There are many times when one can look at the past and predict the future but every so often this is just not possible.
These present times will probably go down in history as the time when the real estate industry completely and totally changed in many ways.
There was a time not so long ago, when delays on account of approvals or litigation was rewarded by increase in prices thereby compensating handsomely for any delays. There was a time when the voice of the customer was completely non-existent, a time when customers felt too helpless to go to court against the developer. There was a time when social media did not exist.
There was a time when there was virtually no regulation or legislation to govern the real estate sector. There was a time when the judiciary was not actively acting against developers. There was a time when the segment most associated with black money and underhand deals was real estate.
Many generations of developers have built their real estate business on the basis of scarcity of land and approvals.
Today’s government is in the mode of increasing supply through increased FSI and reducing the time for project approvals. The government has come up with a law to protect the home buyers. For the first time the judiciary is punishing errant developers. Consumers have become ever more aware of their rights and are willing to fight and even turn militant to get their rightful dues from developers. In yet another move the government has sought to purge the system of all the large currency notes (legitimate and not).
These changes are unprecedented in an industry where a large part of the construction is done by labour carrying materials on their heads.
These changes are going to require developers to change in virtually all aspects of their business.
With today’s customer willing to fight for his right or at the very least willing to speak up on social media for his rights developers need to ensure that the only promises that are made are the ones that can be kept. This newly awakened customer is only strengthened by the provisions of the Real Estate Regulation (and Development) Act RERA.
RERA requires developers to open approvals before commencing sales. Any changes that developer wishes to make requires the approval of more than 60% of the people who have purchased apartments in the project. All this is going to require a change in mindset where mistakes cannot be easily undone. Developers, generally used to following a herd mentality are going to need to get used to looking at data and research before launching of projects as the industry will start to heavily punish mistakes.
There was a time when capital was not a constraint for the business. 1 crore rupees could secure a property worth Rs. 20 crore by way of a part deposit payment for a joint development. The second crore would be paid from customer pre-sales as would the approval costs. This would lead to the launch of a 100 crore project.
75% of the money would routinely be collected with construction of 30% of the building.
The RERA now only permits sales to begin after all approvals and also to draw out 30% of the sales proceeds on receipt and the balance can only be drawn in proportion to the percentage of the work completed on site.
This will require recapitalisation of many developers. Fiscal discipline and planning will be essential.
Developers are required to provide a 5 year defect liability period. This too requires a quantum leap in construction quality else the costs of repair will further erode profit margins for developers.
The recent move by the government to read the industry of black money will require a number of developers to change their entire business models.
The overall impact of all these changes will only be known in time but one thing is sure that the real estate industry will never be the same again.