RERA: An Act Out of Balance

“Comprehensive” is a term recently heard in connection with the Real Estate Regulation and Development Act, known as RERA. Its supporters claim that it will usher in an era of transparency and offer property buyers a set of protections that have long been wished for. At first glance, the Act does appear promising, with features such as simplified measurements of square footage, mandatory disclosure of information, and legal recourse for buyers left in the lurch by delays or substandard workmanship. But scratch beneath the surface, and RERA is not all that it seems. More precisely, this set of measures is likely to lead to unfortunate consequences because the legislation—rather than being holistic in nature—was drafted without the full context of industry dynamics.

To boil the problem down to its essence, RERA presupposes a hyper-efficient market: one in which project implementation runs without a hitch every time, cash crunches are uncommon, and there is no inherent variability with respect to outcomes. This presupposition is not rooted in reality.

No one likes to think of a skyline blighted with unfinished high-rises (as already found in parts of Mumbai), but this can be expected to become a more common sight. One of the most visible consequences of RERA will be a surge in the number of distressed properties. The legislation will both contribute to the cause of the trouble and render the developments impossible to rescue. Cash-strapped developers will be forbidden to raise funds by selling pre-launch properties or units in later phases for which registration is pending, yet will struggle to meet the interest requirements for external financing. The resulting quagmire will be reflected in suspended projects.

Besides causing an increase in distressed developments, RERA will negatively impact property buyers and investors in the ways described below.

  • Higher property prices: It is a generally accepted rule of economics that stricter regulations increase costs. For developers, this will mean a heightened need for institutional financing. This situation will ultimately raise property prices in two ways: 1) the higher expenses—including cost of capital— will be passed along to homebuyers, and 2) smaller developers who lack access to institutional funding will drop out of the market, meaning less competition among developers and therefore higher prices for end buyers. When considering how these factors will increase property prices, one can argue that Act is at odds with the government’s expressed intent to promote affordable housing.
  • Disjointed communities: A rather bizarre—and almost certainly unintended—side effect of RERA is that it will incentive builders to split up developments into microprojects. For illustrative purposes, let’s imagine plans for a new apartment community comprised of five residential buildings and one recreational center. To minimize the potential penalties of violating RERA (which, as discussed earlier, may be the result of government inefficiencies rather than flawed business practices), the developer redraws this community on paper so that each building is a standalone development.
    This is a rational move by the builder, as it minimizes financial risk, but creates an absolute mess for the homebuyer since the “common” recreational center may technically not be part of the same development—even if it is just a few steps away from the apartment building. While the developer may very well aim to create a workable solution in which people living in any of the five apartment buildings can use the sports facilities, it would not be compelled by law to do so. It is hard to imagine a scenario in which this lack of legal protection would benefit owners and residents.
  • Less innovation: Yet another unforeseen consequence of RERA will be a stifling of aesthetic and functional creativity. Let’s say, for example, that a developer imagines an ingenious architectural design for a clubhouse or an experimental solution to water management. RERA, regrettably, will dissuade this. Since fresh ideas tend to take longer to implement, developers will find it safer to copy-and-paste previous designs (instead of improving upon them or rethinking them altogether) and thus avert the risk of costly penalties.

And as if these shortcomings were not enough, the Act contains loopholes big enough to drive a cement truck through. For example, since the cost of land – which is used by RERA to determine the amount that can be pulled from the escrow account – is not fixed, a developer who wants to access funds earlier than warranted can quietly inflate the value of land.

While the overall intent of RERA is praiseworthy—promoting accountability is a good thing, after all—the legislation lacks the painstaking thoroughness and contextual understanding that are the hallmarks of true reform. At best, RERA will offer a partial solution to pain caused by the industry’s less scrupulous players; at worst, it will escalate property prices, dampen competition, balkanize projects, and hamper innovation while netting little extra security for homebuyers—not to mention leaving skylines blotted with unfinished projects.

Those with limited enthusiasm for RERA can hope for follow-up legislation that is genuinely comprehensive and beneficial. The curtain on RERA has not yet been raised, but we are already clearly in need of Act Two.

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