70% money in escrow norm to hit realtors' cash flows

Analysts say developers are mostly dependent on pre-launches

Though the '70% sale proceeds to escrow account' norm in the Real Estate Regulation Bill cleared by the cabinet is expected to reduce malpractices in developers, it could pose serious cash flow risks for them as they are mostly dependent on pre-launches, said analysts and consultants.

As is the practice, developers pre-sell their apartments at lower price points to buyers before obtaining approvals to part fund land acquisitions and divert proceeds to complete ongoing projects.

"This (the new norm) may result in longer cash flow cycles as developers await approvals prior to launch. In our opinion, the markets of National Capital Region (Delhi-NCR) and Mumbai Metropolitan Region (MMR) that have an elongated approvals cycle and dependent on 'pre-launch' sales will be affected more than the southern markets of Bengaluru and Chennai, " said Adidev Chattopadhyay, an analyst with Elara Securities in a note released today.

Amit Goenka, Chief executive Nisus Financial services said the challenge is more in metros where land costs are high. "If money allowed to be taken out is 30%, in metros developers will face a lot of challenges as land costs are over 50% of the project," Goenka said.

 

"I think small developers will be finished as their cost of operations will go up and borrowings will increase," said Om Ahuja, Chief executive, residential at Bengaluru based Brigade group.

Chattopadhyay of Elara says that although the Bill advocates provision of 70% of project cash flows (50% in earlier draft) in an escrow account, it gives leeway to State governments to reduce this percentage at their discretion. "As a result, the intent of preventing diversion of cash flows may not be fulfilled," he said.