RERA – IMPACT ON DEVELOPERS

RERA has been a much awaited compliance statute for the ever burgeoning Real Estate industry. Hitherto, there were not much entry barriers to being a Developer and lot easier being a Realtor (Broker). This has over the years led to a lot of misgivings and shortcomings in the industry, while there has been a burgeoning growth despite these setbacks. These shortcomings have been more towards the Customers who took the brunt of them, and these were in terms of non-clarity on the area sold (carpet, plinth, and common area, etc.); Quality; Specifications – promised vs. delivered; Timely delivery, Legal process; Adherence to Statutory approvals. All this has led to the Customer being stonewalled into a corner, and the Government had to usher in the compliance statue in order to regulate the Developers and as well as the Brokers.

The RERA Act promises to protect the Customers and assures Accountability, Standards, Transparency, Customer-centric behaviour, and a Code of Conduct from the Developers and the Brokers alike. So, with the advent of RERA, the Customers are likely to benefit immensely in order to protect their hard earned monies being invested into Real estate, with the advent of RERA.

The penal provisions are quite stringent so that the Developers / Brokers do not evade any compliance.

The impact of all this will result in a major shake up in two fronts:

  1. There would be a reduction in the Land prices and also the product offerings immediately. The reduction in the product prices would be the result of the various projects which have been delayed due to various reasons ranging from depressed market conditions, to delays in the completion of the project by the Developer, to legal issues plaguing the projects, all of which have been brought under the ambit of RERA. This necessitates facing stiff penal provisions of RERA ranging from penal payments, interest and in certain extreme cases leading to arrest of the Developer / Broker. As such, the Developer is forced to take a hasty action of completing the project even it means selling at lower prices for the fear of facing the consequences of the provisions of RERA.
  2. The second and most important impact will be due to certain draconian provisions of RERA, like 70% of the receipts to be escrowed in a separate account, selling to be only on the basis of carpet area, no sales allowed till all approvals are in place, no forward looking advertisements or publicity about the project to be publicised, etc…to name a few, will result and/or force the exit of major percentage of Developers out of business (read: fly by night operators). I expect the percentage to be in the range of more than 60%.
  3. There will be standard measuring system amongst developers & projects in a micro- market. The total cost divided by the carpet area in square foot will create a standardized benchmarking system for the entire industry.
  4. The resultant effect would be that the remaining Developers would be very selective in their approach to the Project, and mostly inclined only towards Joint development rather than acquiring lands and develop them.
  5. This would create a certain amount of demand never seen before in the market, as there would be short supply of Units of various sizes and budgets. This stage would take about 2 years to reach, and the remaining Developers who sustained through these 2 years with all hardships will reap huge benefits from the market.

 

OVERALL: Good for Customer and very good for the Developers whosoever sustains through the next two years. It is expected to be a “Golden Period” for the Realty Industry. This analysis is only on the impact to the developer community & the impact on customers is discussed separately.

Author is D. Ravichandra Babu, a Chartered Accountant and an Investment banker. He specialises in the Realty sector since last 20 years, and also specialises in other verticals like Media & Entertainment, Non-conventional energy, and few other sectors, and mentors a few startups. Views expressed herein are his personal views.

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