with a supply side overload, you could be offered a decent discount. Or you could be targeting some good locations where the supply side is usually low, and the developers may charge a premium. "It all depends on the property location and the demand-supply dynamics," says Kapoor of Liases Foras. ~