Market analysts and investors are of the opinion that the Real Estate (Regulation and Development) Act, 2016 (RERA), with its consumer-centric approach, will be a game changer for the real estate industry. The new legislation, which many believe will have far-reaching implications, aims to address the grievances that buyers over the years had against developers. The act promises transparent property deals to ensure that the best interests of the buyers are always protected.
Though large developers, investors, and experts across the country are welcoming the move, it’s however, going to be a tough road ahead for small-time promoters. The implementation of the real estate regulation act will most likely force the weaker players to shut down their shops, which can temporarily lead to a short-term slowdown in the new property launches. Small to mid-size builders, who do not have the temperament or capacity to comply with the RERA regulations will be completely wiped out from the real estate market. This will eventually help the property market to consolidate, and create a more transparent environment for both buyers and developers alike.
Under the new Act, after necessary actions by the state governments, real estate companies will have to submit a slew of details to the regulator. This includes details of previous projects as well as the new ones. From small dealers to developers, and even the board of directors, everyone is under the ambit of severe repercussions if the RERA rules are not complied with. Violation of the norms can attract harsh penalties, and even imprisonment, which may extend up to three years.
Taking up multiple projects, after the implementation of the real estate regulation act, would be a challenging affair for small-time developers as they will have to furnish details of their previous projects before seeking sanctions for new ones. Approvals for new projects will be immediately ceased for promoters having a dubious history in the past. Details of pending legal cases, unfinished projects, their status, and the reasons as to why they are still pending will also have to be shared with the concerned authority.
All this is expected to give a hard time to small builders who will be left with no other choice but to reduce or extend the timeline for their new property launches. The decrease in the supply might tentatively escalate the property prices until the market consolidates.
Strict Regulations Are Making the Small-Time Developers Jittery
Under the new real estate rule, developers cannot advertise, market, book, or offer to sell any plot, apartment, or a building, as the case may be, without getting it registered with the Real Estate Regulatory Authority. Moreover, it is mandatory for developers to put 70 percent of the sales receipts from a project in an escrow account, which many believe, will be the biggest hurdle for small-time builders. This particular clause has been specifically designed to prevent fund diversions from an under-construction project to facilitate a new launch.
This rule, predictably, can pose a stiff threat to promoters who have already invested in multiple projects. Small developers, who don’t have adequate liquidity, could land up in a severe crisis due to funding problems and cash crunch.
Several mid to small size residential developers, to come out of this situation, are actively looking to collaborate with big players so that they can monetize their ongoing projects which are at various stages of completion. Recently, the real estate market, in the backdrop of RERA, is witnessing greater levels of engagement with small-time developers as compared to the same quarter in the last fiscal year. This phenomenon is expected to gain momentum in the near future as more and more local players face liquidity issues.
Once RERA is implemented totally, it is almost certain that only the serious and reputed developers will be able to survive in the real estate sector. It is also equally certain that in the near future, weak players will disappear from the scene, or at least be discouraged from initiating random new property launches.
The best strategy for the buyers will be to use the positive market conditions to their advantage by making property deals only with strong, credible builders with a good reputation and track record.