RERA has brought structural changes that had both, positive and negative impacts since developers were not ready; the economy itself was not ready to transition into the RERA regime. There was no regulation in the real estate industry and its malpractices. There simply wasn’t any process.
The Real Estate (Regulation and Development) Act, 2016 is an Act of the Parliament of India which seeks to protect home-buyers as well as help boost investments in the real estate industry. The complete Act came into force on 1 May 2017.
The year 2017 will be remembered for the lowest number of launches in 10-15 years with low interest. It will also be remembered as the year when the industry realised for the first time that if it is not prepared for the changed environment, its role will be redundant.
2017: RERA has resulted in the rationalisation of prices in cities such as Delhi-NCR, Bengaluru and select markets in Mumbai in the first quarter of 2017, while the slowdown in sales and unsold inventory is gradually improving in this year. RERA has deterred developers to jump into new launches unlike the past which resulted in incomplete projects and the buyers had to wait for long durations for occupancy. RERA has ensured that real estate developers cut down on new launches and are focused on completing existing projects and clearing unsold inventory.
2018: With regards to demand and supply, there is still pent-up demand. The sales may still be subdued due to the regulatory changes, but supply is gradually reducing and the new launches are almost nil this year. The near future will see the supply dry up due to negligible launches, and demand side picking up, coupled with inflation in the next 6 months or a year.
International laws Vs RERA
RERA is much simpler in India than (the rules) in West Asia; for developers as well as home buyers. The developers at least have a 30 percent cash in hand in India, but in West Asia, the developers cannot withdraw any money unless they have the amount to build. Only withdrawing 2-4% for architectural fee and overheads is allowed. The customer also cannot withdraw the booking at will; a penalty is charged for doing so. From both perspectives, Dubai real estate regulations are much more stringent than RERA.
2017: The Real Estate Act (RERA) has forbidden unaccounted money from being pumped into the sector and 70 percent of the money given by consumers has to be deposited in bank accounts through cheques is now compulsory. However, this has led to builders defaulting on their loan payments due to less liquidity in hand as compared to before.
2018: The new NPA law this year coupled with the above sanction has led to banks being conservative when it comes to allotting and approving loans to such developers and real estate in general due to increased number of NPAs (non-performing assets) and bad loans for commercial and residential properties with Mumbai topping the list in Maharashtra. The NPA law allows the RBI to direct the banks to recover NPAs from defaulters, either directly or through the RBI’s committees. Banks have been asking for additional documents to provide loans. The withdrawn support of banks has led to developers preferring to take loans from the Non-banking financial companies (NBFCs) for lending inspite of high-interest rates. The year 2018 has seen a boom in the Non-banking financial companies (NBFCs).The whole purpose of RERA is to deter such kind of lenders who lack strong financial planning and are just focused on launching new projects.
The disruption caused by RERA has seen a trend of asset management companies setting up NBFC’s, or buying out existing ones to fund realty projects and increase their stake and investment in the sector. The overseas asset management companies, such as Blackstone and Ivanhoe Cambridge are especially eager to invest and capitalise on the distress of the real estate sector due to the new NPA law and RERA coming into the picture. Overseas companies have struck acquisitions, joint ventures and made strategic investments in struggling and aspiring companies. These companies will bridge the capital deficit in the sector. According to Cushman & Wakefield, the PE inflow into real estate has plummeted to 17 percent hike since 2014 to INR 42,800 cr (USD 6.6 bn).
The residential property developers are getting a massive chunk of equity capital as private equity funds are open to investing for the first time in the past four years. The future will see equity investment more appropriately priced for the associated risks and introduction of more equity-type products in the markets by fund managers as compared to last year.
Overall, all these disruptions will reduce the bad debts in the industry and will encourage banks to lend to developers with a strong balance sheet and track record. This safeguards the interest of the buyers too.
Future of RERA:
The occupancy certificates, no-objection certificates, environmental clearances do not come under RERA. Even utility connections and certificates required for completion are not under RERA purview. This is stalling projects due to which developers have to suffer the wrath of RERA laws. All these certificates and clearances should fall under RERA for a complete 360 effective implementation.
Although the government has offered increased size of the apartment under the affordable housing policy, reduced the GST and given income tax exemptions, there is still scope for improvements in giving approvals and occupancy certificates. Besides that, the state governments should be more proactive in providing the required infrastructure on time, be it for affordable housing to develop or smart cities
However, providing licenses today and not providing infrastructure later is not the right way to go either.
RERA has impacted home buyers immensely:
- Allotters are informed about every detail, any addition or alteration
- Advertisement of the plan and project is made only after the registration with RERA, which ensures complete transparency
- The increased assertion on the timely completion of projects and delivery to the consumer.
- The most positive aspect of this Act is that it provides a unified legal regime for the purchase of flats; apartments, etc., and seeks to standardize the practice across the country.
- Builders quote prices based on carpet area, not super built-up area. This means there is no ambiguity regarding the cost.
The 1 year transition period of RERA implementation was expected to be challenging for developers as they need to realign their business operations to comply with the new regulations. The constraints imposed by the Act have adversely impacted the business model of unorganised developers and it can be expected that there will be some level of consolidation in the industry. This has benefitted larger developers who have the resources and financial flexibility to withstand the near-term challenges and scale up execution levels as required, whereas the small developers are opting for collaborations with established players to gain expertise and improve on design and structure. RERA is evolving. All the stakeholders—be it banks, developers, customers, vendors, government, municipal authorities, etc have to understand that they have to improve and that changes are the only constant.
(Views expressed in this article are of Rohit Poddar, Managing Director, Poddar Housing and Development)