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Real estate regulatory may lead to more JVs with land owners

Real estate developers may have to rely more on joint ventures with land owners to build projects due to paucity of funds once the regulatory bill is passed by the Parliament, according to India Ratings and Research.

The rating agency said that the new launches could come down in the short-term due to certain provisions in the Bill. It also expects consolidation in the industry, with smaller player losing ground to a few top developers with good track record of delivery and compliance.

Earlier this week, the Cabinet approved various amendments to the Real Estate (Regulation and Development) Bill, 2015, introducing provisions for depositing 70 per cent of the money received by builders for a project in the escrow account and punishment for violations.

India Ratings and Research (Ind-Ra) said that the Bill “if enacted could result in a higher reliance by real estate developers on joint venture projects with land owners due to lower availability of surplus cash to buy land.

The provision which prohibits presales until the land is in possession and all approvals are in place, along with the provision to escrow a portion of sales proceeds would lead to higher reliance on joint venture projects and consequently the much needed elasticity in real estate prices, it added.

“The provision in the draft Bill to escrow a portion of the sales proceeds for construction purposes will ensure timely completion and stop the diversion of funds to purchase land or for the launch of other projects. The sector is now closer to getting a regulator”, said Vinay Betala, Associate Director, India Ratings and Research Pvt Ltd.

The escrow account would temporarily reduce liquidity and hence debt servicing capability of the real estate developers.

The agency said the cash flow cycles for developers might get stressed during the transition phase since builders would need to await approvals prior to launch and due to the escrow provision.

“This is likely to reduce the number of project launches initially and supply is likely to come down which means lower inventory in the short run”, it added.

However, the agency said that in the steady state under the new regulation, new launches would happen with developers own cashflows, resulting in a responsible industry where the financial capacity of the developers will determine the extent of launches.

“Consolidation may be on the horizon as smaller players lose ground to a few top developers with good track record of delivery and compliance”, Ind-Ra said.

If the Bill gets enacted, it would lead to protection of the buyers interest and substantial increase in transparency in the real estate development sector, the agency said.

It listed out various provisions in the Bill that are beneficial and positive for buyers like prior registration of projects and agents with regulator, information transparency about booking and construction, launch of projects only post receipt of all approvals and restriction on change in plans without consent of the buyers.