[T.S.R:18060] Real Estate-GOI Turns The Screws (JPMorgan)

 

Ministry of Housing has put up on its website a landmark Draft Real Estate

regulation Bill. This has been in the works for some time and a notification of

the same is being seen as a welcome move by many developers/financiers and

importantly customers. However, the proposed version will likely go through

some modifications before it eventually becomes a law (could take 6-12

months). The focus of the proposed act seems to be overwhelmingly on

ensuring customer protection/data collection/monitoring but overall looks to

be a diluted version of what was being talked about earlier. However, we note

that some of the provisions of the act (issues on delivery given approval

problems) will be difficult to achieve unless other local real estate regulations

are tied to this act. Overall, while increasing working capital requirements in

the near term (given regulation on pre sales before approvals), we believe over

the longer term this act will probably benefit mid to large developers and set

up a level playing field. Key salient features of the bill are -



All RE projects and developers will need to register with the regulator

and get their titles verified before launching a project. Pre sales without

approvals are explicitly disallowed. While some developers (esp. those in

NCR) had over the last 1 year moved to such a practice, in general this has

been a problem in the industry (more so in Mumbai). While pushing up

working capital requirements, this will mean construction can progress as

soon as a project is launched (normally takes 6-12 months). The bill also

seeks to regulate "fancy" advertising of projects.



Ring fencing of project cash flows- The bill talks of ensuring 70% of

customer collections being put in an escrow to ensure project construction

stays fully funded. This will then make cash repatriation (for buying

additional land) difficult to achieve. We note that most banks mandate

specific cash cover to be maintained in project SPVs as part of their

covenants, 70% requirement may be high for developers to achieve.



Setting up of a tribunal to adjudicate cases - The bill envisages, in our

view, a much needed Real Estate appellate tribunal to oversee litigations

between developers and customers. However, some of the proposed

penalties in case of delivery delays etc are punitive and will likely be

contested by the industry. This is as construction approvals are contingent on

multiplicity of govt. approvals from different agencies and are not always in

the developers' control.



Regulatory oversight is here to stay - The biggest structural problem of RE

industry in our view is approvals and if this bill just adds to it, then this will

be a negative. However, if other agencies work in tandem with the regulator,

then this could turn out to be a good development medium term. Over the

last year 4 high profile regulations/cases (i.e. 1. Proposed Land acquisition

(LARR) bill 2. New building code notifications for Mumbai 3.Competition

commission case against DLF and 4. The draft bill on RE regulations)

clearly seem to suggest that from hereon property developers will have to

adjust their business models to an era of far stricter government monitoring

and consumer activism.

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Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.

 

 

 

 

 

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