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Discussions related to Real Estate matters, Real Estate laws, loans, financial queries

Will the Real Estate Bill see a rise in property prices?

Postby webmaster » Tue Jul 09, 2013 8:54 am

With the Real Estate Regulatory Bill awaiting the final nod in the monsoon session of Parliament, speculation has begun on its impact on the realty prices. Amit Shanbaug talked to some of the leading experts in the real estate space and here's what they had to say on the subject...

Niranjan Hiranandani, Managing Director of Hiranandani Group of Companies - Yes

Once implemented, the Bill will bring a lot of transparency in the sector, and all the developers support and appreciate it. However, one needs to understand that there are certain sticky points. Take the deposit of 70% of the cost of the project, which includes the land and construction cost, in an escrow account, which would suck up the liquidity from the market. The land cost is the highest one has to bear today, and currently, most developers are facing liquidity crises, which will be heightened due to the bill.

The developers would have to approach the banks to fund the construction cost. It is virtually impossible for banks to fund hundreds of crores of rupees as there is an RBI cap on lending. So, they would have to consider expensive sources of credit like private money lenders, and the cost of these high interest rates would have to be passed on to the customer.

The incidental costs, such as for raw material and land, have also gone up, and the developer needs to recover these from each flat. Since the project would also need to be sold on a carpet area basis, he would have no option but to factor in all the costs in a smaller area. This will give an illusionary view of price rise. So, we anticipate a rise of 25-30% in property prices for projects.

Another factor is that fewer projects would come in the market as the developer won't be able to advertise before he gets all the approvals. So a lower supply would lead to a rise in demand and, ultimately, a price rise.

Before 1981, it would take just three months for the developer to get all the approvals, whereas now it takes 2.5-3 years. We have to face around 40 authorities to get 52 different types of approvals to start construction. With the Bill, we will have to face one more authority, so the developers' work will increase.

The Bill should also impose penal action for the government authorities that fail to give approvals on time. Rather, the regulator should take on the task of clearing approvals so that lesser time is taken for clearances. The Bill also doesn't have any feature to promote construction activity and doesn't take into account the problems faced by developers.

Pankaj Kapoor, Founder & Managing Director, Liases Foras, a real estate rating and research agency - No

The pricing for any product needs to be seen in relation to the demand-supply mechanism. However, real estate is one sector that does not adhere to any rule of economics. Realty prices in some of the top metros have always risen exponentially at around 3% every quarter even when there was virtually no demand. So, it would be wrong to say that prices will rise only if the Real Estate Regulatory Bill is enforced because prices have always risen regardless of the reasons.

In fact, the Bill would result in better regulation of property prices. Currently, the developer leverages the advance money, which gives rise to speculative activities. For instance, if he gets Rs 100, he pays Rs 10 as token money at 10 places, and to fund the rest, he takes expensive loan at rates as high as 30%. Or, he may call for investors for the 10 places he has paid the token money.

These speculators, too, keep the prices high as they have to recover their costs and make profit. The interest on the loan is ultimately passed on to customers. Once the Bill is passed, such leveraging opportunities will cease to exist as the developer will have limited resources to leverage. For instance, if he were to get Rs 100 as advance money, nearly 70% of this would have to be deposited in an escrow account.

The Bill would also ensure that the project would be completed on time and the developer takes the necessary permissions and clearances before the project is marketed. Another major aspect is the carpet area rate on the basis of which the developer would have to sell his project. The super built-up area, which was around 40-45% of the carpet area, has gone up to 65-70% of the carpet area. Such malpractices would come to an end.

Also, there would be a lot of hidden costs that the developer would add to the cost of the project. So, when such practices are done away with, the customer would get a much cheaper property and would only pay for what is on paper. The Bill would also usher an era of transparency in the real estate sector.

However, the Bill also needs to focus on accountability on the part of the governing authority. It needs to ensure a time frame during which the authorities approve or disapprove the clearances for the project.

Anuj Puri, Chairman & Country Head, Jones Lang LaSalle India - May be

The Bill will pave the way for transparency by regulating the housing sector. It covers all projects over 4,000 sq m in size and seeks to cover major private residential developments across the country. It will provide considerable relief to the ordinary buyer/investor who faces innumerable obstacles while buying property and is duped even by small developers, builders and brokers.

The strict regulation for promoters means that the construction will not only be completed on time, but the buyer will get the property as per the promised specifications. Besides, the setting up of the Regulatory Authority and the Appellate Tribunal will create a dispute resolution mechanism and address the grievances of the consumer who had recourse either to a prolonged litigation in a court of law or consumer courts.

However, it does not provide any relief to developers in terms of expediting the approvals and permissions process. Developers face long and inordinate delays, besides the difficulty in obtaining approvals from multi-headed government agencies, and have stressed on the need for a single-window clearance to cut through the red tape.

As for the real estate prices, one cannot say whether these will go up or down once the Bill is passed. It would depend on the project and the developer. The unorganised developers, who have just one or two projects in their hands and don't follow the rules of transparency, will certainly witness an impact on their bottom lines. They will increase the prices as their margins are bound to take a hit and they don't have a reputation to build.

However, the organised developers, who are known to be transparent in their dealings, follow the construction norms and prefer to have the transaction through cheques, will not be increasing their prices because they won't be impacted once the Bill comes in force. So the price hike in property would have to be seen purely on a case-to-case basis.

By Amit Shanbaug, ET Bureau | 8 Jul, 2013 ... 943357.cms
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