Casting a gloomy shadow over construction and its ancillary industries, the recently enacted Real Estate Regulation Act (RERA) has hit Rebar sales significantly across India in the last few months and is expected to affect markets for at least next few months before the initial impact is mitigated. The Act which has come as a boon for consumers has faced considerable flak from builders and other traders, as it brings in stringent norms to govern the construction industry, which up until now had enjoyed fairly lenient regulations.
RERA makes it mandatory for all builders to register themselves and their projects with authorities. Failure in compliance would not only invite stern action but would also result in huge fines being slapped. Investors soon after the implementation of RERA in many states even refused to release funds fearing action and thus creating a severe liquidity crisis for builders. This almost instantaneously was carried forward to ancillary industries and hit rebar sales. Both sales, as well as prices, came crashing down after July 01. According to a rebar producer from Maharashtra, “the last one month has been quite slow in terms of sales. The small and medium construction companies who make up a significant part of the entire industry have been hit severely. It would take at least five to six months before builders can fall in line with statuary obligations under the act and start placing more orders.” “What is to be noted here is that the demand for superior quality steel would increase rapidly henceforth as the new act has increased liability on builders for repairing structural defects. At least in metro cities like Mumbai etc demand for 500D grade of TMT would increase exponentially due to the need for vertical infrastructure development, however, in tier-2 cities sales of low-grade steel would continue and grades even as low as 415 would be sold to some extent” Garg added.
Nikhil Agarwal, a New Delhi based RERA expert while speaking to Steel-360 about the new act asserted that the legislation is going to significantly affect the volume of residential as well as commercial properties in the next six months. According to Agarwal, the provision for depositing 70 percent of the funds received from buyers in a separate project account until completion has restricted builders from rotating funds in different projects. “Moreover, even the lenders have begun to exercise extreme caution in financing real estate projects” Agarwal added. According to him builders would no longer be able to prelaunch their projects to collect funds and would stifle companies of liquidity, vital in the initial stages of projects.
Non-metro cities still unregulated
The stringent act has delivered a body blow to small and medium scale builders in metropolitan areas of the country but the impact of RERA is still to be felt in tier 2 and tier 3 cities where builders have been operating below the radar this far. According to Agarwal, even though these areas do not contribute much to the overall size of the real estate market, it is imperative to bring these cities under the purview of the act for attaining the actual objectives behind the law. He further informed that the number of registrations from smaller cities is negligible. In Maharashtra specifically out of approximately 11,000 projects registered there are hardly a few from smaller cities. There are even a few cities were almost no registrations have been recorded. Maharashtra Real Estate Regulation Act carries a provision of imposing 10 percent penalty of total project cost if the builder has found averting registration under the act. Agarwal believes that authorities would have to make efforts to implement the act even in these cities. Steel industry observers believe that as the scope and reach of the Act stretch across the country, the strain on rebar sales would further be amplified over next few months.
Demand for superior quality products
RERA expert Nikhil Agarwal also elaborated on the provision for increasing the builder’s liability to repair structural defects from 2 years to 5 years. According to him the precise definition of structural defects is quite ambiguous and it thus includes various aspects of a project. There are a lot of services for example elevators, etc that also may come under the purview of structural defects owing to which builders would improve the quality of construction significantly. Even Agarwal believed that the demand for superior quality rebars and other raw material would go up. According to him, the quality of raw materials being used in metro cities even before the implementation of the act was not of lower quality but henceforth builders would be more careful about products used and contractors being hired.
Funding crunch may ease gradually
According to market experts, demand for housing as well as commercial units has remained stable for almost 6 months and is likely to improve the following implementation of the new real estate act. However, the supply disruption may cause a short-term imbalance which would likely improve realization for builders in the short term but would gradually correct over time. Realtors are hopeful that the funding crunch may also ease out as uncertainty in the market tends to settle and bankers begin to relax the stringent lending norms.
Boon for buyers
The temporary frenzy in the construction and ancillary industries aside, the Real Estate Regulation Act has come as a savior for millions of Indian who purchase property every year. Lured by false promises, buyers of residential as well as commercial properties have since long been troubled by unregulated and unregistered infrastructure developers. The RERA is not only expected to protect property buyers but also tighten the noose on unregulated funding in the sector. The Government of India, in line with its policies to clean the economy of black money and illegitimate financial dealings, intends to use RERA as a strong front against corrupt practices in the real estate industry.