Kaushlendra Singh Sengar
The Nifty Realty Index has gained nearly 52.95% in 2017, wherein Nifty 50 has gained around 14.33% of return. Nifty Reality outperformed Nifty 50 by giving 3.7 times return. This is clearly showing the positive sentiments of traders and investors on the reality sector.
This is because of the key initiatives taken by the government through the Real Estate (Regulation and Development) Bill, 2016 which was passed by Parliament in March last year and all the 92 sections of the Act came into effect from May 1, 2017. The Real Estate (Regulation and Development) Act, 2016 (RERA) is the first regulatory body of the Indian real estate sector.
After RERA we can expect transparency and efficiency in the sector in terms of delays, price, and quality of construction. In addition to this, the promoter of a real estate company has to maintain a separate escrow account for each of their projects. A minimum 70 per cent of the money from investors and buyers will have to be deposited. This money can only be used for the construction of the project and the cost borne towards the land. As per RERA, developers can’t ask more than 10 per cent of the property’s cost as an advanced booking amount. If a builder defaults on delivery within the agreed deadline, he will be required to return the entire money invested by the buyers along with the pre-agreed interest rate mentioned in the contract made as per the guidelines of RERA. This will lead to growth in real estate sector as strong compliance will boost the confidence of investors and simultaneously now builders will also benefit from more buyers.
So, it is clear that now those developers who are running a project only on the money of buyers/investors will not sustain anymore and they have to hand over/sell their ongoing projects to big builders. This will increase the market share of big players.
RERA also focuses on the quality of construction. In the last few years, we have noticed many complaints about the bad quality of construction. So to prevent the same, RERA has made certain provisions. If any issue is raised by buyer/investor regarding the quality of construction within the 5 years of getting possession, then the builder has to resolve the matter in the next 30 days as per the RERA guidelines.
Builders also cannot give advertisements or sell, offer, market or book any plot, apartment, house, building without registering the project with the regulatory authority. After registration, all the advertisements inviting investment will have to bear the unique RERA registration number, which will be provided project-wise. Now the builder can’t run any scheme and mislead the buyers/investors for their benefit.
Therefore, now avoid buying stocks of companies with low reserves and cash flows as RERA increases compliance for new project launches and restricts the use of project cash flows. Only big players will grow in the future. I, therefore, recommend to buy stocks of companies who are much into commercial projects. Going forward, in the next 1-2 years, we will see takeovers and mergers in the real estate sector, which should be in favour of big players.
Here are a few top picks which I recommend to investors from long-term investment point of view (1-2 years).
(The author is Founder & CEO of Advisorymandi.com)