NEW DELHI: The proposed real estate regulations are likely to increase both the cost of compliance and requirement of funds for upfront capital expenditure for builders, putting pressure on their margins. They could safeguard profitability by increasing prices of homes, but in the current slow market, that luxury will be limited to developers with a good track record.
Most builders will have to absorb this rise in cost, said industry experts. The Real Estate (Regulation and Development) Bill, passed by the Rajya Sabha on Thursday, bars developers from advertising and selling homes in projects until they get all approvals from local authorities and they are registered with the regulatory authorities. Projects that are currently under construction will also have to register with the authority.
At the time of registration, the developer will have to disclose all project information including details of the promoter and project plans, including implementation schedule, land status, layout plan, status of approvals, agreements and details of real estate agents, empowering the buyer. Builders will have to deposit 70% of the money collected from buyers into an escrow account that can be utilised only for construction and payment for land. “The cost of capital for developers will go up because they will have to now look for equity rather than structured debt to finance land buys,” said Amit Bhagat, managing director of ASK Property Investment Advisors.
This is because developers cannot sell homes before they get all the project approvals. This means they could find it tough to pay interest if they take debt to buy land. Also, it is unclear now if they can dip into the escrow account to service debt. Builders will also have to manage seamless construction to ensure completion of their projects on time due to the penalties involved, Bhagat said.
RK Arora, chairman of Noida-based real estate firm Supertech, said builders will have to take a hit on margins in the current slow market. But the provisions of the Bill will improve the sentiment and confidence among buyers to purchase homes, he said.
Home sales over the past few quarters have dropped drastically in almost all markets. The slowdown has primarily been because of high property prices, a slowing economy and also the negativity created by several projects getting massively delayed. Unsold inventory in the market as of end-December was 1,124.9 million sq ft, according to property research firm Liases Foras.
A fund manager with a private equity fund says margins will go down for sure and if they go down beyond a point, many smaller developers will have to shut shop. Anckur Srivasttava, chairman of Gen-Real Property Advisers, said with upfront capital requirement going up, support from private institutional sources of capital will become more important. Provisions of the Bill will put pressure on builders to perform. For one they will have to sell only on the basis of the carpet area. Also, both consumers and developers will now have to pay the same interest rate for any delays on their part, unlike earlier when the consumer typically had to pay more.
In the current market, while most builders are finding it hard to sell, those with a good track record of delivery have been able to garner sales. Those variety of builders could look at raising prices to some extent. “Because 70% of the money has to be deposited in an escrow, we will have to borrow from external sources as well. Additional cost will get loaded on to the product,” said Getamber Anand, national president of industry body Confederation of Real Estate Developers’ Associations of India and MD of ATS Infrastructure.