THE RULE OF LAW IN THE JUNGLE OF REAL ESTATE
From an unorganized sector, real estate industry is gradually and consistently completing its journey towards being a corporate industry. And the biggest role towards this transformation is that of the tightening financial and legal provisions. The new policy measures and regulatory mechanisms like the Real Estate Regulation and Development Act, 2016 (RERA), Goods and Service Tax (GST), Insolvency and Bankruptcy Code (IBC) and Environment Sustainability and Governance (ESG) have already started showing their impact on the Indian real estate eco-system. EVOLVING OF THE MARKET Real Estate Regulation and Development Act, 2016 (RERA) addressed the lack of a regulatory mechanism in the real estate sector which made it a risky proposition for buyers and investors. The Act brought in regulatory authorities that ensure transparency and protection homebuyers interest as also creating a level playing field for the real estate developers and brokers. The implementation of RERA has helped inspire confidence amongst the consumers and increased NRIs investments in Indian realty. Goods and Sale Tax (GST) on real estate implemented in 2017 has subsumed multiple taxes like Service tax, Excise duty, Customs duty, Entry taxes on inputs/raw materials, VAT etc. This has not only reduced the burden on buyers of various indirect taxes but has also minimized time-consuming tax procedures. The centralized tax structure also promotes tax consistency and lessens logistics costs. GST is not applicable on sale of ready-to-move-in flats, GST for under-construction affordable housing units is 1%, and for non-affordable projects it is 5%, without input tax credit. Insolvency and Bankruptcy Code (IBC) with its latest amendment has included home buyers as secured financial creditors, bringing them at par with banks and other institutional creditors while receiving invested funds in case the property or the builder is declared bankrupt. Post covid period has seen rising cases of financial pressure on both the allottees and builders leading to stalled projects and IBC has been very effective in helping lenders secure their dues in a much quicker timespan. Environment Sustainability and Governance (ESG) has become an important metric for foreign investors and corporate planning to foray in Indian real estate. Companies with good ESG performance are proven to have lower risks and higher returns, and India too has introduced new ESG reporting requirements. The biggest driver for the adoption of ESG in real estate has been the financial merits of having a resilient asset and being able to attract big foreign and domestic investors. THE UNIQUE CHALLENGES Indian real estate falls under the purview of a combination of State-specific and Central laws. Also, many Central laws have State amendments and then there are rules, regulations and bye-laws framed by local bodies like municipal corporations and statutory authorities such as planning and environmental authorities. The multiple agencies and state specific changes, make it a complex web of legal environment for both the real estate developers as well as the customers. For instance, across states, the implementation of RERA has been irregular. Also, as per experts the regulatory authority needs more teeth for strict implementation of rules and guidelines, dispute resolution and providing relief to both the developers and the homebuyers in case of any disagreement. The real estate industry is still seeking more clarifications on the input tax credit on GST paid for the construction of commercial buildings and leasing. Also simplification and rationalization of GST slabs is a demand from the industry. IBC though has delivered superior value realisation to real estate stakeholders, its resolution rate is among the lowest compared to other industries. Pre-insolvency procedures need to be made more effective and the resolution of a company in the twilight zone should start before it having to fail. The challenges towards adoption of ESG in India is firstly the existence of various green rating systems, lack of standardized building codes and adequate skilled manpower in this area. The lack of standard rules for reporting and the costs associated also deter many real estate firms from adopting ESG. LEGISLATIONS & THE WAY FORWARD There are a number of increasingly strict legislations for the brick and mortar asset as well as its ownership. This presents the paradox of both the challenges and the opportunities in the real estate sector. Challenges – The wide range of rules and legislation and frequently changing policies are the biggest challenge for a real estate player. Project delays due to a score of approvals from various agencies creates cost and time impediment to the project and form the major reasons for delayed or stalled project. Project completion delays due to regulatory issues, labour shortage, and supply chain disruptions on account of state or central political issues too plays a big factor in rise of legal issues. Land acquisition remains one of the main sore points of the sector. Clear land titles, time consuming procedures and overcoming litigations add to the costs of the land and inturn the project. Lack of competent personnel, clarity of laws and procedures add to the complexity of maintaining compliances in all matters from acquiring land, construction, hand over to sustainability performance. Opportunities - Affordable housing presents a huge development opportunity and once the industry status benefits percolate to all such projects, it could be one of the biggest growth segment for the real estate. There is a vast latent demand in this segment that is still unmet and more tax incentives and subsidies can help attract private developers towards creating affordable housing. RERA, GST and IBC have helped create a positive sentiment among NRIs as well as foreign investors that is visible in the growing investments coming in Indian residential and commercial real estate segment. India though still gets a very small pie of foreign investments on account of scarcity of Grade A developments and complexity of regulatory environment. Rising adoption of Green ratings by Indian developers has in turn contributed to the ESG compliances in the real estate sector. With consistency in implementation and enforcement of environmental laws, India is bound to see more ESG compliant developers. WHAT LIES AHEAD Digitization in the sector through the use of technologies like blockchain, artificial intelligence, and big data analytics, from government offices to private realty firms can be a game changer. It will not only make the processes more efficient and transactions more transparent but also help circumvent a lot of legal issues. Real estate is slowly and steadily opening up to the ESG adoption, and there is a long way to go. Once the issues of creating awareness, adequate availability of advanced materials, technologies and trained consultants are sorted, the cost factor will come down. Availability of comprehensive data and consistent guidelines will enable real estate sector to be ESG compliant. Also, a pragmatic way forward will be to build the RERA as the first point of grievance redressal. While, dispute resolutions are being provided by many RERA authorities, more often than not the orders/penalties do not get implemented. RERA has the potential to become a fair ground for both the developers and the buyers to get justice. Streamlining various processes and procedures of IBC by bringing out clarity in clauses to ensure smoother implementation will help cut delays in the resolution process. This will also avoid erosion of stressed asset value. BEING ABLE TO ADAPT TO THE SHIFTING MARKET AND WORKING WITHIN THE LEGAL FRAMEWORKS IS CRITICAL TO THE LONG-TERM GROWTH OF A REALTY FIRM. FOR BUYERS AND INVESTORS, REAL ESTATE STILL REMAINS AN UNPARALLELED FINANCIAL OPPORTUNITY. THERE IS A NEED FOR SIMPLIFYING REGULATORY MECHANISMS. SIMPLER AND MORE COMPREHENSIVE PROCESSES TO GET PERMITS AND APPROVALS FOR THE PROJECTS, WILL DRASTICALLY SHORTEN PROJECT COSTS AND SCHEDULES. A WIN-WIN FOR THE SECTOR AND THE END USER.