RERA likely to impact performance of developers in FY18: ICRA

The Real Estate (Regulation and Development) Act, which came into effect from May 1, 2017, is likely to increase customer confidence and improve demand prospects over the long term, but in the short-term, it may pose various challenges for developers, according to rating agency ICRA

The transition to the new realty regulatory framework under the Real Estate (Regulation and Development) Act (RERA), is expected to slow down new project launches and increase the working capital requirements of developers, thus, creating pressure on their operational performance during this fiscal, said rating agency ICRA.

“The current transition period of RERA implementation, is expected to be challenging for developers, as they need to realign their business operations to comply with the new regulations,” said ICRA senior vice-president and group head, K Ravichandran.

He said the constraints imposed by the Act, will adversely impact the business model of unorganised developers and it can be expected that there will be some level of consolidation in the industry. “This will benefit larger developers, who have the resources and financial flexibility to withstand the near-term challenges and scale up execution levels as required,” he said.

See also: What is RERA and how will it impact the real estate industry and home buyers?

According to ICRA, implementation of the Act has seen delayed, as very few states have been able to create the required regulatory infrastructure till now. The various short-term challenges, are expected to put pressure on the operational performance of developers during FY 2018, added ICRA vice-president and sector head, Shubham Jain.

Under the Act, state governments need to frame rules with respect to the various provisions and set up a state-level regulatory authority, to implement these norms. While many states have notified their real estate rules, certain states are yet to be complete this step. Even fewer states have set up the regulatory authority, as required under the Act.

“The registration process for ongoing and new projects has been lacklustre. As all ongoing realty projects are required to be registered by July 31, 2017, the absence of the requisite regulatory infrastructure can delay registrations, affecting developers in such states,” Jain said.

As per ICRA, the provisions of the Act will also significantly impact developers’ financial profile, as it will raise their working capital requirements and increase reliance on equity or debt financing.

“With the commencement certificate being a pre-requisite for registration and sale of projects, developers will no longer be able to part-finance some of the pre-development costs with customer advances. Also, the restrictions on withdrawal of customer advances, will reduce cash flow fungibility across projects and increase working capital requirements,” the rating firm said.

Developers will have to enhance or scale up project execution capabilities, to ensure that all project commitments are met in a timely manner, it said.

 

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