Real estate industry has undergone remarkable growth and development over the years. A sudden thrift was admitted in the real estate market after Real Estate (Regulation and Development Act), 2016...
RERA came into existence in the year 2016 and aims at protecting the rights of home buyers. It also helps in encouraging private equity investors by keeping a focus on their interests and assuring the safety of their invested money.
In this blog, we will discuss mainly on how RERA encourages private equity investors. Let’s begin with a short introduction on RERA.
What is RERA?
The Real Estate (Regulation and Development) Bill, 2016 was passed by the Parliament in March 2016. Consequently, the Real Estate (Regulation and Development) Act, 2016 came into effect on 1st May 2017. The main objective of the Act was to protect the rights of home-buyers and encourage private equity investors too. The Act came into effect at a time when the sector acutely needed accountability and transparency.
Key aspects of RERA
- It paved the way for the setting up of the Real Estate Regulatory Authority that intends to help regulate the Act better and in the best interest of all market participants – the developer, the home buyer, the lender and the Private equity investors.
- All real estate projects need to be registered with this Authority. Even projects that were still to receive the occupation certificated needed to register. Housing and commercial projects can now be marketed only after receiving all approvals from concerned government offices as well as after its registration with the Real Estate Regulatory Authority is completed.
- In May 2017, 13 states and Union Territories had notified rules under RERA.
- Details of the developer, the promoter and the said project need to be uploaded on the website of the Authority. Even details of previous projects – completed or incomplete – needs to be uploaded online.
- The definition of a ‘promoter’ was widened. Under the new Regulation, a promoter is any person that constructs or sells/markets the constructed property.
- Step-in rights of the private equity investor made been more stringent. Under RERA, investors can still step-in in case of default by the developer, but it needs consent of two-thirds of home buyers who have already been allotted in the project as well as the Real Estate Regulatory Authority. This means that the private equity investor would need to work with allottees to get the project completed.
- Developers can repay the principal sum to investors and interest payable to lenders from 30% of amount received from allottees as 70% needs to be deposited in another account that can be used for construction costs and land development costs only, unless otherwise specified. This regulation is open to be modified at the state-level.
How has the performance of the sector been post implementation of RERA?
|Increase in sales in the sector in metro cities||25%||Jan – June 2018|
|Rise in home prices Year-on-Year||6.7%||Jan – March 2018|
|Increase in corporate leasing activities year-on-year||54%||Jan – June 2018|
|Institutional investment in real sector||$ 5.5 billion||2018|
Analysing the performance:-
Pre-RERA Period- A Cautious Approach
In the pre-RERA period, the real estate sector was able to attract private equity investments successfully though both – domestic and foreign – investors had a cautious approach because they felt that the sector is highly unregulated in this country. Overall, the real estate sector in India in the pre-RERA period was sluggish because all concerned parties were still reeling under the effects of demonetization and GST (Goods and Service Tax). Then came in RERA in 2017 and further slowed down the industry. At the same time, the relaxation in Foreign Investment regulations in real estate witnessed several interested private equity parties lining up in India to invest in the sector. Most players were taking their own time, however, to get adjusted to the various compliances and regulations that were associated with GST and more importantly with RERA.
Pro-customer RERA-A Balanced Approach
As soon as the pro-customer RERA was launched, the private equity investors became more watchful in their approach towards making future investments. One main reason behind this cautious approach was that the RERA is concentrated more into protecting the interests of home buyers which investors felt might cause a conflict with their economic and financial interests. For example, the promoter clause – suddenly, the investors came under the classification of a promoter because of their investment and/or their name being a part of the project and/or their role in marketing the project. The private investors obviously did not welcome this because it meant another long-drawn list of obligatory compliances like compulsory filing with the regulator, insuring the project, procuring completion certificate, ensuring timely delivery etc. which needed to be fulfilled mandatorily else it would attract penalization. Also, it proved to be detrimental to Indian private equity investors who typically like to be involved actively in the project by virtue of them being shareholders. But under RERA, shareholders were also promoters which meant that risks could be passed onto them.
What eventually happened is that while drawing up the investment documents, it was felt necessary to do it in a way that it would reflect the non-participative nature of the investor’s role especially in the management of the project and its implementation so that they could veer away from being labelled as promoters.
RERA-Exit and ROI Policy
The other aspect that made the private investors vigilant was the exit and return on investment policy of RERA. In the pre-RERA period, the developers were required to first pay off the investor from the money received from allottees. However, now, 70% of this money is required to be deposited in a separate account and needs to be used for construction and paying the land costs. This effectively means that the developers utilize the balance 30% to repay the private investors. Of course, all states have different interpretations to this rule – while Maharashtra has classified repayment and returns under cost of construction, Karnataka has not done so. While this clause does not directly hit the investor, it could cause delays in repayment of principal or payment of returns. Here again the need to re-negotiate on the investment documents like a hybrid debt etc. with stricter default clauses and indemnities has been felt.
2018-Beginning of A Brighter And Encouraging Era
In this backdrop, the sector picked- up encouragingly in 2018 – thanks to reforms like RERA – firstly because it helped the system become more transparent and professional and home buyers felt confident in buying properties. While on the other hand, the private investors – domestic and foreign – including institutional entities felt positive of investing their money in the sector. One important aspect of RERA that was welcomed from the private equity investors was the availability of factual data by the developers on the official website of the Real Estate Regulatory Authority that helped in averting their falling in traps of misrepresented information. The other thing about RERA that investors felt was commendable were the step-in rights bestowed on them that they feel will ensure that the developer finishes the project on time and gives possession as per schedule.
Positive Increase in Institutional Investments
The institutional investments in the sector have also grown tremendously – it registered the highest amount in 2018 ever since 2009. The provision of Real Estate Investment Trusts (REITs) listing coupled with growing demand for office spaces has been the major reasons behind this growing interest of institutional investors to invest in the commercial realty sector.
Overall, RERA has helped in regulating the sector clarifying lots of ambiguities that existed previously and hence holds the promise of making things better for the consumer and the private investor in the realty sector. As of July 2018, 25000 projects were registered with the Real Estate Regulatory Authority. RERA is being viewed positively by investors also because it has forced developers to focus on completion of projects and deliver them on time.
Contact Swarit Advisors for any further query regarding RERA.