Real estate Bill to make builders rejig formats

Developers who have done soft launches to HNIs may mull withdrawing as they will do retail launch only when cash flows are sorted out

The new rules in the Bill to regulate the realty sector, such as restricting pre-launches and mandating developers to deposit 70 per cent of money in an escrow account, could hit builders' cash flows and returns in big cities.

The Bill says developers cannot pre-launch a project without all the legal approvals for the project. Experts say many developers do this and take a down-payment.

"If land is worth Rs 150 crore and the developer has paid half of that, they have a tendency to sell a part of the project to investors to part-fund  land payment. It will stop now," said Sunil Rohokale, managing director of ASK Group.
 

Sanjay Dutt, managing director of Cushman & Wakefield said quite a few who'd done a 'soft launch' to wealthy individuals would perhaps consider withdrawing till they'd sorted the cash flow. In the short term, he said, the Bill's passage would reduce inventory for developers with credibility and financial closure. “ In markets where inventory is low, prices will move up by five to 25 per cent,” he said.

A chief executive with a non-banking finance company said developers would look at new structures for financing till the time of launch. For instance, approach lenders at pre-launch and defer payment to land owners, such as 10 per cent now and the rest after approvals. Or strike deals with bulk-buying apartment funds during pre-launch.

However, Anuj Puri, chairman of JLL, believes pre-launch gave developers only a three to six months’ window ahead of the start of construction. “Avoiding that completely might not have negative implications on project finances as widely expected,” he said.

The 70 per cent money in escrow account rule is also expected to delay returns for developers in cities like Mumbai where land prices are high. "Normally, land cost, construction cost and profit constitute 30 per cent each in a project. In Mumbai, land is 60 per cent. So, if you are allowed to take only 30 per cent out, they have to wait till the end to make their profits. The time taken for returns will get longer," said Rohokale of ASK.

C&W's Dutt believes it will significantly impact developers' cash flows. “Especially where developers have bundled projects and taken consolidated debt. They will have to figure out how to manage cash flow for each of those projects and payment of principal and interest,” he said.