Will RERA impact real estate prices?

Will RERA impact real estate prices?

The real estate sector got its own regulator from May 1, 2017, the date when the Real Estate (Regulation and Development) Act, 2016 (RERA) became effective in the entire country. Each state and UT will have its own Regulatory Authority (RA) which will frame regulations and rules according to the Act. With the RERA in […]

The real estate sector got its own regulator from May 1, 2017, the date when the Real Estate (Regulation and Development) Act, 2016 (RERA) became effective in the entire country. Each state and UT will have its own Regulatory Authority (RA) which will frame regulations and rules according to the Act.

With the RERA in place, will the real estate prices move upwards especially in the residential market? The answer to this may not be as straight as an arrow. While the new rules call for a much stricter compliance and transparency, which may push the real estate prices up especially for the new launches, the large amount of inventory overhang in the system, will probably keep the price rise at bay till the supply gets over.

Ashish R Puravankara, Managing Director, Puravankarasays says, “With RERA’s stipulated compliances and regulations, the project launches may occur with lesser frequency than before. With new launches getting spaced out the appetite for existing inventories will go up but will also eventually dwindle. This equation will alter the ongoing demand and supply proposition in the market affecting the pricing across the industry.”

Existing inventory

A major portion of the existing supply relates to under-construction properties including ‘unsold inventory’ which could take anywhere around 12 months or more to complete. All such ongoing projects would now be required to be registered under RERA and hence adhere to new rules.

One such new rule relates to the sale of real estate on the basis of ‘super area’ and not on ‘super built up area’. Till now, the industry has been selling real estate based on super built up area. Now RERA wants projects to be sold on carpet area. Manoj N Kumar, Partner, Direct Tax, BMR & Associates LLP informs, “As per the current market trend, carpet area of a project is generally 30% to 35% lesser than the super built area of the project. Accordingly, the sale of projects on a carpet are ..

But, even though per square feet (psf) price changes, the overall cost of the property may not be impacted much. Sunil Sharma, VP, Marketing & CRM, Mahindra Lifespaces says, “While the move to carpet area-based sales might not have a direct bearing on pricing, home buyers will now be in a position to make better-informed decisions as there will be improved clarity on the space being offered.”

Here’s an example, how it may work. Currently, say a builder is offering 1000 sq feet at a price of Rs 5,000 psf. The area of 1000 sq feet is the super built-up area that developers advertise and on which the actual transaction happens. This translates into Rs 50 lakh as the cost of property. Going forward, developers will have to advertise the carpet area and hence have to transact on its price. Assuming the carpet area is 700 sq ft, the price has to be modified to Rs 7,143 (a rise of nearly 42percent!) so as to keep the cost maintained at Rs 50 lakh.

New launches
Unlike in the past where builders had a field day with the projects, various RERA provisions would now ensure stricter control on management of funds and timely delivery of projects. “There will now be a pressure to deliver projects on time and this pressure will be translated to contractors who in turn will demand much higher rates for construction. This, in turn, will lead to an upward pressure on prices for the end customer, however, on an overall basis the total cost of ownership for the customer will actually reduce even though the sticker price of purchase goes up,” says Rohit Gera, MD, Gera Developments and VP Credai, Pune Metro. Any delay in possession of a home result in an increase in the total cost of ownership especially when it is financed through a home loan.
So, as and when new RERA compliant project gets launched, the cost to a builder is expected to go up and therefore the prices. Kumar says, “With the implementation of RERA, the overall costs of development of real estate projects are expected to go up and the same is likely to result in an increase in the prices of the real estate projects.”