Real Estate Regulatory Authority (RERA) act is expected to be implemented in Maharashtra by May 1, 2017. Rajeev Talwar, Group ED, DLF spoke about how much could the organised players in the space stand to benefit by this act.
He said the industry has taken up RERA very positively.
“Any regulation in any sector is well intentioned. With all due respect, any regulation is better than no regulation but subsequently licensing needs to go otherwise it would be an over-regulated sector”, he further added.
Below is the verbatim transcript of Rajeev Talwar’s interview to Latha Venkatesh, Sonia Shenoy and Guest Editor Adrian Mowat on CNBC-TV18.
Sonia: I just wanted to open the discussion by asking you what your view is on RERA once it get implemented post the May 1st? There will be a lot of transparency in execution etc. but there are some onerous announcements, clauses that have come in on the back of RERA, so tell us what is your view on how the industry could take it as a whole?
A: I think the industry has taken up as a very positive measure. Any regulation in any sector is probably well intentioned. But we were of course quite keen that instead of having such an onerous regulation, so many clauses including imprisonment I think a simple one line order if the government had given that you cannot sell any residential apartment in view of our past experienced of our decade without completing it first or at least completing the structure, I think that would have taken care of it. But with all due humility and respect, any regulation is better than no regulation, but subsequently licensing needs to go, otherwise it would be an over regulated sector.
Adrian: How do you see this new regulation changing your business model?
A: I hope you were in touch with DLF on various other counts and we have decided as a firm for the last four years when we saw this coming forth that we would only be selling completed apartments. So, over the last four years, we have delivered or tried to deliver all our customer commitments.
Hopefully, by the end of this calendar year, all our customer commitments would be met and yet we would be having readymade stock to sell as well as ready to be occupied immediately worth about more than USD 2 billion with us.
In all, we all will change to a model which will not merely promise on paper and then find the route a little cumbersome, but with RERA coming in and laying down stipulating that you can only announce a project after all clearances have been obtained, I am certain that there would be a year to two-years gap between any new launches because all builders will have to take all approvals, all clearances, land title within those two years would be very clear. So I think in all we should see a delay in some launches but so much a better deal for the customer and the buyer.
Adrian: Business direction has meant that some operating cash flow, free cash flows being negative for number of years. Do you think that now the adjustments being made that the real estate industry can move to a better free cash flow position?
A: Free cash flow I think in the immediate near future may be a problem and you are seeing many large companies and established companies facing a problem. But, overall yes with realisations getting better when apartments have all the clearances, their construction schedules would be online and plus with better value realisation of completed apartments, I am sure that lots of companies will change their business model and are able to adapt to new regulation will find it easier in the future, but I am not so sure in the next year or three four quarters.
Latha: I just want to take that point forward, RERA becomes a reality in Maharashtra on the May 1, now it would take a while before they are staffed, they hit the ground and some time before consumers start approaching them, so do you think immediately the real estate companies in Mumbai or in Maharashtra just be rushing to finish, initially will it be a crunch situation where they are only trying to meet old deadlines?
A: I think that was the intention of RERA itself that customer commitments must be met, they must be honoured and perhaps that is where the government, the courts and people at large including the media were finding it a problem to cope up with multiple delays in multiple projects all over the country. I am sure that it would be in good state for all real estate companies to finish their projects, to complete their customer commitments and then go in for fresh new projects. So, I think there will be two effects – one that yes customer commitments would be met, but the new system would also entail delays. So, I think in that meanwhile anyone who has a completed flat or a completed apartment will get a better value for it, so I think they would then stand to gain in the short term too.
Adrian: We have had nearly a six year downturn in the real estate industry, if we are looking at things like pre-sales. Do you think we have now got a very advantageous combination of events here, so we have got a new regulation which should improve the buyers’ confidence in the real estate product combined with the decline in mortgage rates that looks like a very attractive combination particularly considering we have been let us call it a six year bear market in residential real estate?
A: I am so glad that you deem it so yes, I think there are fortuitous circumstances taking place right now that first of all greater transparency, greater accountability. Number two- mortgage rates coming down, loan rates coming down and I think a very good direction by the government. The largest segment of housing shortage in this country is of what we now call affordable housing, 30 square meters to 60 square meters and a large number of incentives being given to them. There are still some polices tweaking which needs to be in place and no lesser than the Prime Minister’s Office (PMO) is on the task.
In India if you have seen it over a period of time that policy announcements once made measures taken need time to get fine-tuned, but eventually make a big difference whether it was the telecom sector, which began of in the mid-80s, whether it was the aviation sector which began off in the 90s, early 90s and now hopefully the direction being given by the current government on affordable housing will get tweaked over a period of next two to three years just like real estate investment trust (REITs) did initially and hopefully I think that would mean a big quantum jump in the volumes of work being undertaken by the construction and real estate industry. But more than that I think it will throw up a lot of people into this business afresh. That means a great jump for employment.
Sonia: Have we seen any improvement in demand at all because the NCR market is still extremely sluggish and when we spoke last during your previous quarter earnings you did mentioned that it will take at least a couple of more quarters before you see any recovery in demand, what is the status as of now?
A: I don’t think we could link demand with this oversupply. There is an oversupply it takes time to get absorbed just like the commercial sector did after the slowdown in 2008. It has taken almost seven years after that for the oversupply to get absorbed.
In the residential sector because of loan rates coming down, mortgage rates coming down, I think when Adrian was giving the example of Mexico he touched on a very critical point which is mortgage rates and the tenure of mortgages, we will come to that a little later. But, I think this oversupply will get absorbed on better earnings by the other industries in general in the economy and that will add fillip with lower interest rates to getting this oversupply in the residential segment absorbed.
I think that should take about three to four quarters, but within that period I think a newer regime would come into place, newer emphasis on affordable housing, more tweaking of policy on issues like floor area ratio (FAR), floor space index (FSI), density, standardised plans a larger number of projects being launched, public-private partnership on government lands and PSU lands which is public sector enterprises and public sector undertakings on those lands I think all that will mean a huge jump in the coming five years.
Latha: Your best place to advice audience on this entire Pradhan Mantri Awas Yojana itself, the affordable housing scheme. Who is likely to benefit most? If you were a betting man would you bet on cement, would you bet on housing finance companies, would you bet on real estate?
A: I think real estate, yes, how many of them would go public first of all and what kind of partnerships shape out, but of course the companies which supply the basic raw materials whether it is cement, steel, ceramics and of course housing finance companies they would do rather well.