LOCK­ING CAP­I­TAL

The es­crow ac­count pro­vi­sion will en­sure that money is spent only on spe­cific projects and pre­vent de­lays in pos­ses­sion

HT Estates - - NEWS - Van­dana Ram­nani

The realty bill makes it manda­tory for a de­vel­oper to main­tain a sep­a­rate bank ac­count for ev­ery project to en­sure that the money raised for is not di­verted to an­other. Many builders tend to use the money col­lected from buy­ers on ac­quir­ing new land parcels.

This in the short to medium term, af­ter the bill is en­forced, may lead to a no­tice­able slow­down in launches of new projects, as get­ting all the nec­es­sary per­mis­sions in place is a long and te­dious process which can de­lay a project launch, un­less the gov­ern­ment fol­lows up with much-needed ad­min­is­tra­tive re­forms that speed up the en­tire process. Hence, the bill may cre­ate an up­ward pres­sure on prices as there will also be some cost im­pli­ca­tions as de­vel­op­ers wait to launch their projects with due ap­provals in place, says San­jay Dutt, ex­ec­u­tive, man­ag­ing direc­tor, South Asia, Cush­man & Wake­field. CREDAI chair­man Lalit Ku­mar Jain also de­scribes the pro­vi­sion in the bill for a manda­tory de­posit of 70% of the cost in an es­crow ac­count as “im­prac­ti­cal.”

Con­struc­tion costs of projects vary in dif­fer­ent mar­kets. For in­stance, in mi­cro mar­kets as in prime ar­eas, the cost of con­struc­tion may be around 30% whereas in sub­ur­ban ar­eas it could be as much as 80% of the en­tire cost. The pro­vi­sion should factor in the spe­cific con­struc­tion cost to en­sure projects are com­pleted on time, and pre­vent fund di­ver­sion. Other­wise, the growth in the sec­tor will be ar­rested as fund­ing for land pur­chase will not be avail­able from banks, thanks to the neg­a­tive weigh­tage given by the RBI for real es­tate fi­nance.

Ac­cord­ing to Neeraj Bansal, part­ner, real es­tate and con­struc­tion, KPMG in In­dia, block­ing cap­i­tal for over five years may put pres­sure on the cus­tomer. For one, the de­vel­oper will not be able to launch a project for at least two years since he will have to wait to get all clear­ances in place. He will have to pay both for the li­censes and the cost of land from his own pocket and in such a case the in­ter­est cost could be passed on to the cus­tomer. Op­por­tu­nity cost will be re­duced for the de­vel­oper and he will even­tu­ally load it on to the project. If the de­vel­oper was launch­ing five projects in three years ear­lier, he will now be able to launch only two.

In­tent be­hind this pro­vi­sion is good but a sin­gle slab can­not be ap­pli­ca­ble to all cities or states as in some states land is fully paid for on the first day it­self, es­pe­cially in the case of states where de­vel­op­ers buy land di­rectly from vil­lagers. In ar­eas where the land cost has to be in­curred on a de­ferred ba­sis along­with con­struc­tion costs, 70% pro­vi­sion seems to be rea­son­able, says Anckur Sri­vast­tava of GenReal, a real es­tate ad­vi­sory firm.

The reg­u­la­tor should come up with very clearly stated au­dit­ing and re­port­ing and com­pli­ance guide­lines for es­crow ac­count man­age­ment. Also, if the mar­ket is ex­pect­ing bro­kers to en­rol with the reg­u­la­tor, an en­vi­ron­ment should be cre­ated wherein bro­kers are paid com­mis­sions through an es­crow ac­count, he adds.

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