The RERA Effect – Indian Real Estate Waits to Inhale

Anuj Puri, Chairman – JLLR (JLL Residential)

 

Did demonetization erase black money in real estate?

 

Just a couple of months ago, demonetization appeared to have taken all the remaining steam of our Indian real estate’s sails. Sales in the significantly cash-driven resale homes market nosedived and prices in this segment declined by as much as 20-25%. They were already trailing primary sales prices by 25-30% in the investor-driven residential corridors before demonetization.

Developer sales in new projects were, at first, expected to be immune to the cash starvation in the economy, as this segment has primarily been patronized by end-users who use home loans and not cash. However, it quickly became evident that the negative sentiment had seeped into primary sales, as well.

It cannot be said with certainty that the demonetization move has completely eliminated black money from the sector, particularly where money that is already deployed is concerned. However, cash transactions wherein unaccounted or ill-gotten money was being parked in real estate have certainly become exceedingly difficult to execute. Also, the Benami Transactions (Prohibition) Act will help in identifying and vastly reducing the incidence of black money in real estate.

A market revival against all odds

Significantly, the demonetization drive will also play an important role in housing demand resurrection. Banks now literally have a surfeit of capital, and are looking at an unprecedented opportunity to counter post-demonetization financial shrinkage by increasing their loan books. The subsequent decline in the MCLR has now resulted in more affordable home loans to budget and mid-range home buyers. It bears remembering that the Indian housing market first got off on a running start because of access to low-cost home loans.

Already, interest rates have declined to as low as 8.5%-8.8% – perhaps we will see them reducing even further to a mark reminiscent of the all-time low of sub-8% seen in 2006-’08. If we also factor in that property rates across the country in both the first sales and secondary sales segments have either stagnated or shown a downward trend, it doubtlessly emerges that this is a very favourable time for home buyers right now.

Of course, affordable loan rates are not the sole factor driving home buying sentiment, especially when it comes to first-time buyers. However, it is certainly one of the crucial considerations. Affordable home loan interest rates are particularly important for budget homebuyers, since even marginal reductions in EMI burdens can propel their decisions to buy. Needless to add, this customer base is a very important one for the Indian property marketplace, as healthy residential property sector always finds its foundation in strong demand from mid-income and lower middle-income end-users.

That said, the housing market cannot hope to begin flourishing again unless there is a very supportive regulatory environment that governs it. Over the years, several important regulations with pertinence to the real estate sector were gathering dust on bureaucratic tables. The most important one of these – the Real Estate Regulatory Bill, or RERA – has finally been fast-tracked and will be implemented across India shortly.

The RERA Effect

This very critical Act literally holds the key to the future growth of the Indian real estate sector. Because it has the potential to clean up the sector at all levels, RERA saw a lot of opposition from both government and industry stakeholders with vested interests in the past. It was only with the arrival of the Modi Government that it received the determined forward impetus it needed to overcome all objections and clear every hurdle. The current Government understands that RERA’s implementation will not only help revive end-user sentiment but help further open up the Indian housing sector to foreign investments.

Even now, we continue to hear almost daily of fresh cases of property buyers’ complaints on being led astray by builders who wanted to make a quick buck off their gullibility. Unfortunately, countless first-time homebuyers are enticed by such builders with the promise of low rates and attractive add-ons and freebies – and they respond.

It may seem amazing that in a country where consumers are extremely brand conscious and aware of the fact that established brands mean assured quality, unscrupulous developers with no reputation or indeed desire to establish one have been able to entice buyers at all. However, the fact is that a home is not a retail commodity, and the cost of buying one often involves one’s life’s savings in India. As a result, homebuyers have been focusing on price and often turning a blind eye to builder brand, quality of product and location and even legal veracity of a project.

In most cases, such buyers have fallen victim to builders who get on the market with one-off projects and have no intention of rising up the value chain to become reputed market players. This means that they see no need for transparency, accountability and sound business practices. Their modus operandi is to book profits on the back of sub-standard construction materials, acquiring and building on plots which do not have clear titles and/or development permissions, and generally thumbing their noses at local development rules.

In the past. these are also the kinds of builders who accepted unaccounted-for cash as part of their transactions, thereby adding to the industry’s burden of opacity and cheating the government on stamp duty and registration revenues.

With RERA about to kick in in all earnest, the time has finally come for homebuyers in India to breathe free and invest confidently. No more will unscrupulous smaller builders or even larger organized developers be able to take buyers for a ride.

Yes, even brokers are covered

In fact, even property brokerage houses will come under the ambit of RERA, meaning that agents or agencies operating in smaller pockets who did not hesitate to foist inferior or flawed properties onto their clients will be wiped out. No longer will buyers who used the services of such brokers in the past risk winding up with properties whose defects become evident only after the deal is done.

RERA renders brokers and agents punishable if they do not comply and abide with the regulator’s strictures ruling. Previously, smaller brokers had an unrestricted play on the Indian residential real estate marketplace, and many of them thrived on misinforming or under-informing their customers. With RERA, homebuyers who use the services of real estate agents and agencies will be protected and have access to quick legal redressal in case of faulty business practices. In fact, brokers who made their money out of the ignorance or unwitting trust of clients will now be eradicated from the marketplace.

Under RERA, agents and agencies will have to ensure that they are duly registered with the Regulator. By registering themselves, they effectively declare themselves completely accountable for their business activities and practices.

No, it’s not about size – it’s about ethics

Real estate brokerages that survive this shakeup will not necessarily be defined by their size but by the manner in which they have been conducting business. There will be several small-scale brokerages which have already built for themselves a reputation for transparent practices for whom it will be business as usual post-RERA. Along with the larger organised real estate advisory firms which have a business philosophy based on ethics rather than profiteering, these agencies will gain a significantly bigger market share.