Homebuyers May Have to Pay a Premium for Transparency

The cash-driven property market was expected to crash after demonetisation.

A picture of the Mumbai skyline. Image used for representational purpose. (Photo: iStock)

Transparency and accountability could come at a cost for homebuyers.

Property prices are expected to rise in Mumbai as the new housing law may edge out smaller builders and squeeze supply, even though inventory remains high and registrations are at a six-year low.

“Whatever distressed sales had to happen, have happened. We are anticipating a price rise now,” said Ashutosh Limaye, head-research at property consultant JLL India.

The Real Estate (Regulation and Development) Act, 2016 will not allow developers to divert funds from one project to another, and the new law has increased compliance costs, which will bring down new launches and hurt supply, he said.

Among other things, the housing law, which came into force from 1 May, makes it mandatory for developers to register projects and get approvals before starting sales. It also mandates that 70 percent of the funds raised from sales should be kept in a separate account.

Maharashtra is among the states that have notified the rules, which hold developers and brokers accountable for commitments they make to homebuyers. 

Lesser-known developers would not be able to launch a lot of projects, said Dhaval Ajmera of real estate developer Ajmera Group. “There would be a slowdown in supply, and I feel the prices would go up because demand is ever growing.”

Revival After Slump

Home registrations in the city fell 21 percent in January-March to 14,239, a six-year low, according to data sourced from Director General of Registrations, Mumbai and complied by National Real Estate Development Council (NAREDCO).

The impending rollout of RERA and goods and service tax (GST), along with demonetisation, created confusion among buyers, said Hitesh Thakkar, secretary of NAREDCO.

Prices are stagnant and the situation could continue till December-end, but consumer sentiment is slowly coming back, he said, adding that buyers should not expect prices to fall.

The cash-driven property market was expected to crash after the Prime Minister invalidated old Rs 500 and Rs 1,000 notes in November 2016. Although the price trend could not be established post demonetisation, there has not been a drop, said JLL’s Limaye. The prices have risen three-and-a-half percent in the last one year, he said.

Unsold Inventory To Fall

The current unsold inventory in Mumbai region, including Thane and Navi Mumbai, stood at 78,000 units at March-end, according to the data by JLL India. Knight Frank India pegged the number at 1.5 lakh for the Mumbai Metropolitan region by December-end.

Although there has been a drop (in unsold inventory), it’s nothing to cheer about. This drop is because the new launches have fallen drastically.

Samantak Das, Chief Economist, Head of Research, Knight Frank India

With RERA, the inventory may come down further with fewer new launches, said Limaye. Buyers would also go for complete or near-complete projects and would not mind paying a premium for that, he said.

For developers, the business model has to change because 70 percent of the money raised needs to be kept in an escrow account, he said.

Traditionally, builders used to depend on buyers’ money during bookings or launches and siphoned money from one project to another. That has to stop. With this clause, builders will have to come clean and be transparent about their projects. Now they cannot depend on buyers’ money.

That will squeeze the supply. And with fewer project launches, prices would go up in the medium to long term, agreed Sanjay Dutt, ‎CEO, India operations and private funds, Ascendas-Singbridge.

Developers till now have lowered costs by reducing the carpet area, said Amit Wadhwani of Sai Estate Consultants Group. But as sales go up and supply comes down, prices will steadily increase till 2019, he said.

Higher Compliance Costs

The holding and compliance costs will increase post RERA. These costs are getting added because a developer cannot sell the product until getting the required approvals, said Limaye.

Pre-RERA, a developer could sell the project even when permission was not in hand, but now, they can’t. That means, the builder will have to put in more money upfront, which would be passed on to buyers. 

Ashutosh Limaye, Head-Research, JLL India 

Raw Materials May Get Dearer

Cement and steel prices are also expected to rise in coming months, pushing up construction costs. According to Naredco’s Thakkar, a bag of cement that currently costs about Rs 270-350, could go up to Rs 400-425 in the next couple of months.

(This story was first published in BloombergQuint)