Finally, amid all speculation, the Real Estate Regulation and Development Act (RERA) has become a reality. As of May 31, 2017, 18 states and Union territories have notified RERA rules. Maharashtra and Madhya Pradesh are taking the lead and have already set up websites for registration. While developers are gearing up for the future with RERA, the moot question among buyers remains if they should buy or wait for further price corrections. Price is a factor of demand-supply dynamics in any market. Thus, it is important to check what would be the change in demand-supply dynamics post RERA.
As expected, the number of launches have already reduced in most cities. For example, in Mumbai, we witnessed 24 percent drop year-on-year in new launches in the first quarter (Q1) 2017. However, demonetisation and lower sales volume have also played a role here, but RERA is likely to negatively impact supply further in the short term as it does not allow developers to make a sale before they get all required project approvals. The mandatory requirement to have all approvals in place before sales should increase holding costs for the project. This has increased the threshold for entry into the real estate industry, and may adversely affect smaller enterprises.
Developers may face liquidity issues as banks, financial institutions and funds would prefer to enter the project once it is registered with the authority. Smaller enterprises may find it difficult to venture into the market due to liquidity issues. Thus, in all probability, supply is likely to reduce in the coming months. Another interesting change in the supply side would be the product typology. The product typology is changing from luxury to affordable. Developers are trying to find out a way to make houses more affordable as the government has recently given infrastructure status to affordable housing that has attracted many developers into making a foray in this sector.
If we look at the demand side story, much of us will realise that investor participation has come down in the residential sector and it is primarily the end user who is driving the market. This shift in demand is more evident in traditional cities such as Delhi NCR and Mumbai. The preference for buying has shifted from under construction projects to ready-to-move in projects among home buyers. With policies such as Credit-Linked Subsidy Scheme (CLSS) that are now extended to the middle income buyers having income upto Rs 18 lakh per annum income, most of the demand is likely to come from the middle income group end users.
It is evident that the demand-supply dynamics have already started changing and this is due to not only RERA implementation but also due to other government policies. While RERA is impacting the supply side of the story, it is the macroeconomic factors such as industrialisation, automation, and digitisation which will have a significant influence on the demand side of the real estate sector. We cannot rule out the possibility of further stagnancy in the residential market due to turbulence in technology job sector.
Currently, all key cities in India have high unsold inventory, so lower new project launches should ensure demand-supply equilibrium in the residential sector. Looking at the demand-supply scenario and increasing construction costs, the prices per square feet are unlikely to come down. However, overall costs of buying will come down due to various factors such as decrease in interest rates, affordable category with basic amenities and size of apartments making home ownership more affordable for a larger section of the population.
(The author is Senior Associate Director, Research, Colliers International India)