Real Estate Bill leaves markets lukewarm

Real Estate Bill leaves markets lukewarm

June 06, 2013

After hanging fire for years, the cabinet approved the Real Estate (Regulation and Development) Bill, 2013, which promises to bring transparency to the murky sector, which has been out of favour with investors for some time, as is evident in the performance of the S&P BSE Realty index, which is down 73% over the last five years compared with the benchmark Sensex, which is up about 25% in the same period.

The question is: will the law address issues such as delays in project completion and the provision of basic amenities that cause inconvenience to buyers and often entail a misuse of customer advances?

Given that land and property matters are under state jurisdiction, the true strength of the Bill lies in bringing the multitude of regulators under one banner. Delays are sometimes on account of clearances and legal disputes that crop up during the course of construction. For instance, DLF Ltd’s dream project, Crest, in Gurgaon, which closed bookings in a record three-four days, selling 250 premium apartments, is in trouble, following a stay order by the Punjab and Haryana high court.

Accountability is not fixed in case of delay and inconvenience to buyers. Such delays have led to cost overruns in mega commercial or residential projects and impacted estimated profitability. For instance, the unexpected stay order on Crest has led to a downgrade in DLF’s earnings estimates, as analysts expect operational cash flows to be eroded.

Still, it wouldn’t do to expect too much from a Bill in which enough amendments and dilutions have been made to justify questions regarding the sanctity of its intent to make the realty sector more transparent.

Earlier, the Bill required the developer to compulsorily park 70% of the money raised for a project in a separate account and use it only for that project. This would have prevented inappropriate use and churning of capital across projects, which has often rendered even large realty firms cash-strapped. But dilution of this clause to “70% or lesser percentage, based on the appropriate government” will not hinder capital churn across projects. In fact, the fair use of funds, raised for a specific project, could have improved cash flows in business.

Another negative is the exclusion of the commercial sector from the purview of the Bill. Overcapacity and unsold projects in this segment have added to losses of realty firms.

Meanwhile, the need for real estate brokers to register themselves with the regulator and for purchase to be registered before an advance is paid, is likely to prevent speculative transactions that cause inexplicable spikes in real estate prices.

Further, the intent to have one regulator in every state might compound the problem of the already numerous clearances required at present to launch a project. An additional regulator instead of a single-window clearance may only create another conduit for graft and further delay projects. That will mean delayed projects, cost overruns and debt overhang on balance sheets. The Bill offers no relief on these counts.

Little wonder then that the markets did not seem enthused by the development.



Category : MPD-2021 News


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