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Arpit Palod

Arpit Palod is analyst at Idein Ventures, a global Venture Capital and Private Equity Firm, which has invested in number of real estate companies including BuildTraders, REstate and Infurnia. He has a keen sense of consumer psychology and loves to play with numbers. An avid reader and writer of tech and finance, he can beat you at Table Tennis anyday!

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The Eventuality of the Real Estate Sector

The Real Estate (Regulation and Development) Act, 2016 is an Act of the Parliament of India which seeks to protect home-buyers as well as help boost investments in the real estate industry. On implementation of RERA, only builders with sound reputations will remain in the fray - this probably its most important function in protecting consumer rights and interests.

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Real Estate in India is going through a major change at the moment. There is RERA and then there has been demonetisation. With a sustained increase in paying capacity and advent of easier home loans, the demand is also on an all time high. Here we try to deconstruct the real estate sector from a short term and long term perspective, and provide some interesting insights and probable conclusions of the growth of this sector.

Impact of Cash Crunch and Digital Economy push

Short term:

  • A sting conducted by a real estate channel in Mumbai indicated three things: developers were willing to stagger payments over several months if the cash portion was paid in new notes; those who wanted to pay with old notes had to pay a premium over the face value of these notes; and property dealers were eager to sell at discounts and for cash. So, the economy of cash transactions is back.

  • There has been less sales and purchases in the current environment, and a number of small or medium scale developers have stopped construction or marketing altogether, waiting for the dust to settle down.

  • Now that the money is legal and cleansed, people are looking at various new avenues to recover some of their losses, and R.O.I that is tax free is very attractive for obvious reasons. Dubai is a very sought out destination to invest in Tax-free property with solid returns for Investors and also for end users who are looking at a second home. Many taxpayers have declared income under IDS, paid hefty taxes, and have access to legal money now. And such legal money has legal use in real estate globally.

  • Home loan rates get cheaper: Demonetisation has increased the flow of money into banks from the unorganised and the small scale industrial sector by compelling these sectors to deposit their savings in banks. It has opened a window of opportunity for everyone to avail home loans at significantly lower rates allowing them to fulfill their dream of owning a home. The deflationary effect on the economy due to better liquidity will lead to price stabilisation making it a buyer’s market. The Reserve Bank of India will also have ample leg room to bring down the repo rates. Liquidity with the banks will help them translate the repo rate into lower borrowings for home loans. The rupee is also expected to strengthen in the consecutive months thereby increasing the purchasing power of consumers.With higher denomination currencies contributing to almost 85% of our total $ 250 billion currency in circulation, banks have seen an upsurge in deposits. This increased liquidity may lead to home loan rates being reduced. Impact has already been seen with some banks cutting their lending rates even without waiting for RBI directives on the same.

  • Cash transactions in land: Sellers who have been carrying out agricultural land transactions will suffer, because cash has always played a big role in such deals. Most land deals in the unorganised sector involve a cash component ranging from 10-40% in different markets. After demonetisation, ongoing and upcoming deals could see longer closure cycles. But the impact will be temporary, as it will also ensure market correction.  

Long term:

  • While the demonetisation initiative by the Central government means further delays in ongoing real estate projects due to the massive cash crunch, it also paves the way for a cleaner and more transparent real estate industry in the time to come. Developers will now look for alternate funding arrangements while end-users or investors will wait for more certainty before making any move.

  • Increase in Construction on unused lands: Land hoarding has been a common activity owing to anticipation of constant increase in the value of land without adding any tangible value to it. But with real estate getting a shocker, a number of landowners would not want to keep their land unused as there is no guarantee of a constant increase in value of the land. Now, these landowners will try to create real value by allowing construction on the same. Land Banks like REstate are going to benefit a lot from such impact.

The new boss called RERA

The Real Estate (Regulation and Development) Act, 2016 is an Act of the Parliament of India which seeks to protect home-buyers as well as help boost investments in the real estate industry. On implementation of RERA, only builders with sound reputations will remain in the fray - this probably its most important function in protecting consumer rights and interests. Once RERA becomes an enforceable law, it will change the ways in which residential housing projects are planned, offered, sold and possessed across India. Property buyers will no longer need to worry about unfair contracts, delayed possessions, non-notified alterations in building plans and other risks.

RERA makes it mandatory for builders to pay 12% interest to home-buyers for any delay in handing over apartments. With buyers losing confidence in the developers, the sector is facing an unprecedented slowdown. Developers say implementation of the rules will help restore confidence of buyers and help revive the real estate sector.

As per the draft, it would be mandatory for all commercial and residential real estate projects to register with the regulatory authority for launching projects. Punishment up to three years or fine of 10% of the estimated cost of the project can be imposed by the regulatory authorities for non-registration of projects Mandatory uploading of project details by the developer on the RERA website, including layout planning and completion schedule.

Every builder will have to register with the state regulator. The final rules specify that developers of ongoing projects will also have to deposit 70% of the funds collected, but which have remained unused, into a separate bank account within three months of applying for registration. is aimed at providing security to buyers and ensuring that construction is completed without the builder transferring the funds to another project.

However, implementation is the key and for this Govt. will help establish state-level Real Estate Regulatory Authorities (RERAs) to regulate transactions related to both residential and commercial projects and ensure their timely completion and handover.

But does this mean end of middle sized developers? Surprisingly, it means exactly the opposite. By creating such regulations, entry of regular players will increase as the playing field will be levelled. That’s where companies like REstate which act as umbrella organisation for such builders will benefit a lot.

Who wins out of all this:

  • Real Estate Consultants: Consultants like JLL, Knight Frank will obviously benefit from the process of organisation of this sector, as they will be able to play a major role in guiding large developers.

  • Data and Technology Companies: Innovative companies like REstate and Buildtraders that are trying to modify the manner in which transactions with respect to real estate takes places, will obviously benefit out of the digital push and push towards better organisation of the industry.

  • End User: Biggest benefits will be for the end user who will now see more transparency and will starting feeling in control, unlike now, when control does not seem to be with the end users.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house


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