RERA good for industry’s future but transition issues, delayed implementation may affect FY2018 performance: ICRA

New Delhi, August 14, 2017: The effective implementation  of the Real Estate (Regulation and Development) Act, 2016 (RERA) that became effective from May 1, 2017 should result in increased customer confidence and improved demand prospects over the long term, says an ICRA note. The basic objective of the Act is to protect the interests of the consumers through improved transparency levels and accountability of real estate developers. It encompasses mandatory project registration, enhanced disclosure norms and liabilities on promoters for violation of rules.

Elaborating on the developments, Shubham Jain, Vice President and Sector Head, ICRA said, “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 favor of the developers owing to information asymmetry and lack of a dedicated regulator.”

A key requirement for the Act to become effective is the role 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. Moreover, the transition to the new regulatory framework is expected to constrict the new 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.

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. Developers’ returns on equity investments could be moderated by their limited ability to take out surpluses from projects in the initial stages of construction. Most importantly, the developers will have to enhance or scale up project execution capabilities to ensure that all project commitments are met in a timely manner.

Commenting on the impact of the new regulatory framework, Mr. K Ravichandran, Senior Vice President and Group Head, ICRA said: “The current transition period of RERA implementation is expected to be challenging for developers as they need to realign their business operations to comply with the new regulations. The constraints imposed by the Act will adversely impact the business model of un organised developers and it can be expected that there will be some level of consolidation in the industry. This will benefit larger developers who have the resources and financial flexibility to withstand the near term challenges and scale up execution levels as required.”

RERA is expected to bring about more transparency, stability and discipline into the sector, and thus attract better participation from prospective customers. However, these can only happen once the requisite regulatory infrastructure is put in place in a timely manner to implement the provisions in letter and spirit.

Corporate Comm India(CCI Newswire)