With the Union Cabinet approving the Real Estate (Regulation and Development) Bill, the popular view is that it will help property buyers benefit and make the system more transparent. The real purpose of the bill is to give a reliability of the delivery of the project once it is launched. While the bill has its good intentions, precedents show us how such regulations usually eliminate the small builders completely.
Highlights of the bill:
1. All residential projects having units that are more than 4000 sq mts will fall in the ambit of this regulation.
2. All projects to be launched only after all the permissions have been received for the construction of the project.
3. About 70% of all the money collected for the project has to be used only for this project.
4. Projects to be sold on carpet area only.
5. Each state will have a tribunal for redressal of complaints.
In the past India has seen regulators like IRDA, SEBI, TRAI, CCI, RBI, DGCA, ICAI. What each of the regulator has undoubtedly brought in is the required “buyer benefit”. However, a side effect of such a regulator’s impact on the market is consolidation. For example, the proposed real estate regulator in the new bill makes it compulsory for all new projects which are more than the size of 4,000 square meters to follow a few rules. Now such a regulation would actually harm the big projects and builders would try to divide projects and do smaller projects only. However, a few factors like cost of construction, cost of marketing and the cost of providing common facilities push builders to do larger projects only. The customer eventually thinks that he should invest his hard earned money in a project which is regulated rather than an ‘unscrupulous’ builders’ unviable project. This breaks the back of small builders, who survive on a single scheme at a time.
These days in a metro city there is already a lot of consolidation with a few names like Lodha, DLF, Hiranandani, etc. dominating the real estate sales market. Lodha claims sale of Rs. 10,000 crores in the last fiscal which is more than DLF’s sale of Rs. npr ask me another 9,000 crores in the same period. In a Tier 2 city there are lot of local builders operating in selected areas of the city. Usually the local builder association has about 2,000 small and medium builders which are now dormant – due to slow market conditions. The SME segment has already got the burden of lack of reliable brand, inability of having fixed salaried staff and inability to invest in modern techniques of construction. When such a builder wants to scale up to large sized projects, he will need to comply with the regulator’s provisions which will deter him further.
We have seen in stock market that eventually all the small and medium sized IPO and brokers are eliminated from the market. It is said that SEBI regulations have closed more brokers than the slow market. So we have a handful of stock broking houses like Motilal Oswal, Angel Broking, Share Khan, etc. who own practically the lion’s share of the market. It is said that unless a broking house has 10,000 customers there is no viability to run the operation. Oligopoly is the future of real estate sector, be it a builder or a broker.
The proposed bill has a concept called “registered brokers”. Hence brokers are also going to fall in to the ambit of regulation, which until now has been totally out of regulation. Such regulations in other countries have streamlined the entire industry and have brought a lot of transparency. Brokers slowly adapt to the regulated world and start building their own brand. This indirectly regulates the secondary market also.
Even the CREDAI (Confederation of Real Estate Developers Associations of India) has ‘strong reservations’ according to the Credai president C Shekhar Reddy. He has expressed his concerns about the License Raj re-entering the real estate world and unnecessary victimisation of members. It is important that the Bill maintains equilibrium between the developers and end users. Implementation of this Bill as it is will cause substantial increase in cost to buyers. In the long run the bill has the potential to actually shatter the government’s initiative of ‘housing for all’ at affordable rates.
Right now the cabinet has passed the bill and it is scheduled to be tabled in both the houses in the monsoon session. The bill most probably will get passed uneventfully as officially only the state of Chhattisgarh has opposed it. So the regulator will actually cause ‘irregulations’ as it is not conducive to the small time brokers and is quite lopsided in approach. Oligopoly seems to be imminent.