RERA effect: Builders rush to restructure realty projects, business model
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Mumbai: Builders are back at the drawing board to restructure realty projects and arrange finance to ensure compliance with a stringent real estate law that took effect on 1 May.
Under the Real Estate (Regulation and Development) Act 2016 (RERA), developers can market only those projects which have received all approvals. They must disclose all approvals, timelines and the project master plan before launch, and keep 70% of sales proceeds from every project in an escrow account.
Some builders like Hiranandani Group, Tata Housing Development Co. Ltd and Wadhwa Group are dividing large projects into multiple phases to register them individually.
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“We may treat each building as a phase and register accordingly. Not necessarily for every project, but that’s the easiest thing to do. This is because the new law requires us to work in phases now. You don’t get permissions in one shot for everything,” Niranjan Hiranandani, co-founder and managing director of Mumbai-based Hiranandani Group said.
Hiranandani is also restructuring its 350 acre (142 hectare) mixed-use development in Thane where more than 100 acres are yet to be developed.
Given that violations of the new law could invite jail term up to three years or heavy fines, builders are reworking modes of funding and prioritizing project launches based on estimated future cash flows and available approvals.
Hiranandani plans to register two of its ongoing township projects at Powai and Thane in Mumbai suburbs by next week. While 75% of the 250 acre project at Powai has been developed, the remainder has been divided into two phases to be registered under RERA.
Developers have time till 31 July to register ongoing projects. As many as 14 states and union territories are yet to notify the new rules.
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Another Mumbai-based developer, Wadhwa Group, has divided two projects— “Atmosphere” and “Courtyard”—into various smaller phases where each would be treated as an independent project.
“Earlier, we were planning for common amenities and facilities within the project, now we have planned in such a way that each phase would have its own amenities,” said Vrushank Mehta, head of corporate strategy and land acquisition, Wadhwa Group. Wadhwa is also talking to non-banking finance companies (NBFCs) for longer-term funding, instead of only for land acquisitions.
“Money may not flow freely to the project initially because of the escrow account and other expenses. So, it is better to have a sanctioned line which takes care of major part of the construction,” he said.
Tata Housing, which operates in several cities, is similarly splitting large projects into smaller ones, a company official said, asking not to be identified.
Industry experts predict a slowdown in new launches in the first six months of the year as developers realign businesses.
“With traditional cash flows during a project’s life cycle changing due to an evolved policy framework and compliance, developers are busy changing their business models too,” Ramesh Nair, chief executive and country head, JLL India, said in a note released on Monday.
Ashish N. Shah, chief operating officer, Radius Developers Ltd said, “We have now reviewed all the projects and considered the impact on the sequencing of delivery and managing consequent cash flows... Each project’s amenities are now micro-planned. We have also seen increased interest of banks and NBFCs in extending credit lines wherein initially pre-sales were planned,” Shah said.
Gurugram-based DLF Ltd has already announced that it is shifting to a build-and-sell model where it will only sell completed projects as this reduces the risk associated with under-construction projects.
This year, the company plans to deliver most of its under-construction residential projects, which add up to around 10 million sq. ft.
“We are changing our system of working. We will market and sell projects after completing it. We will make new projects after getting all the clearances after arranging for project funding but we will only sell and market when they are completed or structure is completed,” said Rajeev Talwar, chief executive, DLF.