Real Estate Act- Impact on Realtor’s
Real Estate Act- Impact on Realtor’s
Head- Client Advisory at SNMA Enterprise Pvt. Ltd.
A shake-up of the real estate sector is imminent, post the enactment of the Real Estate (Regulation and Development) Act, 2016 . Provisions of the Act are likely to impact liquidity of real estate players in the short-term and Analysts believes that organized players, who have better access to funding sources, will be better placed to tide over this crunch, though their credit profiles will weaken as a result. In particular, two provisions are likely to have immediate impact.
1.One not being able to launch projects before obtaining all approvals and
2.Second-End use restrictions on 70% of sale receipts or Es-crowing of 70% of sales proceed.
India-Ratings: – If the Act is enacted it could result in a higher reliance by real estate developers on joint venture(JV) projects with land owners due to lower availability of surplus cash to buy land. The provision which prohibits pre-Sales/Launch until the land is in possession and all approvals are in place, along with the provision to escrow 70% of sales proceeds, will lead to higher reliance on joint venture projects and consequently the much needed elasticity in real estate prices.
RERA prohibits sale of projects without registration, for which the receipt of all approvals and Commencement Certificate is a pre-requisite. The Act covers even currently on-going projects within its ambit and provides a timeline of three months from the commencement of the Act for registration of such projects. This provision will have an immediate impact on developers with on-going projects, where the developer is selling flats without receiving all approvals. Sales from new projects have been a key source of liquidity for developers and such proceeds have been deployed by them towards completion of existing projects, additional land purchases and debt servicing.
Key Factor is Es-crowing of 70% of Sales Proceeds: –
Cash flow cycles for developers may get stressed during the transition phase since developers will need to await approvals prior to launch and due to the escrow provision.
This provision shall prevent diversion of receipts from a project for other purposes by the developer and hence impact its liquidity. This provision will especially impact developers with projects in cities such as Mumbai/Delhi & high end projects in other cities, where the component of land cost within the apartment price is much higher than the construction cost component, as this provision will lock-up the entire surplus over the construction cost in the escrow.
This is likely to reduce the number of project launches initially and supply is likely to come down which means lower inventory in the short run. Hence could provide the much needed boost to the Real Estate prices as supply will be bottle necked.
Es-crowing 70% will put pressure on developers to raise more funds from other sources (debt or equity). Organised players have access to varied sources of funds, namely loans from banks/non-banking financial companies, Non-convertible debentures, private equity and structured debt, thus they are likely to be able to tide over the liquidity crunch, though the debt raising and cost of such funding will result in weaker credit profiles in the short term.
Can Rogue’s Be Tamed? Talk with any Realtor/ developer he will have his own version to label this ACT as DUD. Reasons ranging from that the bill will lead to further delays, high cost, fewer number of projects, and shortage of housing, this will further fuel corruption at authority level. Well, it’s a known fact that Builder’s & City Development Authorities are Hand-in-glove and corruption is rampant.
Now, what seems to be a Herculean task is that there would be, my conservative estimate, in excess of 1 Lacs developer, in India, (CREDAI alone has 11,500 members) which will fall in the ambit of the RERA (As it covers 500sqMt OR more than 8 Appt.). It will be A devil of a Job for the authorities, to nail every small developer and ensure compliance. Black Money will still flow in as smaller builders may solicit part of the investments in cash.
SNMA Capital Advisors