The State of the RERA Act

When it comes to a $150 billion dollar industry, it turns out there’s no such thing as a magic bullet.

The State of the RERA Act

India’s Real Estate Regulatory Authority Act went into effect last May, and was instantly lauded as a game-changer, a comprehensive piece of legislation that was going to transform the nation’s massive real estate industry overnight. Fast forward fifteen months, and the reality appears much more nuanced, and neutral: while the industry is slowly adopting several of the modernizing aspects of the Act, a complete industry transformation seems far off. However, one segment of the market – agile, tech-savvy real estate firms – is set to thrive, thanks to its ability to ride RERAs strengths and mitigate its weaknesses.

While an unintended consequence, many economic factors point to increasing real estate prices as a result of RERA, presenting the discerning investor with a golden opportunity: a chance to invest in the future of Indian real estate, right before that future arrives. To understand this in more detail, we’ve put together an analysis of RERA’s ambitions, implementation, and impact on the real estate eco-system.

Lofty Ideals

While the rollout of RERA has been a little rocky, the impetus behind its passage was rock-solid. Envisioned during the extraordinary property boom of the early 2010’s, the Act was designed as an overarching check on some of the industry’s less savory tendencies. RERA passed the Lok Sabha in May 2016, with developers having a year to prepare for its implementation. They had a lot to prepare for; on paper, the Act is quite comprehensive, requiring developers to adhere to a laundry list of consumer protections, including:

  • Registering all projects with a state Real Estate Regulatory Authority, which would serve as a hub of previously hidden information about all residential projects being marketed to buyers
  • Keeping the majority of funds raised for a given project in an escrow account, which could only be accessed in accordance with a pre-approved project plan
  • Creating a tribunal in each state for speedy adjudication of any consumer complaints
  • Imposing stiff penalties on developers for delayed projects or unapproved alterations

In many ways, these regulations represented a sea change in how Indian developers went about constructing complexes and communities. Most notably, for example, the requirement of an escrow account prevents developers from using money raised for one development to invest in another, a common way the industry had previously funded new projects. Perhaps more importantly, a project that gets stalled becomes a massive legal liability for the developer, protecting prospective homeowners from seeing their investment stagnate for years on end.

The Act went into effect on May 1st, 2017, and was hailed as a new day for the Indian real estate industry, with the hope that the nation’s property market would be transformed into a mature, reliable, transparent sector, where homebuyers would be protected against bad actors, developers would transition to international-grade business models, and investors would be able to deploy their capital with the utmost confidence.

A Work In Progress

Fifteen months in, though, the sun still hasn’t quite fully risen on the post-RERA property market. Rollout of the Act has been patchy, and the regulators’ capability to enforce has not been commensurate with the size of the industry. At the same time, developers across India have begun to modify their business models towards a more transparent and professional standard, a development that will benefit both high-quality builders and Indian homebuyers in the medium and long run.

In the immediate term, however, RERA is still a work in progress. Only 15 states have even begun to set up a legitimate appellate tribunal, and even most of those that have appear to have taken their foot off the gas pedal, allowing interim authorities to halfheartedly enforce the Act’s suite of regulations.

Maharashtra has taken the lead in terms of implementation, with the state responsible for 62% of the 25,000 registered projects across the nation. Most other states, though, have proven vulnerable to pressure from developers, who are attempting to delay reforming their business models to the new regulatory reality, and some – like Tamil Nadu – are openly ignoring directives from the Central government to move things along. Customer awareness about how to check the online portals and file complaints also remains low, easing the pressure on state governments to quickly enforce the Act.

Evaluating the Impact on Real Estate

What has all this new regulation and uncertainty meant for the industry? While it has had differential effects on the different sectors, verticals, and types of players in real estate, it has had an unambiguous effect on the market itself, a supply-demand mismatch that is set to trigger a price correction. The financial restrictions have led to a significant shortage of capital, favoring developers with access to institutional capital at the expense of developers without. Supply has also shrunk due to the slowdown in new project launches (down 23% in 2017-18) as developers adapt to the new regime and obtain financing and regulatory approval. Combined with the increased cost of capital from institutional sources, real estate prices seem set for an increasing trend in the coming years.

This creates an environment where some firms might be uniquely situated to take advantage of RERA’s benefits (like greater transparency and increased consumer confidence) while skillfully navigating the Act’s downsides (like penalties for delays and greater difficulty raising funds) to profit from the increasing prices. Unorganized and less-experienced builders are losing out to developers who have extensive experience completing projects on time and who have embraced a more professional outlook. This latter group includes both the typical ‘Grade-A’ developers as well as smaller players whose business model is naturally in alignment with RERA.

In fact, these firms are liable to make a huge difference in how the industry matures. Firms that excel in dynamics like financial standards that are ahead of the curve, transparency, and timely completion are much more able to raise institutional capital – a challenging necessity for any future large-scale development – than those who traffic in cash and guesswork. Additionally, while the market as a whole may not be in the midst of a dramatic boom, factors like a plethora of distressed but high-quality assets up for grabs and a consumer base that is increasingly used to finding information online represent a golden opportunity. Nimble, forward-looking firms who can acquire these distressed properties and turn them into world-class developments are looking at a very bright future.  

Indeed, with private equity investments in India expected to grow to $100 billion by 2026, the chance for a new breed of real estate players to earn huge profits is enormous. As the shakeup from RERA begins to settle, these savvy firms will be the biggest winners.

All in all, the Real Estate Regulatory Act hasn’t quite yet lived up to the hype that surrounded its rollout. However, in the long run, the Act has cleared the way for Indian real estate to transform itself into a mature and stable asset class, and empowered the next generation of real estate firms to build this future, one brick at a time.