RERA Act has improved India's real estate sector, but challenges persist

Delays in residential real estate projects have historically been one of the key challenges faced by the sector. Such delays result in erosion of customer confidence and financial losses for customers and investors, while also impacting the perception of the industry in the eyes of various stakeholders.

The delays can be on account of varying reasons such as lack of timely approvals, inability to mobilise required funds (debt or equity), poor sales response resulting in inadequate customer advances, or, in some cases, mismanagement and diversion of funds.

While such issues continue to impact the sector, particularly in the wake of the COVID-19 pandemic which has disrupted construction activities to some extent in FY2021, there is also a marked improvement in the execution track record since the introduction of the Real Estate Regulation and Development Act (RERA) in 2016. The consequent curtailment of supply from smaller and less reputed developers has also played a role in streamlining the execution cycles.

As per the data available from PropEquity, residential real estate projects launched after the introduction of RERA are witnessing an average delay ranging from 10 to 18 months across the top cities. While such delays are significant, they represent an improvement over the delays seen in projects launched prior to the RERA implementation, which ranges from 20 to 48 months across the various cities.

The RERA Act requires projects to be registered with the state authority before any sales activity. Apart from penalties which can be imposed for delays in meeting the committed completion date, the Act has also introduced checks and balances on utilisation of the customer advances and mandated construction-linked payment schedule in sale agreements. Such oversight has had a favourable impact on the developers’ adherence to committed timelines.

In addition, the realignment of market structure post-RERA Act and other regulatory developments have resulted in significant curtailment of supply from smaller developers who were not able to meet with the increased compliances. With the consumer preference gravitating towards larger and organised developers, there has been improvement in the average execution cycles.

Notwithstanding the improvement seen after the implementation of the RERA Act, challenges persist in the sector. There are significant number of legacy projects which remain stuck on the execution front due to the financial stress faced by the developers. Despite various changes to the Insolvency and Bankruptcy Code (IBC) framework to specifically address the concerns of the real estate sector, the progress on the resolution of some of these projects has been slow.

The SWAMIH Investment Fund, which was specifically created for last-mile funding support for completion of construction of affordable and mid-income housing projects, targets the completion of at least 10,000 homes per year for the next 3-4 years. In comparison, the total amount of home inventory installed projects is estimated to be over 450,000 units. Moreover, the fund is intended for projects which have positive net worth. Hence, the stuck projects which are not financially viable are not eligible under this resolution, and may involve significant losses for various stakeholders.

There are also concerns regarding the lax implementation of the RERA rules in certain states. This is evident from various media reports on consumer groups that are asking for stricter implementation of the RERA rules by the state authorities and enforcement of the penalties and consumer rights available under the Act. Appropriate monitoring and enforcement of the rules by the state authorities will be critical to ensure that the gains made by the sector after the implementation of the Act are sustained and further improved.

The last two years have seen a significant turnaround in the performance of the residential real estate sector. Among the various factors that have supported this demand revival, the improved consumer confidence and willingness to invest in projects under construction, especially from developers with established track record of execution and delivery, has played an important role.

Mathew Kurian Eranat is Vice President & Co-Group Head — Corporate Sector Ratings, ICRA Limited. Views are personal, and do not represent the stand of this publication.