RERA impact: Small, mid-size real estate firms struggle to raise funds

Under the Real Estate Regulation and Development Act (RERA), presales or sale of housing units without first securing all the required approvals has been strictly prohibited. Photo: Ramesh Pathania/Mint

Mumbai: Small- and mid-size property firms are struggling to raise funding for projects under the stringent new real estate sector regulations that came into force this year.

Several are chasing capital from non-banking financial companies (NBFCs) or private lenders or are scouting for partnerships to share costs.

Under the Real Estate Regulation and Development Act (RERA), presales or sale of housing units without first securing all the required approvals has been strictly prohibited.

Prior to RERA, presales had been a common practice among several developers to fund the early stage of development, including financing the cost of land or paying for approvals which accounts for 20-30% of the project cost.

Besides, the mandatory rule of maintaining a 70% escrow account for every project and other compliance costs are also pushing up the overall project cost.

“Smaller firms are under capital pressure. They are increasingly stuck with raising new capital as their balance sheet have not been well organized as opposed to a corporate developer,” said Amit Goenka, managing director (MD) and chief executive (CEO) of Nisus Finance Services Co. Pvt. Ltd, a financial services firm specializing in real estate.

Goenka said most of the smaller firms are turning towards far more expensive institutional capital as they are not eligible for bank loans because of their size or lack of credit track records.

“We had to take a review of the type of developers we are financing. We are alright partnering with slightly smaller ones though obviously one has to look at the risk parameters,” he said.

Mumbai-based Mirchandani Group’s launch of a few of its new projects has been delayed as it scouts for capital to fund them.

While the company has not relied on presales in the past, overall development costs have gone up by another 50% post RERA, forcing it to look for more funds at the early stage of development, said Vijay Mirchandani, managing director.

“Sourcing funds is going to be a big challenge post RERA. One cannot take bookings from investors without all the approvals in place due to RERA. Permission cost are huge accounting for almost 25-30% of the overall cost. Hence you have to raise lot of money to bring the project up to a start,” he said.

The company is looking either for a partnership with another developer or to raise money from NBFCs or global funds to launch three projects in Mumbai.

Overall working capital has gone up and the requirement of funds has only increased after RERA, according to mid-size real estate companies Ekta World and Nahar Group.

“Cost has increased for the developers. There are management and administration cost to stay RERA-compliant. And maintaining 70% in the escrow account would also put additional costs and investors are also not very happy about (it),” said Manju Yaglik, vice chairperson at Nahar Group.

Depending only on consumers’ funding is no longer a solution and post-goods and services tax (GST) sales of under-construction projects, especially the ones nearing completion, have also slowed, she said.

Ashok Mohanani, chairman of Ekta World, agreed that the overall working capital could increase post-RERA.

While the upside is that the money in the escrow account would be utilized for one  particular project, the downside is that it would remain idle, he said.

“While we are comfortable for our mid-income projects, we may feel a slight pinch for our high-end projects,” Mohanani added.