This article of mine first appeared in Financial Express, Aug 2018
Close watchers of the Real Estate Industry in India have been prophesying for some time that the Real Estate (Regulation and Development) Act (RERA) implemented in May 2017 will be a game-changer in an Industry, which has been plagued with a deep sense of mistrust for the past four-five years. A mistrust which precipitated the fall in sales of homes from a high of half a million per year in 2013 to half that number in 2017. This mistrust emanated from a significant section of the Developer community building huge supplies, not keeping their promises, delaying project construction and in many cases taking the consumers for a ride. When an entire consumer community votes with their feet, it takes an Industry 5-10 years to recuperate.
And help to resolve that problem had come from unexpected quarters. Thanks to the Government’s twin intervention of Demonetisation and RERA, the Industry got the jolt it deserved. Cash transactions vanished after Demonetisation. RERA brought in clauses to protect consumer interests, to prevent developers from using monies fungibly, to ensure consumers got what they had been promised. The Supreme Court played in tandem, turning out to become the protector of the masses, and dealt severe judgments against some errant developers.
Some Industry specialists had forecast such a positive scenario, based on their collective knowledge from the impact regulatory bodies had brought about in other sectors – TRAI (Telecom Regulatory Authority of India) in Mobile Telecoms, IRDA (Insurance Regulation and Development Authority) in Insurance and to some extent, the tough SEBI (Securities & Exchange Board of India) in stock markets and mutual funds. In each case, the new regulation took three-four years to stabilise, had to go through two-three versions to finally find its feet and its teeth, but ultimately ended up in exploding the sector with a decade long growth of 15-20% CAGR. Also, in each of these sectors, larger professional corporates entered after regulation, foreign players – waiting and watching for decades – entered the country, existing players failing to smell the coffee vanished, and the Industry consolidated for the better.
So let’s see what has happened in the Indian residential real estate since May 2017. The bad news first – only few states have seriously started implementing the clauses and spirit of RERA. Maharashtra is head and shoulders above all other states in the discipline and diligence of implementation of RERA. The next three-four states have tried to take a leaf out of Maharashtra’s book, and are now trying to catch up. Leaving these five, it is sad to note that other states are still trying to get their acts together, and if this continues for longer, people will start suspecting the intent rather than commiserating with the complexity of implementation.
Let’s double-click further to see how the market is evolving. Referring to the latest Realty Decoded Report from PropTiger.com (Apr-June 2018), there are two cities of India, which together are now contributing to 51% of all sales of new homes across India. No points for guessing which are these two cities – Mumbai and Pune! This number was around 39-40% till a year back! And go ahead and please guess as to when did these two cities start breaking away from the pack? Right again – mid of 2017, after RERA got implemented.
If this won’t convince the nay-sayers, then I am not sure what will? The simple cycle is that RERA gets implemented under a strong and strict RERA authority, Developers start playing by the rule and spirit and start falling in line, consumers start believing the promises made on the Product, start feeling genuinely protected, and start coming back to the market. The beauty of the residential real estate product is that there indeed is a genuine demand for homes to live in, and especially in a developing and fast-growing country like India where each year, tens of millions of people are moving from lower class to middle class. We just need to do enough not to scare off this real demand into sitting on the fence or starting to rent rather than buy.
The Investor community, which follows the base User demand, will return once end-users start returning. So just turning poetic for a moment, “actual RERA will get actual Residents, and actual Residents in turn will get actual Returns”. To add to the impending Goldilocks situation, stocks have already done their bit in the past 2 years, and should take their cyclical break, possibly giving real estate a chance to enter the asset allocation of Investors.
Predicting from the other States following in the footsteps of Maharashtra RERA, Bengaluru and Ahmedabad should see revival of business soon. Hyderabad is seeing a resurgence of demand post resolution of the Telangana issue, and hopefully, the RERA their keeps on strengthening; Else they may end up committing the cardinal sin – running fast, but in the wrong direction!
Like the Gayatri Mantra says, “May thou guide our intellect in the right direction”, let’s hope market participants notice the direction in which the winds are blowing, implement RERA sincerely, align with customers, and see the best years of Real Estate come back!