How Are Developers Coping With RERA, Other Changes?

One can certainly not be accused of falling for the hyperbole if one said India's real estate developers — well, a majority of them, at least — are existential crisis of sorts. On the one hand, they are busy making efforts to register themselves with the Real Estate Regulatory Authority (RERA) of the state concerned. On the other hand, they are trying to learn the ropes of the new Goods and Services Tax (GST) regime. The banking system has also decided to go tough on developers as the past plans of the two parties growing together have gone awry. In fact, the banks are now declaring to shift their focus on retail for future growth. Getting projects financed would no more be a task easily accomplished.

Nothing to bank on?

"To bring back investments, the fundamentals of project financing will have to change. Projects will have to be much more completely tied-up before they get funded... A lot more time will be spent on planning before monies get committed. That will be a substantive change in project financing," ICICI Bank Managing Director and Chief Executive Officer Chanda Kochhar said recently.

Some developers have already run out of luck.

The IDBI Bank recently moved the National Company Law Tribunal (NCLT) to start insolvency proceeding against Jaypee Infra for defaulting on a Rs 526-crore loan. If media reports are to be believed, Noida-based Amrapali might meet a similar fate.  For two weeks now, 500 buyers have continuously been staging a protest in front of the company office in Noida after news of the real estate major facing financial difficulties surfaced.

It is worth mentioning here that credit growth slipped to a historic low of 5.08 per cent in the financial year 2016-17, the lowest since the financial year 1953 when it stood at 1.8 per cent. Matters seem not to have improved much in the first quarter of the current financial year either — credit demand stood below six per cent during the first quarter of FY18.

In a scenario such as this, how are developers coping?

The wait for homes gets longer

First of all, they are extending the delivery dates of their projects, says a recent report.

According to the report, which has been prepared by a global consultancy major, six out of 10 under-construction projects in Mumbai have revised their delivery dates by over a year after the real estate law become effective.  Till August 16, 57 per cent of the projects registered under the Maharashtra RERA has extended their delivery targets, says the report.  Only one-third of the projects registered with the state RERA will be completed on time, the report adds. A similar trend might be seen across the country.

No free “launches”

As pressure mounts on developers to deliver, new project launches have taken a backseat. Considering they will have to fulfill several conditions under the real estate law before launching a new project, developers are anyway not left with much of a choice in this matter.

According to a PropTiger DataLabs report, new launches across the nine major cities of the country "as expected" fell 43 per cent in the first quarter of FY18, on a quarter-on-quarter basis.  "Most of the new launches were restricted to the first month of the quarter. Except for Gurgaon and Hyderabad, all other markets saw a decline in launches over the same quarter the previous year," the report added.

"We might see further dip in launches and sales in Q2 FY18 as developers will rush for registering their projects under the RERA, and will be in the process of arriving at new cost sheets and brochures," the report adds.

The nine major cities included in the analysis are Ahmedabad, Bengaluru, Chennai, Gurgaon (including Bhiwadi, Dharuhera and Sohna), Hyderabad, Kolkata, Mumbai (including Navi Mumbai and Thane), Noida (including Greater Noida and Yamuna Expressway) and Pune.

Of ideal worlds and rude realities

The changes in regulatory framework make it imperative for the developer to make new additions to their existing workforce. For instance, hiring project managers would be necessary if a developer longs to survive in the market. A great deal of capital must also be spent in hiring legal professionals and setting up a compliance department that can help a developer cope in the new market.  Changing realities also make it a must for the developer to put in place a robust information technology infrastructure, and hire specialised technical staff to support it. Now, developers may have had their noses in the trough earlier, but fact of the matter is that most of them are financially stressed currently.

Thinning profit margins in the past have left their coffers empty at a time when they need their monies the most. Data show the past three years have been caused tremendous pressure on builders' finances. Considering lenders will follow a more complicated drill before loans are sanctioned to developers, looking for outside help might not yield desired results either. This is going to be a major pain point for real estate players.