While applicability of RERA on the ongoing projects at the time of notification of rules is still a grey area, there is definitely a change in developers’ mindset while planning for new projects.
A lot has been written and said about the impact of RERA and GST on the real estate sector. These two have undoubtedly been most sweeping macro factors, which are changing the way developers have started looking at the execution of the project and buyers are looking at the way transactions will be done. While applicability of RERA on the ongoing projects at the time of notification of rules is still a grey area, there is definitely a change in developers’ mindset while planning for new projects. Some of these are as below:
1. Phase-wise execution of the project: A project, which is intended to be sold under-construction needs to be mandatorily registered with RERA. Among other guidelines, developers need to define completion date of the project. There is a penalty clause, if the project is not completed within the defined time-frame. Therefore, developers are now planning to execute large projects in different phases. For instance, if they are developing 8 towers, they can register 4 towers with RERA as phase-I and define different completion timelines for the remaining 4 towers as phase-II. While basement can be common and completed during phase-I only, structure of phase-II towers can be done under different timelines. This gives developers extra time in phase 1 itself, if there has been a poor response. Also, planning for phase-II can be tweaked to align with customer demand in phase-I. For instance, more number of 2 BHK units can be planned compared to 3 BHK or 4 BHK units.
2. Adopting new technologies in construction: Many developers are executing high rise buildings with new technologies such as Mivan shuttering to shorten the execution timelines. Gradually, these technologies will become the new norm rather than aberration.
3. Forging with financial institutions for construction funding: The sales velocity in under-construction project has been sluggish so far, and is expected to remain due to applicability of GST, uncertainty of execution timelines, quality concerns, etc. Therefore, even large developers who have shied away from the construction funding are planning to tie up with a financial institution and have a back-up plan in place to fund the construction in case inflows from customer advances dry up during the execution of the project.
4. Sales of finished units: Developers such as DLF who have deep pockets and fast project execution capabilities are tweaking their business strategy, in which they construct, get the completion certificates, and then sell the project. This is to avoid applicability of RERA, which is still in its early days and its full implications are unknown. Additionally, since there is no GST applicable on ready-to-move-in units, realization per unit will be better, if you sell only finished units. However, this is not a risk-free strategy. It will come with its own set of challenges. For instance, developers will have to lock-in substantial capital until sales commences.
(By Sandeep Batra, Associate Director, Capital Markets and Investment Services at Colliers International India)