How RERA will impact risk-return dynamics for both developers, homebuyers

Published: April 13, 2017 12:55 PM

The much-awaited Real Estate (Regulation and Development) Act, 2016 (RERA) was enacted last year promising transparency and regulation in the real estate sector. While the process to get a regulatory framework for the real estate sector itself was tedious, getting all the states to regularise the sector at the ground level is turning into a far more interminable task.

The provision of mandatory registration and requirement of keeping 70% of the project money into an escrow account is likely to reduce the buyer risk to a certain extent.

By Surabhi Arora

The much-awaited Real Estate (Regulation and Development) Act, 2016 (RERA) was enacted last year promising transparency and regulation in the real estate sector. While the process to get a regulatory framework for the real estate sector itself was tedious, getting all the states to regularise the sector at the ground level is turning into a far more interminable task. Currently, all the states are gearing up to implement RERA, and we expect the regulation to be a reality at least in some states by the end of the year despite all the discussion and ambiguity around relaxation of various clauses in state rules. The clauses that are most disputed ones are the inclusion of ongoing projects in the ambit of RERA, penalty provisions, promoters’ responsibility for structural default and clear titles.

Although such ambiguity is likely to remain for a while, the act is likely to change the way real estate sector operates in India. It will also influence the demand-supply and risk-return dynamics for both developers and buyers.
Until a couple of years back, real estate investments yielded an un-proportionate high returns for a few investors, however, money got stuck in delayed projects for a lot of them. After the implementation of the Act, the investment in the real estate sector will be more mature and short-term (1-2 years) investors looking for speculative gains will find it difficult to make money in this market. Like other mature markets, real estate investments will yield returns to those investing for long term (more than 5 years).

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Currently, the major risk associated with the investment in an under construction project for a buyer is delay in delivery of the apartment/plot; and the delivered product not being as promised at the time of booking in terms of quality, specification and carpet area. The delay in delivery is either because of delay in getting necessary approvals by the developer or use of the project money for some other purposes. The provision of mandatory registration and requirement of keeping 70% of the project money into an escrow account is likely to reduce the buyer risk to a certain extent. The provisions of promotor’s liability for clear title, inclusion of real estate agent under the purview of Act and penalty clauses will increase the overall transparency and accountability in the system. This in turn will trigger the demand from new expectations created by the Act. Indeed, the sentiment among buyers was started turning more positive, but demonetisation further dampened the sentiments in November 2016.

Having said that, the economy seems to be started having consumption base recovery. At the same time, for a developer, the mandatory requirement to have all approvals in place prior to sales should increase holding cost of the project. This will increase the threshold to entry into the real estate industry; and will adversely affect smaller enterprises. Developers may face liquidity issues as banks, financial institutions and funds would prefer to enter into the project once it is registered with the authority. Smaller enterprises may find it difficult to venture into the market due to liquidity issues. To reduce holding costs, we will see more joint development (i.e. an agreement to develop between property owner and developer) rather than outright land purchases. The provision of inclusion of existing projects under RERA is also pushing developers to complete their under construction projects.

The developers are rushing towards completing their undergoing projects especially the one which are in advanced state of completion as abiding by all the regulations mentioned in RERA for an undergoing project are more difficult to comply with than the new projects. On completion of the project, the builders may get the occupation certificate and may not have to go for all the hassle of completing all the formalities of RERA provisions. This in fact is good for buyers who are looking for early completion of their projects.

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Thus, on the supply side, there may be a drop in new project launches after RERA. This is because fewer projects are likely to be ready for registration and probably the developers will first complete their under construction project and wait to see how the new norms pan out before launching new projects. Currently, all major cities in India have high-unsold inventory, thus lower new project launches should ensure equilibrium in demand and supply in the residential sector. Developers who will prepare for the changes in advance will benefit from the demand. Over time, RERA will weed out speculators in the Indian property market and enhance the credibility of the sector.

(The author is Senior Associate Director, Research, Colliers International India)

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