RERA implementation likely to slow down project launches

Implementation of the Real Estate (Regulation and Development) Act, 2016 (RERA) will result in increased customer confidence and improved demand prospects over the long term, said an ICRA note.

However, the transition to the new regulatory framework is expected to constrict project launches and increase working capital requirements of developers. These short-term challenges are expected to put pressure on the operational performance of developers during FY2018 also.

“Some of the prominent benefits likely to ensue from the new regulations include elimination of non-compliant developers and agents, facilitation of informed decisions by the buyers, increased standardisation, improved accountability for timely execution as well as the appropriate use of customer funds. The intent of the Act is to implement a level playing field between the developers and the buyers, which till now had been tilted in favour of the developers owing to information asymmetry and lack of a dedicated regulator,” Shubham Jain, VP and Sector Head, ICRA, said. A key requirement for the Act to become effective is the role the states are expected to play. However, implementation of the Act has seen delays as very few states have been able to create the required regulatory infrastructure till now.

ICRA said the State governments under the Act need to frame rules with respect to the various provisions, and set up a state-level regulatory authority to implement these rules. While many states have notified their real estate rules, certain states are yet to be complete this step. Even fewer states have set up the regulatory authority as required under the Act. The registration process for ongoing and new projects has been lacklustre even where the regulator is operational, such as in Maharashtra.

As all ongoing real estate projects are required to be registered within three months of the commencement of the Act, the absence of the requisite regulatory infrastructure can delay registrations of ongoing and new projects affecting developers in such states.

As per ICRA, the provisions of the Act will also significantly impact developers’ financial profile as it will raise their working capital requirements and increase reliance on equity or debt financing.

With the commencement certificate being a pre-requisite for registration and sale of projects, developers will no longer be able to part-finance some of the pre-development costs with customer advances.

Moreover, the restrictions on withdrawal of customer advances will reduce cash flow fungibility across projects and increase working capital requirements.