India’s Real Estate (Regulation and Development) Act (RERA) will boost transparency, discipline, and accountability in the property market. The Act entails a near-term drop in new project launches as fewer projects will be ready for registration; it will deter entry by smaller players due to higher holding costs; and it should make joint development more popular, says a report.
“Demand should benefit from new expectations created by the Act. Indeed, sentiment among buyers already appears to be turning more positive. This is good for the market in both the short and the long term. On the supply side, we expect a drop in new project launches in the short term. This is because our analysis suggests that fewer projects will be ready for registration as developers will wait to see how the new norms pan out and how other projects fare,” says a report titled Developers Get On Board – Implications of Real Estate (Regulation & Development) Act 2016 by Colliers.
The Act has brought in various consumer-friendly provisions that are bound to increase demand in the real estate market. There are certain consequences of RERA that should increase transparency and help improve overall confidence of the buyers. At the same time there are a few provisions that will create teething issues initially and cause a decrease in supply in the short term.
The mandatory requirement to have all approvals in place prior to commencement of sales will reduce the risk of project delays due to uncertainty in getting the initial approvals required to start construction. However, many approvals can only be sought on commencement or completion of the project construction when a completion certificate is acquired (e.g. completion certificate). There will not be any respite from delays on account of these approvals.
Fewer projects may be ready for registration after enactment of the Act as it does not allow developers to make a sale before they get all required project approvals. However, the approval process is expected to shorten in the next few years as the government is adopting an online mechanism. Thus, the drop in new project launches should only continue for a short term. The mandatory requirement to have all approvals in place prior to sales should increase holding costs for the project. This will increase the threshold to entry into the real estate industry; and will adversely impact 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, the report says.
“To reduce holding costs, we anticipate that joint development (i.e. an agreement to develop between landlord and developer) will be a preferred mode of development; rather than outright land purchase,” the report says.
The intention of this provision in the Act is to reduce approval risk for the consumer, which is a prime cause of project delay. The intention is laudable; however, the Act does not cover the approval process under its ambit. Numerous stakeholders have called for a single window clearance for all approvals. However, a look at the approval process in other Asian countries and even the USA reveals that the time required for approvals in these countries is far less than in India, in spite of them also having multiple agencies providing project approvals. The key problem is the lack of clarity of norms, transparency and accountability in the approval process which needs to be addressed in India. Internationally, the time taken for getting approvals is three to nine months.
“We suggest that the Act should also address the process of getting all the approvals to commence a development project and set a maximum timeline (three to nine months) to get all necessary approvals. By addressing this issue, the holding cost of land can be reduced, and this benefit can then be passed on to the consumer in terms of lower prices,” the report says.
As for the requirement to keep 70% of the project proceeds in an escrow account, since builders or developers sometimes divert funds from one project to another, the new regulation dictates that for every project the developer needs to have an escrow account.
This step will remove a common perception amongst buyers that the money they pay for a project is siphoned away for other purposes, thus improving buyers’ confidence.
It was also recommended in the report that the government and industry should work together to set up courses and informative seminars for real estate professionals. For example, Real Estate Management Institute (REMI), in collaboration with CREDAI, Maharashtra Chapter has recently introduced a three week certificate course for real estate brokers. In the coming years; a real estate degree should be a prerequisite for registration with the Regulatory Authority. The real estate industry associations should encourage best practices and set high ethical standards for their members to follow. Organized sectors such as banks and financial institutions are more likely to invest in ring fenced projects, it says.