The Maharashtra Housing (Regulation and Development) Bill, 2012, has been passed by the Lower House of Maharashtra Legislature and now awaits nod of the Upper House and presidential assent; latter two approvals expected to be procedural in nature. The regulation is expected to provide greater transparency to both consumers and investors in terms of disclosures and greater control. However, costs for developers are likely to increase marginally, as besides compliance expenses, we expect cost of unorganised funding also to increase. We maintain ‘Overweight’ stance on the sector.
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Key features protecting consumers are only moderately effective
The stated objective of this land mark bill is to prevent sundry abuses and malpractices prevalent in the real estate sector. Key benefits to consumers will be greater transparency in terms of disclosure requirements by developers to consumers and greater consumer control over changes in project design. However, penal clauses for project delays can still potentially leave buyers shortchanged as the bill leaves significant elbow room for developers to renegotiate project delivery timelines, a key grouse of a home buyer.
Bill to drive greater transparency for investors
The bill requires developers to disclose project details related to carpet area, utility area and details of FSI, additional FSI and TDR consumed, along with details of phasing and project timelines. Developers are further required to post approvals as received on the regulator’s website. We expect these disclosures to significantly enhance transparency for equity investors, driving returns in the long run.
Cost of unorganised funding may increase
The cost of HNI funding to the industry may increase as the bill also contains provisions that mandate signing and registering an agreement with the buyer if the developer has collected more than 20% of the sale value as advance, increasing transaction costs for the bulk buyer (who eventually looks to sell it for a profit). Additionally, the interest payable by the developer to the buyer has been capped at 15%. While clarity is yet to emerge on the scope of applicability of this cap, a general applicability may create hurdles for the sale and buyback financing arrangement, as prevalent in the industry. However, developers may choose to pay interest above the threshold in cash to circumvent the hurdle cushioning any possible impact of this provision.
Another layer of approvals for developers
The real estate industry is currently grappling with multiplicity of regulators and requirement of a large number of approvals. The bill will add another regulatory layer for the industry to navigate. We also highlight that the central government is also planning its own version of a real estate regulatory bill which may get further impetus post passage of the bill by Maharashtra.
Regards,
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