The real estate buyers in Kolkata are eagerly expecting the implementation of the Real Estate Regulation Act, 2016 (RERA) as it is widely believed that the RERA will go a long way in protecting the interests of the buyers. While the RERA will surely enhance consumer protection, but there are strong reasons to believe that prices of flats in Kolkata will increase after the RERA is in force.
It is somewhat premature at this stage to measure the impact of the RERA on the prices of flats in Kolkata, but we can surely consider some of the factors which can drive the prices of flats up.
Prices of Flats in Kolkata will be Adjusted on the Basis of Carpet Area
After the implementation of the RERA, prices of flats in Kolkata as elsewhere in India will be determined based on clearly defined carpet area. The widespread practice of selling flats based on built-up or super built-up area will come to an end.
While this is sure to make the prices of flats transparent, chances are high that developers may increase the cost of per square foot for the carpet area to offset the revenue they would lose.
Sensing the move from regulators with regard to the RERA, many prominent developers such as Godrej, Mayfair, Paranjape Schemes etc. in Mumbai have started quoting by carpet area, the rates for which is naturally higher than that quoted on theÂ saleable/super built-up area. Although this trend is already visible in Mumbai, it is expected that developers in Kolkata will soon follow suit. Therefore, the perceived conclusion that property prices will come down as a result of RERA is incorrect.
Builders are already looking at adjusting the prices of flats in Kolkata based on carpet area. Since the earlier prices based on saleable/super built-up area gets readjusted based on carpet area, prices per sq. ft. will go up. But this process will keep the total price of flats unchanged.
Let us suppose, a flat of 1000 sq. ft. is having a carpet area of 750 sq. ft. It is currently being sold @ Rs 1000 per sq. ft. based on super built-up area i. e. 1000 sq. ft. Therefore the total price of the flat is Rupees 10 lakh. After implementation of the RERA, pricing will be based on carpet area which is 750 sq. ft. in this case. The adjusted price is likely to be about Rs 1334 per sq. ft. Actually, Rs 10 lakh is divided by 750. Thus the effect on theÂ total price of the flat will be neutral.
Increased Cost of Compliance with the RERA will be Passed on to Flat Buyers
The RERA mandates the developers to keep detailed records, hand over flats in time, and keep a major percentage of theÂ project cost in an escrow account. These provisions will increase certain costs to the developers and it is highly likely that these cost elements will be passed on to the buyers.
For example, it is in the interest of the developers to hand over the flats in time to escape the penal provisions of the RERA. Therefore, the developers are likely to work only with reputed and resourceful contractors and increase supervision at each stage of project execution. These are likely to increase professionalism in project execution and the cost of project execution will go up moderately.
The developers will also try and offset the decreased return from the capital kept in escrow accounts as the widespread earlier practice of using the booking amount of one project to launch other projects will come down.
Developers will Possibly Insure Themselves against Payment of Damages
The RERA stipulates stiff penalties for non-compliance with its provisions. The penal provisions include fines, jail terms or both.
â€śIf any promoter contravenes the provisions of different sections of the RERA, he shall be liable to a penalty which may extend up to ten per cent of the estimated cost of the real estate project as determined by the Authority.â€ť
For example, any delay in project completion will make the developer liable to pay the same interest as the EMI being paid by the consumer to the bank.Â The buyer can also expect after sales service for a period of one year of taking possession in case of any deficiency in construction.
Insurance products are being mulled by the insurance industry to protect the developers against payment of stiff penalties and legal costs. The premium amount outgo on such insurance schemes will obviously be added to the project cost.
Smaller Developers will Find it Difficult to Comply with the Provisions of the RERA
A large number of small developers will find it extremely difficult, often impossible, to comply with the provisions of the RERA.
They might find the requirements of depositing a large part of the project cost, ensuring high-quality material and workmanship, keeping detailed records, providing after sales service and above all, handing over flats within the stipulated time very challenging.
While these conditions will definitely increase theÂ efficiency of the sector as a whole, but better business and construction practices are likely to be adopted better by relatively larger and well-established developers in Kolkata.
If you are looking at buying a flat in Kolkata, it will be much safer to buy it from renowned and well-established developers, even if the costs are somewhat more.