Explained: How RERA can bring back the best years of the real estate industry

By: | Published: July 26, 2018 2:39 AM

Close watchers of real estate have been prophesying that the Real Estate (Regulation and Development) Act, 2016, (RERA), implemented in May 2017, will be a game-changer in an industry plagued with mistrust for the past 4-5 years

rera, real estateThe investor community, which follows the base user demand, will return once end-users start returning.

Close watchers of real estate have been prophesying that the Real Estate (Regulation and Development) Act, 2016, (RERA), implemented in May 2017, will be a game-changer in an industry plagued with mistrust for the past 4-5 years—a mistrust that precipitated the fall in sales of homes from a high of half a million per year in 2013 to half that number in 2017. This mistrust emanated from a significant section of the developer community building huge supplies, not keeping their promises, delaying project construction and, in many cases, taking consumers for a ride.

The help came from unexpected quarters. Thanks to the government’s twin interventions of demonetisation and RERA, the industry got the jolt it deserved. Cash transactions vanished after demonetisation; RERA brought in clauses to protect consumer interest, prevent developers from using monies in a fungible way, ensure consumers got what they had been promised. The Supreme Court played in tandem, becoming the protector of the masses, and dealt severe judgments against some errant developers.

Industry specialists had forecast such a positive scenario, based on their knowledge from the impact regulatory bodies brought about in other sectors—TRAI in mobile telecom, IRDA in insurance and, to some extent, SEBI in stock markets and mutual funds. In each case, the new regulation took 3-4 years to stabilise, went through 2-3 versions to finally find its feet and its teeth, but ended up in exploding the sector with a decade-long growth of 15-20% CAGR. In these sectors, larger professional corporates entered after regulation, foreign players—waiting and watching for decades—entered India, existing players failing to smell the coffee vanished, and the industry consolidated for the better.

Let’s see what happened in residential real estate since May 2017. The bad news first—few states have seriously started implementing the clauses and spirit of RERA. Maharashtra is head and shoulders above others in the discipline and diligence of RERA implementation. The next 3-4 states have tried to take a leaf out of Maharashtra’s book and are catching up. Leaving these five, it is sad to note that other states are still trying to get their act together. If this continues, people will start suspecting the intent rather than commiserating with the complexity of implementation.

Let’s double-click further to see how the market is evolving. Referring to the latest Realty Decoded Report from PropTiger.com (April-June 2018), two cities now contribute to 51% of all sales of new homes across India. No points for guessing—these are Mumbai and Pune. This number was around 39-40% till a year ago. Now go ahead and guess when did these two cities start breaking away from the pack? Right again, in the middle of 2017, after RERA got implemented.

If this won’t convince naysayers, then I am not sure what will? The simple cycle is that RERA gets implemented under a strong and strict RERA authority, developers start playing by the rule and spirit and start falling in line, consumers start believing the promises made on the product, start feeling genuinely protected, and start coming back to the market. The beauty of the residential real estate product is that there is a genuine demand for homes to live in, and especially in a developing country like India where each year tens of millions of people are moving from lower to middle class. We just need to do enough not to scare off this real demand into sitting on the fence or starting to rent rather than buy.

The investor community, which follows the base user demand, will return once end-users start returning. So, just turning poetic for a moment, “actual RERA will get actual residents, and actual residents in turn will get actual returns”. To add to the impending goldilocks situation, stocks have already done their bit in the past two years, and should take their cyclical break, possibly giving real estate a chance to enter the asset allocation of investors.

Predicting from the other states following in the footsteps of Maharashtra RERA, Bengaluru and Ahmedabad should see revival of business soon. Hyderabad is seeing a resurgence of demand post resolution of Telangana issue, and hopefully the RERA there keeps on strengthening, else they may end up committing the cardinal sin—running fast, but in the wrong direction! Like the Gayatri Mantra says, “May thou guide our intellect in the right direction”, let’s hope market participants notice the direction in which the winds are blowing, implement RERA sincerely, align with customers, and see the best years of real estate come back.

By Sunil Mishra, COO, IL&FS Housing Business

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