Rera does bring hope

It will certainly not be an instant cure, even if retrospective clauses are invoked

The Real Estate Regulation and Development Act (Rera) was passed by Parliament last year, with a leeway of 12 months for states to notify the respective rules and regulations and set up local regulatory agencies. The deadline has been missed by most states, and according to Crisil, many of the Act’s provisions have been diluted.  As of the first week of May, nine states (Andhra Pradesh, Bihar, Gujarat, Kerala, Madhya Pradesh, Maharashtra, Odisha, Rajasthan, and Uttar Pradesh) and six Union Territories (Andaman and Nicobar Islands, Chandigarh, Dadra and Nagar Haveli, Daman and Diu, Lakshadweep, and Delhi) have notified the respective Real Estate (Regulation and Development) Rules, 2017.

Rera will be slow getting off the ground. The Act tries to fix multiple problems. On paper, the provisions make a fair amount of sense. But, there will be wide differences in the efficiency with which states implement the law, especially since they have latitude in creating rules. 

Assuming Rera goes through various states without too much dilution, builders would be forced to disseminate all sorts of information about themselves, including any history of legal disputes. Every project would have to be registered. Any changes to a sanctioned plan would have to be cleared by buyers. 

Delays in completion and handing over would incur penal interest payments. At least 70 per cent of money paid by buyers for a specific project would have to be kept in an account dedicated to that project. This aims at elimination of fund diversion. Structural defects that showed up within five years would have to be repaired free of charge by the developer. Buyers would also be penalised if they were late in paying. Jail sentences and heavy fines are proposed for certain types of violations. 

Rera is proposed to be applied retrospectively to ongoing, incomplete and undelivered projects. There are huge inventories of such projects and many buyers (and lenders) have their money stuck in these.  By some estimates, there are several years’ worth of inventory stuck in high-end locations like the National Capital Region (NCR), Mumbai, Pune and Bengaluru.  

The Act has a strong consumer-focus. If it does go through nationally, buyers would have much easier and also quicker recourse in case of disputes. This could lead to fresh investments entering the sector, including real estate investment trusts, which look to buy property and enjoy rental yields. In turn, that could lead to fresh momentum for the construction industry, creating jobs, and improving the offtake of cement, steel, paint and other building materials.  

The Act doesn’t deal with the corrupt aspects of the sector. Land acquisition, conversion, registration, etc. remain murky. So does the possibility of doing black and white deals. The whole demonetisation tamasha has done no apparent harm to the black economy, with cash apparently readily available for anybody who needs to do a big transaction.  

Even if those aspects don’t clean up, better customer service and faster dispute resolution could be game changers. Realty has been down and out since 2012-13 and associated sectors like construction have suffered as well.  A pick-up in activity or even the promise could push up prices. 

Rera will force some shakeout as well, since financially weaker developers and the less politically connected ones will simply not be able to negotiate it. The sector has seen a sharp decline in valuations, though this is always tricky where real estate is concerned. There are multiple ways to value developers. It is not easy to extrapolate revenues. A company that generated RsX in one accounting period will not necessarily generate anything like the same amount in the next one. It could earn much more or much less. 

Prices can change sharply and demand can change a lot as well. A company that has liquidated inventory might take a while to create its next set of assets.  Valuation of land banks using some sort of net asset value model is equally vulnerable to variable land prices. So, while the Act certainly does bring some hope, it will certainly not be an instant cure. It will take years to liquidate inventory, even assuming the retrospective clauses are invoked.