A shake-up of the property sector is imminent once the Real Estate Bill gets implemented in the next three months, according to India Ratings & Research.
- Under new law, developers will put 70% sale receipts in escrow account
- Sales from new projects are key source of liquidity for developers
- All approvals to be made mandatory for launching new projects
Developers wouldn't be able to launch new projects before obtaining all approvals and will have to deposit 70 per cent of sale receipts in an escrow account once the new law comes into effect. The new rules are likely to impact the liquidity of real estate players in the short-term, the research firm said.
"This will put pressure on developers to raise more funds (debt or equity). Organised players have access to varied sources of funds, namely loans from banks/non-banking financial companies, non-convertible debentures, private equity and structured debt, thus they are likely to be able to tide over the liquidity crunch, though the debt raising and cost of such funding will result in weaker credit profiles in the short term," it said.
The new norms prohibit the sale of projects without registration with the Real Estate Regulatory Authority, for which the receipt of all approvals and commencement certificate is a prerequisite.
Sales from new projects are a key source of liquidity for developers. Tighter liquidity could force developers to rely more on joint venture projects with land owners due to lower availability of surplus cash to buy land, said India Ratings.
The research firm also said that the provision of depositing at least 70 per cent of sale proceeds in a separate account will "especially impact developers with projects in cities such as Mumbai or high-end projects in other cities, where the component of land cost is much higher than the construction cost".