Corporate governance and transparency, banes of realty

For the last few years, the real estate sector has been stagnant. Few project launches and sluggish price trends add to the view that real estate is ‘down’. This could change with the implementation of the Real Estate (Regulation and Development) Act (RERA), 2016, which is expected to bring in transparency and solve other problems such as project delay and quality of construction. Rohit Inamdar, senior vice president, ICRA Ltd, spoke to Mint about the current scenario in the sector, and what changes the new real estate Act can bring to the sector. Edited excerpts:

How do you see prevailing situation in the residential housing segment?

Very few launches have happened in the residential housing project in the last couple of years in major markets such as Mumbai, Bengaluru, and especially in Delhi NCR (national capital region). We have observed a few project launches recently. However, the large inventory and slow sales fail to inspire confidence among the builders. Under-construction projects are not attracting many investors, as they do not see much upside in terms of rate movements. End users are looking only for completed properties, as they don’t want to take on the construction risk. All these factors add to a difficult market. Hence, developers opt for varied methods like 80:20 schemes (where you pay 20% of the property value at the time of booking and the rest at possession) to push sales.

Do you think that developers are waiting for the RERA to be implemented, and then launch the new projects?

Yes definitely. As real estate is a state-level subject, once specific provisions are declared things will get much clearer. The developers are awaiting that. But, there are grey areas as the Act is not very clear about the project to which it is applicable. I understand that projects without the occupation certificate, before the implementation of the Act, are likely to come under the preview of the Act.

We also believe that with the RERA, a lot of consolidation could happen. Smaller developers with a few projects could, at times, find it difficult to conform to the compliance norms. There has, therefore, been an effort at consolidation, whereby many large developers have taken over smaller projects. This is likely to help in execution and also provide the initial funding to kick start the stalled projects. Once the RERA comes into force, more such consolidation is likely to take place.

How will RERA be able to address the issues such as project delays and low quality of construction?

It all depends on how it is implemented. But most issues like project delays would be addressed as it is likely to bring in a certain level of financial discipline. Normally, if you sell 70% of the project, you don’t need bank funding.

In almost all the market, everything can be done on the basis of 20% money received as booking amount and initial payments, and the subsequent payments can come in on a construction linked basis. There was a time, in markets like Gurgaon, when payments by customers were not linked to construction. Irrespective of the progress of construction, the developers got the money with the passage of time. The fact was that this money was used to fund either other projects or buy lands, and this created the project delays. Otherwise, once you have the approvals these (residential housing projects) are not very challenging constructions. By definition if you are able to sell about 70% of the available units, these projects can be easily funded by cash flows that the project generates.

So, once RERA comes into force, project delays would come down because it has provisions that require all approvals for the projects to be in place before the launch and maintaining 70% of the amount received in an escrow account. This is likely to bring in financial discipline. Of course, if the developers are not able to sell the projects up to that threshold (70% of the project), then they may need other sources of funding.

How will RERA help the sector to attract funding from different sources?

Transparency and corporate governance are the main bottlenecks for the real estate sector currently. We also see that the better-off companies attract a lot of capital from foreign investors. If these issues are taken care of, funding will definitely increase. But for that, the outlook of the market also has to improve.

Do you think it’s a good time to buy or invest in residential real estate market?

It’s a good time for end-use buyers who are sitting on the fence. Now developers are also focused on liquidating their completed inventory, because that is where homebuyers are showing some interest. Homebuyers are not willing to take the construction risk by investing in under-construction properties.

Commercial real estate transactions have already started picking up in last 2 years. Occupancies have gone up in the recent past, rentals have remained firm, and vacancies have lowered. There is always a lag between the absorption in commercial and residential spaces. The residential absorption is expected to go up over the next 2 years and since few launches have happen in last few years, there are chances of prices going up. Pent-up demand and lack of additional supply is expected to result in price appreciation after couple of years. Investors having a long-term horizon of more than 5 years can think of investing in real estate. Three years from now, we are likely to see some upside in the market.

Author: Ashwini Kumar Sharma
Credits Live Mint

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