The Real Estate Act is a potential game changer
Real Estate (Regulation and Development) Act 2016, or RERA, will have a far-reaching impact on builders who will need to recalibrate their business practices to stay relevant
Real estate, widely considered to be a major asset class, has been traditionally plagued with opaque practices, information asymmetry, and a muddled regulatory framework in India. One of the frequently cited reasons for the current slowdown in residential sector is the trust deficit between customers and developers.
For the past many years, developers have not been able to deliver on their commitments, seriously denting the confidence of potential buyers.
The Real Estate (Regulation and Development) Act 2016, aimed at bringing in transparency and redefining the engagement between various stakeholders, can be a potential game-changing event.
The level-playing field created between various stakeholders would provide much-needed confidence to investors and home buyers to take a relook at the sector and make informed investment decisions.
While the Act might transform the way in which various stakeholders operate, it will particularly have a far-reaching impact on residential developers, who would need to recalibrate their business practices to stay in the game.
Rigorous project planning and management: Increased disclosure level for project registration would prompt developers to make realistic commitments on project specification, amenities and delivery timelines to avoid stiff penalties on default.
Project configuration, planning and execution management would, therefore, get more efficient.
Similarly, new projects might get broken down in phases to keep their sizes manageable and avoid execution delays. Some of the best practices, currently being neglected by the majority but followed by international and corporate developers may become the new industry norm in the RERA world.
Conservative project finance structures: RERA would require new projects to have all approvals before a launch. This would lead to larger gestation period prior to a project launch. Consequently, new projects would require higher proportion of working capital towards land procurement, architects, consultants and regulatory approvals being financed by promoter equity as against the current practice of sourcing it from customers through hurriedly done half-baked project launches.
Efficient project cost control mechanism: RERA would make product pricing structures extremely transparent. Post sale and last minute product price escalations by developers on frivolous grounds would be history. This would encourage developers to establish strong cost and delay control mechanisms within their project management and monitoring systems. Procurement efficiencies would need to be raised and leakages due to negligence or internal corruption would need to be plugged to protect project profit margins.
Increased participation by institutional players: In the past, many of these institutional players have burnt their fingers badly due to lack of governance and execution efficiency. Their past experiences have hitherto forced them to either stay away or invest through extremely conservative debt structures to protect their investments.
Cheaper capital pricing by institutions: Capital pricing at the new investment stage is always a function of perception of risk—market, regulatory, execution and counter party. RERA would reduce the risk perception significantly due to its stringent disclosures and penal provisions.
Consequently, pricing of both debt and equity instrument are expected to come down once RERA is implemented in letter and spirit.
The transformation in business practices with RERA being a catalytic force would ensure that only serious and strong players remain within the sector. Therefore, going forward, a consolidation among players within the sector cannot be ruled out. The transformative impact of RERA would lie in the intent and speed at which various state government implement the regulation.
Rajeev Bairathi is executive director and head, Knight Frank Capital Markets.
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