Real Estate Bill Could Increase Property Prices: JLL India

The Real Estate Bill will bring in better transparency and better corporate governance into the real estate sector but property prices could go up, said Anuj Puri, chairman & country head of property consultant JLL India. The Cabinet on Tuesday approved amendments to the Real Estate Bill 2013 to regulate the sector and protect home buyers from unscrupulous developers.

The new bill will "dramatically" change the financing model of the industry, which will increase the cost for developers, Mr Puri said. The bill, which has to be passed by the Parliament to become law, stipulates that a project cannot be launched without getting registered with the proposed regulator. Another key provision of the amended bill also makes it mandatory for developers to put aside 50 per cent of the money collected from and use that only for funding construction of the project.

Mr Puri said since developers cannot collect money from the buyers during the pre-launch stage, they have to look at alternative sources of funding, increasing their project costs. (Pre-launch state involves means raising money from buyers for projects which are yet to get all regulatory approvals.)

Explaining the current funding models of many developers, Mr Puri said, "They buy a plot of land and quickly get an architect to build dummy plans and start selling it at the pre-launch stage. In many states, the law does not prohibit them from doing a pre-launch.

"They collect the money and with that money pay the balance to the land owner from whom they have bought the land. And utilise the rest of the money to buy another plot of land or spend that money on construction."

But if the new bill becomes law, the pre-launch stage is going to disappear and only after approvals, developers can launch the project , said Mr Puri. "Now, the developers have to buy land through their own equities. Or they need institutional investors for debt to back these projects," he added.

This is likely to increase the cost of real estate, Mr Puri said, because developers have to borrow money for one year or one and a half years from institutional investors.

Mr Puri however does not see a big jump in real estate prices because they are already near its peak.

Despite some rise in prices, consumers benefit overall, Mr Puri said. The Real Estate Bill takes away many risks associated with a project from a consumer stand point, he said.