With the Real Estate Regulatory Act (Rera) making it mandatory for developers to deposit 70 per cent of the receipts through any kind of sale in an escrow account, 'apartment funding' (AF) mode of raising funds from investors is likely to perish, says property consultant Jones Lang LaSalle (JLL).
Rera, which came into effect from May 1, requires developers to deposit 70 per cent of the payments through any kind of sale in an escrow account, which is to be used for project expenses and is not available to the promoter developer until completion of the project.
"AF is a fund-raising structure where the involved investors acquire real estate units at deeply discounted prices. Such funding route would not only ensure [a] quick sale of multiple units which would support their financial needs and they had no restrictions on its usage," said Akshit Shah, associate director of Capital Markets Research, JLL India.
However, with this regulation in Rera, the key benefit for the developers to get upfront funding from apartment funds is lost, he said.
"While the developers receive all the money, they can take out only a small part of it for purposes other than project-related expenditures," Shah said.
He further said with goods and services tax (GST) being introduced, the cost of purchase has increased by 6.5-7 per cent for under- construction projects. Earlier, developers were charging value-added tax (VAT) plus service tax, which together accounted for around 5-5.5 per cent. Now, it will attract 12 per cent GST.
As per the new GST norms, newer greenfield projects will get the benefit of full input credits, which can be passed on to the buyer and offset the additional tax cost.
However, for under construction projects, since most of the projects were partially built in the earlier tax regime, only a portion of input credit can be availed, which will increase the cost of purchase, making it rather unattractive for investors who would earlier have considered apartment funding as an investment route.
"Since the basic purpose of the structure now effectively stands defeated, apartment funding and most similar structures are no longer feasible or even possible," Shah added.