In my previous post titled Why property prices wont fall in India I had argued that property prices aren’t going to come down any time soon. This article is my take on this landmark Bill and its implications on the property prices. Will the recently passed Real Estate Regulatory Bill help in reducing the prices? Or the prices will go up?
There are three important features of the Real Estate Bill 2016 that are worth noting:
1) The Act obliges the developer to park 70% of the project funds in a dedicated bank account.
This is the most critical feature which will ensure that developers are not able to invest in numerous new projects with the proceeds of the booking money for one project. Unfortunately it will have a negative effect on the property prices. Reason being developers will have to borrow more funds to buy lands, which constitute the biggest chunk of project cost. Earlier they used to “rotate” money from one project to another project or new opportunities using customer advances. As customer advances comes at no financial cost to the developer the new land payments usually was done using proceeds from other ongoing projects.
External cost of funds to buy land usually varies from 18% to 30% per annum. As the developers won’t bear the cost of borrowing the cost shall be passed on to the buyers. Thus increasing the property prices for new launches where land will be acquired using borrowings.
2) The Act paves way for the formation of State Real Estate Regulatory Authority
Real Estate suffers from chronic apathy as well as greed of government agencies. It usually takes anywhere between 6 months to 24 months to get necessary approvals to launch a project. Another regulator means further delays and additional “below the table expenses”. Additional delays will lead to more financial cost of borrowings for the developer, thus increasing the property prices further.
3) The Act mandates sales on Carpet Area
All projects shall be sold on the basis of carpet area and NOT on ambiguous saleable or super-built up area which consumers struggle to understand.
If all other things remain equal (Ceteris paribus), this will have NOTIONAL effect on the property prices as the “quoted price per sq ft” will increase without having any effect on the total price. Reason being Carpet Area is usually 60-70% of the saleable or super-built up area (referred as Efficiency). So if a property was sold at Rs. 1400 per sq ft on saleable area (efficiency being 70%), Ceteris paribus, the same property shall be quoted at Rs. 2,000/- per sq ft on carpet area. However the total cost of the property shall remain same.
Though there will be increase in the property prices, benefits of the Bill outweigh the cost. Developers will become more responsible and have “more skin in the game”. The era of doing real estate projects with customers money is over.