A RERA boost for real estate sector

The Real Estate (Regulation and Development) Act (RERA) is expected to usher in an urban renaissance in India. There is a certain palpable sense of excitement among all the stakeholders as 2016 ended on a dismal note for the real estate sector, thanks to demonetisation. We couldn't have expected 2017 to start with more refreshing outlook.

The real implications of RERA can only be gauged over a period of 2-3 years, but it will bring in a whiff of fresh air for the real estate sector so far reeling under a lack of funds and missed deadlines. Flat property prices over the past two years have made the real estate sector a no-go zone for investors. But RERA, along with demonetisation and goods and service tax (GST), will make sure that the market is largely driven by end users.

Our data suggest that prices have softened only marginally in the post-demonetisation period. Any further softening of prices is more likely to attract end users who will see homes becoming more affordable. To understand the real impact of RERA, we must first analyse its impact on its two key stakeholders builders and buyers.

While RERA benefits the builders by bringing in more transparency and accountability, which will stand them in good stead by ensuring the flow of institutional funds, the real winner will be the end-user the home buyers who will be protected from unscrupulous activities thanks to the setting up of a regulator.

The immediate impact would be likely on consolidation, how capital is raised and deployed, and increasing compliance costs for developers. But if we look at the larger perspective, the net gainers will be the organised developers, who will pass on the benefits gained from RERA to the consumers, whose interest will be protected by the regulator.

Over a period of time, we expect RERA to result in:

Transparency: The onus will be on state regulators to bring in transparency and discipline. It will lead to revival of the trust between the builder and the customer and improve the overall sector.

Demand uplift: RERA will boost consumer confidence resulting in demand. Lot of fence-sitters, investors who had been lying low, will come back to market

Consolidation: RERA will act as a catalyst for the much-needed consolidation in the industry. A lot of small and medium developers will have to improve their delivery capabilities to survive. The consolidation will bring better funding into the industry thus tackling supply side issues including timely delivery. With the overall health improving, it will also result in increased flow of funds from foreign institutional investors.

The inevitable implementation of RERA has already led to many developers hastening the delivery of their projects. This trend was clearly evident in the quarterly average prices data of Under Construction (UC) vs Ready-to-Move-in (RM) stock, where the RM properties continue to command a premium over UC properties. But the price of RM properties has seen a decline.

The price of UC properties has seen a marginal increment due an increase in delivery of projects over the quarter, the net result being the closing of the gap between prices of RM and UC properties. It is encouraging to see that some states like Maharashtra have not only notified RERA but have also set up a regulator, but some states are still dragging their feet, needlessly delaying compliance.

I have no doubt in saying that RERA as a law works best under the umbrella of federalism but what is worrisome is the fact that states have been given the freedom to make changes to the central law to tailor it to their own needs.

The whole idea of RERA is to make sure that the consumer is spared the horror of taking on big developers who indulge in unscrupulous practices. The spirit of the law will be lost if we don't adhere to the idea of a successful business for all stakeholders, including the buyer. After all, the customer is the king.

By Sudhir Pai