Impact of RERA on Real Estate Prices
May 2017

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On May 1, 2017, The Real Estate (Regulation and Development) Act, 2016 (RERA) became effective in the entire country. RERA was formulated and came into existence to bring transparency in the real estate sector. Now, each and every state and Union Territory in the country will have its own Regulatory Authority (RA) which will frame rules and regulations in accordance with the Act. It is a general perception in the market that post RERA, the prices of properties will go up, especially in the residential segment. However, what's the ground reality? Let's find out.

Unsold Inventory
Almost all the metro cities, including Mumbai and Pune, have witnessed a slowdown in sales in the real estate sector in the past couple of years. Due to this, there is a lot of unsold inventory in the major Indian cities. Even if RERA, which calls for transparency and stricter compliance, is effective now, it won't really push the prices of properties upwards as the demand is limited and there is a lot of unsold inventory left in the system.

Super Built-up Vs Carpet Area
One of the main rules in RERA is that properties will be sold on the basis of the "carpet area". The practice which was being followed till date was to sell the properties on the basis of "super built-up area". Carpet area is usually thirty percent or so lesser than the super built-up area. Due to this, builders will now increase per sq. ft. cost of their properties to maintain them at the same prices as before. However, this increase in per sq. ft. prices may seem like RERA has pushed up the prices, but in reality the overall cost of a said project will more or less remain the same. Moreover, the customers will now exactly know how much area they are actually buying. This will lend transparency to the system, thereby increasing consumer confidence, which is excellent for the real estate sector.

High Cost of Construction
RERA has made it mandatory for the builders to deliver the projects on time. The contractors hired by the builders have to ensure that they do their work in a timely manner. To complete the work in a shorter duration, the contractors will invariably demand higher rates for construction, resulting in increased costs for the builder, which he will pass on to the customers. On the positive side, this will also do away with the delay in possession. As most customers these days depend on a home loan to finance their property, when they get possession on time, the overall cost of the property is bound to come down, even though the per sq. ft. quoted rate by the builder goes up.

RERA has strict rules pertaining to the management of funds for a particular project too. Then there are restrictions on the sale of open car parking spaces. Post RERA, the builders are expected to regularly update information about the project, maintain a webpage, etc. to keep the customers aware. There is also a requirement for builders to transfer common areas to housing societies. All this is bound to increase the costs for the builder, which he would pass to the customers. Moreover, before RERA, all risks related to delay in possession, lack of quality in construction, changes in the project, etc. were borne by the customers. However, now these risks have been transferred to the builders. It's inevitable that any increase in costs resulting from these risks will be eventually borne by the customers.

Effect on Developers
Due to the strict rules and regulations, builders will now have a tough time making their under-construction projects RERA compliant. This could mean that the sector will not see many new launches in the coming months. Also, it is possible that because of delay in getting approvals from various government bodies, builders are unable to give possession on time, inviting additional costs and fines owing to RERA incompliance.

RERA is expected to decrease competition in the real estate market. Smaller developers might find it difficult to be RERA compliant and exit the sector altogether. Reduced competition could further push the prices of properties up. Looking at all these factors, it can be concluded that a price readjustment is definitely expected post RERA, however, whether it translates into actual increase in overall property prices, that only time will tell.