How Developers Are Managing Cash Flow After The Implementation Of RERA

The introduction of the Real Estate Regulatory Authority (RERA), is anticipated to transform the real estate sector into a tightly controlled and regulated industry. The premise of the Act is to bring increased transparency and accountability across the sector, which has traditionally been unorganised and fragmented. The Act seeks to protect the interest of the consumer while ensuring greater transactional and delivery vigilance on the part of developers.

Now that the deadline to register ongoing projects is over, real estate companies are forced to look inwards to focus on two critical aspects that the Act requires- an adherence to meeting the committed delivery timelines and an efficient management of project-level cash flows.

One of the largest concerns articulated by developers on the Act has been around cash flow management.  The Act limits any collections in advance from buyers (on registered projects) and restricts withdrawals from the project on account of accomplishing delivery milestones. The framework of the Act has been developed in a way that makes it mandatory for developers to deposit 70 per cent of payments received from sale in a project account, which is to be used for project expenses. Furthermore, the Act restricts project account withdrawals to the completion of a particular phase of a project and only on the requisite sign off by an architect, an engineer and an accountant.

With collections by way of advance bookings drying up under the new regime, developers have exhibited a concern with respect to managing their business cash flows. For a number of real estate companies, this stipulation requires a restructure of their current operating processes and perhaps a change in marketing and sales strategy. Project management has now become an essential aspect of the development process to allow developers to outline the scope of the project, determine the timeline for delivery with the associated cost for effective cash flow management, ensure optimal management of vendors and quality control in the procurement and construction process.

Consumers have often been at the receiving end and struggled as a result of poor cash-flow management on the part of the developer. As the Act seeks to be more aligned with the interest of consumers, ensuring the protection of a buyers' investment is of paramount importance.  It is with this purpose that the Act ensures that a buyer's interest is safeguarded through its many stringent requirements.

In other more advanced markets, real estate companies have grown accustomed to the workings as outlined in the Act. The avenues for funding projects that they typically use for development financing include developer's cash/equity, investor equity, joint venture agreements, loans or public/government loans or guarantees. One of the added benefits of the RERA is expected to be seen with respect to investors and financial institutions who get greater comfort on the transactional and delivery components of the project as a result of the RERA and the Goods and Services Tax (GST).

All these measures will, in the long run, contribute to create stable businesses, as well as reduce the trust deficit between the consumer, the investor and the developer. Hence, these changes while seeming overwhelming in a short period of time should be welcomed positively as we get more structured as an industry and as an economy.