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  1. Increased protection to home buyers

Increased protection to home buyers

The Indian real estate industry is fragmented, with no single construction firm having a leading position.

By: | Updated: June 1, 2018 4:26 AM
NBFC, Indian real estate industry, RERA, Insolvency Code, home buyers The industry scenario is that, in large cities, the inventory of houses to be sold will last for 3-4 years.

R Kannan

The Indian real estate industry is fragmented, with no single construction firm having a leading position. At the same time, given the demographic profile of India, the number of first-time home buyers is on a rise. According to a recent RBI data, bank credit to new home buyers increased by 13.3% to Rs 9,74,600 crore as on March 31, 2018, compared to Rs 8,60,100 crore in the same period last year. Apart from residential construction in large cities, even people living in towns/rural areas have started building homes for themselves. The aspirations of crores to have a home were fulfilled by the entry of new players and availability of funding from banks, housing finance companies, NBFCs and private equity firms, and we saw a boom in the industry. Traditionally, 50% of property cost is financed by home buyers through own funds and the balance is through bank finance and other borrowed funds. In most of these cases, half the price of a property had to be paid in cash. Further, real estate development was taking place in unauthorised areas and a few fly-by-night operators capitalised the boom to cheat home buyers.

Introduction of RERA and demonetisation created turbulence in the industry. RERA has brought many provisions to protect buyers’ interest. Companies have to create an escrow account and 70% of the collections from home buyers have to be deposited into this account. Withdrawing money from these accounts have a lot of restrictions. Companies have to be transparent and publish all the details including approval from authorities and their construction plans.

These provisions from RERA necessitated the formalisation of the industry and adoption of best corporate governance practices by real estate firms. This is likely to lead to consolidation of businesses and only a few large players will be able to sustain their business. Small players may become subcontractors to these large players. The regulations have constrained the availability of finance from various sources. RERA implementation is in the take-off stage and will take 3-4 years to attain maturity.

The industry scenario is that, in large cities, the inventory of houses to be sold will last for 3-4 years. Many real estate firms are finding it difficult to navigate through new regulations and are looking for funds to finish pending projects. The firms were initially funded by banks, NBFCs and private equity firms, but that funding has almost dried up. In this context, home buyers are likely to be treated as financial debtors as per Insolvency Code.

This provides them with double protection from RERA and IBC. Insolvency Code implementation is also in the take-off stage and the speed of resolutions is not as per expected time-lines. This is likely to be so, considering that this is a new legislation.

Financial institutions will be hesitant to fund real estate projects directly and it will result in home buyers taking loans from these institutions and paying advance to developers. The industry has become hyper-competitive and it takes a long time for developers to market all the flats they have and mobilise resources to complete the projects. Further, unlike in the case of banks, individual home buyers do not have the knowledge or expertise to pursue debt recovery from financial services firms.

If a project under resolution is sold to other developers and that project continues, it will be a win-win situation for all—home buyers will be able to recover the amount. In case the project goes for liquidation, all creditors including home buyers will only be able to recover a part of the amount.

Considering the current state of the industry and the financial condition of builders, the legislation for protection of customers should take care of continuing projects and protect the interests of all the stakeholders to ensure continued flow of funds to good developers. A detailed analysis of the two legislations from the perspective of each stakeholder has to be carried out, bringing out the pros and cons for each stakeholder group and the legislation which could be finalised after taking into consideration all the implementation issues.

The writer is Head, Corporate Performance Monitoring & Research, Hinduja Group

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