How will RERA impact property prices - Kotak Bank
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12 SEPTEMBER, 2017

Real estate sector is witnessing the biggest change in its regulations and is heading towards being a more
transparent, competitive, hassle-free, value oriented and consumer-focused sector. One of the most significant transformations that is driving this change is Real Estate Regulatory Act (RERA).

Real Estate Regulatory Authority, the regulator that governs the real estate sector  was introduced on the 1st May 2017.It is aimed at protecting the interests of buyers in the real estate sector and establishing an arbitrating mechanism for speedy dispute redressal. It is an act to create a mechanism that effectively regulates and addresses issues like project delivery delays, property pricing, quality of construction, title and other changes, in an efficient and transparent manner.

Although, RERA presents a very promising picture and is working in different ways for sustainable growth, the impact will be different for different situations and will depend on the execution by the government.

That said, here are some of the factors of RERA that will impact the prices of the real estate sector:

Reduced Supply & Increased Demand

Since developers will now be required to work within the strict framework of the regulatory body, supply will reduce and only those project will be launched which are likely to complete within the promised timeframe.

On the other hand, due to the strict regulatory framework, government incentives for the buyers and increased consumer confidence, there will an increase in the demand.

And eventually, with reduced supply and increasing demand, there is a high chance that the residential market will soon witness an increase in property prices.

Transfer of Costs & Risk

It is important to look at this from the risk point of view. Previously, the risk of quality, title, delays, changes the project were all borne by the customer. However, with RERA in place, the buyers will now have something to fall back on, in case the builders default in their commitment. These costs will now be borne by the developer. Here's a list of factors that will be the drivers of this increase of costs and decrease in risks:

  • Sale on the basis of Carpet Area (Existing & New Inventory)

    Developers would now be required to register all existing and new inventory to RERA and adhere to its new rules. This means selling of property on the basis of carpet area and not built-up or super built-up area, forcing them to increase the area rate of the property.

  • Compulsory Registration of Real Estate Brokers

    Under RERA, brokers and real estate agents will compulsorily be required to register themselves with the body. There will also be a registration fee attached to it, which will vary from state to state. This
    will be anywhere between INR 10,000 to 5 lac, depending on the state. This rise in the brokerage fees will ultimately be passed on to the consumers leading to the rise in overall property prices.

  • Timely Completion of Projects

    The new Act explicitly states that the developer has to specify the time of completion of the project during its registration. If they fail to do so, there will be strict action taken against them, which includes hefty interest and penalties. According to a data released by PropUrban, top southern cities including Bangalore, Chennai and Hyderabad have already witnessed a 70% decline in new projects as compared to the same period last year. This reduced supply and increased demand would eventually lead to higher prices of property.

  • Fixing Structural Defects upto 5 years

    According to the earlier regulation, developers were required to fix any structural defect that took place within 2 years of construction. This duration has now been increased to 5 years under RERA. This means an additional cost on developers, which would subsequently be passed on to the buyers, as the overall cost of the project would increase.

  • Increase in Land Prices

    Post-demonetisation, the scope for diversion of cash from other businesses to real estate has been narrowed down to zero. This, in addition to RERA, will make it necessary for developers to use legal funds to purchase land, thus increasing the price of the land. The pricing will further affect the overall costs of the project as well.

To conclude
: The real estate sector is in the midst of a massive change and will soon enter into a consolidation phase. That would result in several small and medium unorganized players being wiped out. Ofcourse, there will be a marginal increase in the property rates but the industry will not witness a huge difference. Additionally, there won’t be any bombardment of new launches for some more time as well. Builders will have to first clear the old stock and then launch new projects.

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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.