The Cabinet has recently cleared a Bill which, if enacted, would encourage real estate developers to rely on joint ventures with land owners since there will be less surplus cash available to buy land, according to India Ratings and Research (Ind-Ra) in a report by Ravi Teja Sharma on the Economic Times.
The provision states that approvals must be in place and that the land must be in possession before pre-sale can take place and that a part of the sales shall be escrowed. These provisions are expected to result to higher reliance on joint venture projects and improve elasticity in real estate prices.
"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 & Research, which is a Fitch group company.
According to Betala, the escrowing for construction purposes of the provision shall decrease liquidity and the real estate developers' debt servicing capacities during the transition to the new system.
"The surplus cash available to companies to purchase land is likely to reduce and this may result in the higher reliance on joint venture projects with land owners. Since all approvals need to be in place prior to project launches, it will reduce delays and ensure timely implementation of projects," Betala said.
Developers may also encounter challenges in the transition phase such as with the cash flow cycles now that it is required to have all approvals in place before launching a project as well securing an escrow account.
"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. However in the steady state under the new regulation, new launches will 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," he said.
When implemented, India Ratings believes that it could result to more transparency in the real estate sector hence protecting the buyer's interest.
"Various provisions in the bill such as prior registration of projects and agents with the regulator, information transparency about booking and construction, launch of projects only post receipt of all approvals and the restriction on change in plans without consent of the buyers are positive for buyers. The provision requiring escrowing of a portion of sales proceeds for construction purposes will be especially positive for buyers, as this will stem the diversion of funds by builders for other projects and improve timely implementation of projects," it said.
The Bill will significantly impact buyers, lenders and investors by boosting their confidence, a crucial factor for developers' long-term growth capital, said India Ratings.
