Published on: Aug 25, 2017 @ 15:04
The Real Estate (Regulation and Development) Act, 2016 came into effect across the country from 1st May, 2017. There is a lot of hope and expectation from the new law which promises to bring in much-needed transparency and regulation in the real estate sector.
The Real Estate (Regulation and Development) Act (RERA) is being implemented with the purpose of applying a uniform ‘code of conduct’ for developers across the country. Moreover, it will bring in a regulator for the sector, which largely remained unregulated until now. So, RERA is expected to benefit both the buyers and sellers and enhance the credibility of the sector. It will protect the interest of the homebuyers and ensure timely delivery of projects. Therefore, the entire real estate sector is set to gain from it as it would attract more buyers.
Earlier, India’s real estate sector has been generally marred by inordinate project delays, some unscrupulous practices by some developers, misrepresentations of the fact and poor quality of construction.
Dilution of the RERA
According to the guidelines of RERA, each state and UT will appoint its own Regulatory Authority which will frame rules and regulations. Although RERA is a central law but real estate is a state subject. So, its actual implementation will depend on the actions taken by all state governments.
There are reports that some state governments have diluted some provisions of the Act in the Rules notified by them. For example, central RERA Act includes both under-construction and new projects into its ambit whereas some states want to include only new projects. Since, RERA promises to bring transparency in the real estate sector, dilution of the Act at the state level is a cause for concern. RERA is one of the most consumer friendly laws and states should not dilute its provisions and play against the spirit of the Act. .
Will the residential property cost increase post the implementation of RERA?
The answer to this question can not be very simple and straight one. In fact, property prices are basically determined by demand and supply in the market including some other economic factors. Implementation of RERA alone can not influence the prices too much for too long.
Land prices may increase
The purchase cost of land may go up post RERA because of the transparency factor. Now, it will be necessary for the developers to do only the transparent transactions. This will add to their overall input costs and therefore it may lead to an increase in the end product prices.
Costs for developers to increase
Post RERA, there will not be any new project launch before getting all approvals in place. So, the advantage of keeping the different prices between ‘pre-launch’ and ‘official launch’ will not be available to developers any more. Therefore, when new RERA compliant projects get launched, this additional holding cost for developers is likely to be passed on to buyers, resulting in an increase in their cost of purchase. Moreover, investors with appetites for high risk and high returns will get reduced as the risk of residential investment will be mitigated.
Reduction in new projects launch
In fact, a large number of the supply comes from under-construction properties including ‘unsold inventory’. Now, all ongoing projects are required to be registered under RERA for selling their units and hence comply with the new rules. Since, the new rules call for a much stricter compliance and transparency, which includes control on management of funds and timely delivery of projects. So, there will be more pressure on developers to deliver the projects on time. Therefore, developers will become more cautious and may launch only those projects, which can be completed within the stipulated timeframe. Besides, Builders are already saddled with under construction projects which are to be brought under RERA and make them RERA compliant.
A large number of unorganised players and small time players will find it difficult to exist in the market post RERA. Only genuine developers would be able to operate in the market. Therefore, It will go in favor of consumers as well as developers who do clean business.
Moreover, new projects launch may slow slowed down because of the impending RERA compliances. This may affect the demand and supply proposition in the market for short term period. So, we anticipate a marginal upward increase in pricing for residential units across the industry.
However, with the new projects launch getting delayed, the large amount of the existing inventories will probably keep the price in check till the supply gets over.
Pay for only Carpet Area
Now, in accordance with RERA guidelines, developers have to align themselves to RERA compliances to sell projects on carpet area instead of super built-up area. The real estate market has been selling flats based on super built up area until now but going forward, it will be done on the basis of carpet area. Therefore, the buyer will now pay only for the carpet area and not for the super built-up area. It may push the real estate prices up especially for the new launches.
In fact, carpet area of a flat in a project is generally 30 per cent to 35 per cent lesser than the super built-up area of the project as super built-up area also includes balconies and other common areas into it. Therefore, as per the general practice until now, you get only 650 – 700 sq. ft. carpet area if you book a 1,000 sq. ft. house.
Let’s take an example. If a builder is selling 1000 sq ft super built-up area at a price of Rs 6000 psf. then the actual transaction in the market at present is being done only at this rate. The area of 1000 sq ft is the super built-up area that builder advertises and on which the actual transaction happens. So, the total cost of the property translates into Rs. 60 lakh. Going forward, developers will have to advertise the carpet area on which the actual transaction will happen. Assuming the carpet area is 700 sq ft, the price has to be modified to approximately Rs. 8572 per square feet (psf) so as to keep the cost maintained at Rs 60 lakh.
So, even though psf price of the flat increases but eventually the total cost of ownership of the property for the customer may remain almost the same. Therefore, the selling price of a flat of a project on a carpet area basis is likely to go up to maintain the total cost of the property.
Transparency will make for a conducive environment for fresh investments in the sector. This will help increase fund flow into the projects. If you look at the developed foreign markets, they attract huge FDI in the housing sector as they have more transparency. Now, Indian real estate sector is also expected to attract huge FDI like them.
Moreover, on the positive side, affordable housing projects which are smaller in sizes will be more in demand and supply. Now, due to greater transparency post RERA, there will be positive sentiments in the market. So, this will boost the confidence of the consumers of the residential market and help to attract more home buyers. These end-users are generally from the middle-income and low-income group. With the government’s incentives for affordable housing and the recent reductions in home loan rates by banks, we expect a stable and continuous demand from these end-users. This could result in a significant consolidation drive in the real estate market.
Ajay Verma, founder and writer of TheHousingWorld, a real estate and mortgage news website. He has over fifteen years of rich experience in the above mentioned industries.