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