RERA: How Will It Impact The Residential Property Market ?


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

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.

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