Developers to deposit less money in escrow. Real estate experts want clarity on housing ministry proposal.
The housing ministry’s proposal to allow builders to divert up to half the amount collected from a buyer for a specific project to other projects has been welcomed as a “fair and positive step” by the developer community. Experts, however, say that the amount to be put in an escrow account should not be uniform but differ for metros and far-flung areas. Issues such as establishing single window clearance and an efficient regulatory body also need to be addressed first, consultants say.
The amount collected for a project from the allottees and put in an escrow account to be used only for construction of that project has now been reduced to 50% from the earlier 70%. The earlier clause in the Real Estate (Regulation & Development) Bill, drafted by the previous UPA government, was aimed at keeping a check on the developers and preventing them from diverting buyers’ money to start new projects instead of finishing the one for which money was collected. The real estate lobby was pushing hard for dilution of this clause.
This is a “fair” clause and we welcome it, says Getamber Anand, president elect Credai (Confederation of real estate developers association of India), adding the builder community would also want the taxing authority and the urban local bodies to be made part of the bill.
Sanjay Dutt, executive managing director, South Asia, Cushman & Wakefield is of the view that the proposal to review the Real Estate Regulatory Bill to allow builders to use 50% of buyer funds whilst reducing the mandatory holding in escrow account to only 50% (from previous 70%), will be a welcome move, should the parliamentary committee accept the same. From the developers’ perspective, this will allow them to utilize the money for construction activities to ensure timely completion of the project. This is positive for developers who will have more access to capital in short term for time bound activities relating to specific projects.
The dilution, according to experts is necessary as the amount kept in an escrow account can be used only for construction and usually the major cost in any project is that of land. Most developers have already paid for the land parcel before launching the project and construction cost is generally not more than 30%. A major chunk therefore would have been left unutilised in the escrow account.
By making developers block capital, there will be an opportunity loss that he will be forced to pass on to the buyer. This is like asking somebody to park ` 20 crore when you need only ` 3 crore for construction. There is huge interest to be paid on the remaining amount that is lying idle for which the customer may be forced to pay, say consultants.
“The government has said that all construction-linked expenses should be paid out of the escrow account. It is, therefore, not clear whether the interest expenses (which are also part of construction cost) and land cost are also part of this 50% limit or not. A clarification is required on that front,” says Neeraj Bansal, partner, KPMG in India.
For projects in far-flung areas where the land cost is much less, a higher amount should be kept aside in the escrow. “The government needs to take one more step, they should define what an urban location is for which 50% amount should be kept aside in an escrow account and define a second layer of cities where the escrow component should be 70% or even higher so that the developer is forced the complete the project on time,” says Bansal.
So, how will this change impact the real estate sector? The impact of this in the long run will be that there will be an assured supply in the market which in turn will impact prices of units.
“This will increase available liquidity with the builders. Considering the factors such as high interest rates on home loans, difficulty in securing bank credit for projects and overall dip in private equity investment sentiment, the move to reduce the escrow amount limit will usher in liquidity for both housing and commercial projects,” says Sachin Sandhir, global managing director, emerging business and MD, South Asia, RICS.