New Bill will change Indian real estate market forever

Over the last few years we have seen major movement in the Indian real estate market with the authorities looking to be more transparent and offer additional protection to investors. It may have taken longer than some would have hoped but the recent bill signed by the Indian authorities is certainly a game changer. There are a number of elements to take into consideration which includes:-

Real estate regulations

At this moment in time there are literally millions of apartments across India which have eaten up investor’s money but have yet to be finished. This has created a number of legal arguments between investors and developers although historically there has been very little in the way of recourse for investors in times of trouble. However, this situation will change with national and local regulatory bodies to be set up with large home and office projects legally obliged to register. There is also an obligation for real estate brokers to sign up – which has been another area of contention.

Protection for investors

In times gone by there has been nothing to stop developers using deposits and initial instalments from investors for purposes other than the specific property development projects. Some developers have overstretched themselves acquiring land which has left them short of funds to finish some projects. In future there will be a legal obligation for developers to put aside at least 70% of monies collected in a separate bank account which can only be used for the specific projects for which they were collected.

This is a major move by the Indian authorities although one disappointing factor is the option for state authorities to reduce the 70% figure.

Late payment penalties

Many people will not be aware but prior to the signing of the recent real estate bill builders were fined 10% a year interest when the project was delayed. However, rather bizarrely, if an investor missed an instalment they could be charged up to 18% as a penalty fee. The new legislation will ensure that both parties are charged the same rate of interest in relation to late payment/development delay penalties.

When you bear in mind the current issues across the Indian real estate market, with in excess of 1 million apartments unfinished across the country’s three major cities, this change in penalty payment interest rates could have a material impact.

Pay for what you use

In a further reflection of the draconian real estate regulatory system used in years gone by the idea that investors pay for communal areas in multiple apartment developments has been abolished. This will likely place more pressure on the finances of property developers across India but investors will only pay on the “carpet area” living space. It will be interesting to see how this move impacts the real estate market and indeed whether property developers look at alternative means of funding communal areas.

Building approval

Many investors in the Indian real estate market will have experienced the situation where funds have been taken for a development only to find that property planning permission and government approvals were never forthcoming. The new regulations will insert a legally binding clause into each contract stipulating that projects can only be launched after regulatory clearance. This additional transparency and enhanced legal framework can only help to promote the Indian real estate market to both domestic and overseas investors.