Shaking up realty sector

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Kozhikode: Creative destruction — the terminology credited to  Austrian economist Joseph Schumpeter for describing the periodic crisis in capitalist economy — may not be a familiar term in the real estate sector in Kerala. But, this concept invoked at each juncture of the “boom and bust cycle” of modern economies across the world may soon be a realistic possibility in the realty sector in the state with the central government approving the proposal for setting up a regulator for the realty sector in the country.  
 
With the Union cabinet green signalling the draft of the Real Estate (Regulation and Development) Bill on Tuesday, the construction sector in the state is in for a shakeout. Fly-by-night operators will be forced to leave the space anticipating a stringent regulatory regime.
 
The approval has come at a time when a number of national and state levels leaders in the realty sector are lagging behind by two to three years in delivering the promised apartments and villas.
 
The Confederation of Real Estate Developers Association, the apex body of builders in the country, gave a cautious welcome to the move by the government. C. Shekhar Reddy all India president of CREDAI said that the organisation welcomed the cabinet approval for the long awaited real estate regulatory bill.
 
At the same time Reddy also expressed reservations about certain provisions of the bill.
 
A similar view was expressed by John Thomas, president of the Kerala chapter of CREDAI. “We whole heartedly welcome the initiative of the government. But, the industry is having certain apprehensions about the provisions,” he said. “I am making these observations on the basis of the draft proposals as the final draft approved by the cabinet has not been released so far,” he said.
 
The main apprehensions are about three areas: timely delivery of buildings to customers, escrow accounts for each project and restrictions on promotional activities, John Thomas said. 
 
“In all these areas the bill seems to have taken a ‘blame it all on builder’ approach,” he said. “Timely delivery is the most important component in real estate business and the builder should bear maximum responsibility for it.  But, it should be taken into consideration that there are several externalities like approval from a plethora of regulatory authorities.
 
A builder in Kerala needs to take clearance from at least 24 agencies ranging from the local bodies to the environment authority.  Getting approvals from electricity board and water authority are the worst issues faced by builders.”
 
The wait for an electricity connection sometimes stretches from six months to one year, said a builder in Kozhikode. The proposed bill has not taken into account such factors for the delay in delivery, he said and added that then there are also externalities such as hartals, strikes and non-availability of construction material like river sand.
 
In the case of escrow account, the bill proposes that 30 per cent or the land cost of the total project cost can be retained by the builder while 70 per cent needs to be invested in the project. The 30 per cent norm is arbitrary as the component of land cost for each project varies from place to place, Thomas said.
 
For instance, in Marine Drive in Kochi, land cost may be 50 per cent of the total project cost, but in Aluva it may account for only 20 per cent. The ‘one size fits all’ approach seen here is unlikely to help the cause of the builders, he said.
 
The restrictions on advertisements is also likely to spoil the promotional campaign of projects. “I understand that the bill has proposed that the builder needs to take permission from the regulator each time of a campaign. In a dynamic sector like real estate I don't think such steps make any sense,” he added.