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Impact Of RERA On Property Prices

Impact Of RERA On Property Prices
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A new page in the history of Indian real estate sector was created with the implementation of the Real Estate (Regulation and Development) Act, 2016, (RERA) on May 1, 2017. Each state and union territory will now have its own Regulatory Authority (RA) that will frame rules and regulations in tandem with the Act. As the days of anticipation come to an end, the Indian realty market is looking to get back on the growth track.

While there are certain issues that need to be addressed, the nation wants to know the impact of the Act on the property prices and the sales volume. However, the answer to this is not as straightforward as it may sound.

As per the Act, all the projects will now be sold based on carpet area and not the super-built-up area. The former is typically 25-30 per cent less than the latter. Thus, there is a possibility of price per sq.ft. going a bit higher.

Mandatory Registration of Agents = Higher Brokerage Fees

With brokers and real estate agents having to mandatorily register themselves, there is a high possibility that the secondary (resale) market will see an uptick in brokerage fee from the buyers' perspective. Under the RERA, the registration fees for agents vary from state to state. While it is as low as Rs 10,000 in Gujarat and Maharashtra, Karnataka may propose it to be in the tune of Rs 5 lakh in the city and Rs 2.5 lakh in rural areas. Ultimately, agents who can afford to pay this initial amount will, in most probability, pass it on to the consumers.

Timely Project Completion = Decline in New Launches

The new Act clearly states that the developer must specify time for project completion during registration. Thus, the focus now will be to complete existing projects.

The implementation phases of RERA has already brought tight constraints to the residential sector revealing a large fall in new launches this quarter vis-a-vis the corresponding quarter last year.

As for Q1 2017, PropUrban data indicates that the top three southern cities including Bangalore, Chennai, and Hyderabad recorded a decline of whopping 70 per cent in new units supply when compared to Q1 2016. More stringent policy frameworks on the table are likely to reduce these numbers further.

Meanwhile, if we go by the simple supply and demand logic, then less supply would result in higher prices. But one needs to also look at the unsold stock across cities. This unsold large supply invariably might help in keeping the prices under-check in most markets.

70% Sale Proceeds In Escrow Account = Possible Price Rise

Another clause in the Act that could impact property prices is keeping 70 per cent sale proceeds in a separate escrow account. While the move is to curb the fraudulent practices followed by a few players in the market, it will restrict developers from using the money collected from buyers for other projects.

The 'new watchdog' will definitely hit the smaller players hard and that will either result in their exit or merging with larger players. Other clauses that could result in price rise include restriction on sale of open car parking spaces and requirement to transfer common areas to housing societies.

Fixing Structural Defects Up To 5 years from sale = Additional Cost On Buyers

Time and again developers have raised a concern pertaining to the cost paid for the structural defects. Now, many developers are of the opinion that since they have to bear the cost of structural defects up to five years, they would add this extra cost in the price of the property, thereby increasing the overall cost.

It is interesting to note that the clauses in the Act that are meant to be in buyers' favour are turning out to be the villain that might result in price rise. However, it is too early to comment as these are mere speculations.

All said and done, single-window clearance for faster approvals is the need of the hour. Government should look into this matter with utmost seriousness otherwise price rise and projects delays will become unavoidable!

 
Edition: July 2017

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