RERA has made it considerably difficult for the small and mid-sized developers to raise capital for launching projects. RERA was introduced earlier this year by Central Government to bring more discipline and order in this developer favored sector.
RERA restricts property developers from engaging into presales and consumer funding prior to receiving all the necessary approvals. Before RERA, presales had been a common practice to provide for land prices and securing the required approvals which consists 20-30% of the total project cost. Now that is prohibited by RERA, real estate firms are approaching Non-Banking Financial Companies which are far more costly than banks or getting into tie-ups to raise capital. Banks are mostly ruled out as an option for the small firms because of their size or lack of credit track records.
Besides the restriction on presales, RERA also mandates 70% of the fund raised from the consumer booking into an escrow account that can only be used for developing the property. While the benefit of escrow account is that the money is used to build one project only, the disadvantage is that the money sits idle. Previously it was a common practice among developers to use the money raised from booking amount to complete another project.
“Smaller firms are under capital pressure. They are increasingly stuck with raising new capital as their balance sheet have not been well organized as opposed to a corporate developer,” said Amit Goenka, managing director (MD) and chief executive (CEO) of Nisus Finance Services Co. Pvt. Ltd, a financial services firm specializing in real estate. “We had to take a review of the type of developers we are financing. We are alright partnering with slightly smaller ones though obviously one has to look at the risk parameters,” he said.
The overall working capital increased after RERA. Extra administration and management cost has come into the picture to remain RERA-compliant. Sales of the projects nearing completion have slowed after the Goods and Services Tax are being levied on them. The costs for the developers have increased while the sources of funds have narrowed.