News Analysis

How RERA will impact various stakeholders

Meera Siva BL Research Bureau | Updated on January 11, 2018 Published on May 02, 2017

A contractor operates a knuckleboom loader while working on the construction of a new high rise condominium in the Brickell neighborhood of Miami, Florida, U.S., on Friday, Sept. 30, 2016. While overall U.S. home inventory continued to decline in July on a year-over-year basis, a fifth of the nation's 100 largest markets saw increases in supply, according to a report Wednesday from real estate search engine Trulia. Half of the top 10 gainers were communities in Florida. Photographer: Scott McIntyre/Bloomberg   -  Â© 2016 Bloomberg Finance LP

The much-awaited implementation of RERA Act, took effect May 1, 2017. The impact of the Act on the real estate sector is expected to be largely positive, especially for larger listed players. The strict rules will likely eliminate small and dubious players and ensure that only large and trusted players sustain in the market. The Act can also be a sentiment reviver for the sector which has been reeling under pressure due to slowing sales. Besides high prices, falling trust and shift towards financial assets, demonetisation also took a toll, sinking stock price of many listed firms.

Many positives

The Act provides protection to buyers from painful issues such as prolonged project delays for which buyers are not compensated. Also, the Act makes project registrations mandatory and developers must give complete specifications and timeline for delivery. And by bringing advertisements and promotional activities under its ambit, mis-selling may be brought under check. In all, higher protection could translate to increase in buyer interest and sales, benefitting developers.

Two, the sector may attract more funds as there is regulatory oversight, instilling investor confidence. This could benefit developers as property development is capital intensive.

Three, the Act may also help reduce overall delays in the system and increase transparency. Often projects are delayed due to issues in granting approvals by various agencies. With more stringent oversight on timelines, there is likely to be more streamlined process, information sharing and co-ordination to ensure on-time delivery to home buyers.

Improving prospects

These positives have buoyed shares of listed property developers - stock prices have been on an uptrend in 2017, after touching a low in December 2016. For example, share price of Pune-based Kolte Patil Developers has more than doubled in the last four months. Likewise, shares of DLF are up over 80 per cent in 2017.

There have also been other factors, besides RERA. Lower interest rate in the economy has been a positive for both developers and home buyers. Also, the Budget offered sops to developers and home buyers, which helped revive sentiments. The cycle also appears to be reversing in the sector - with home prices in many cities not rising in the last few years (or falling in some localities), affordability has increased, reviving buyer interest.

There was also bargain hunting by investors who saw value in beaten down share price of big-brand developers. For example, shares of Godrej Developers fell 22 per cent after demonetisation. It recouped the loss quickly and is up 68 per cent from its November 2016 lows.

Regional differences

North-based listed developers have seen better investor interest compared to South-based players. For example, Delhi-based Ashiana Housing is up over 70 per cent in 2017, compared to 40 per cent increase in Bengaluru-based Prestige Estates.

One reason for upbeat sentiment in the North is the impact of RERA. Compared to the South, where project delays are minimal, there were many projects in the NCR region which were not delivered even five years after the promised completion date. The Act would eliminate such issues and bring more buyers into the market. This could translate to higher revenue and profit for developers.

Caution ahead

With the Act in place, while home-buyers can look forward to better days, the same may not hold for investors in the real estate sector. Real estate investment has not been able to deliver sustained returns in the past. There is a shift from real to financial assets and returns may be more moderate, keeping away speculators. Interest rates may not go down in a hurry and may stay at current levels. Also, there is likely to be initial pains in implementing the Act.

Additionally, not all States have notified rules for the RERA Act, impacting developers. In the long-term too, while developers with good on-time completion will benefit, those who slip on deadlines may have to pay penalties to home buyers, impacting profit.

Published on May 02, 2017

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