Changes needed to support real estate project financing in India

The Real Estate (Regulation and Develop-ment) Act, 2016, which came into force last year, aims to bring transparency and accountability in the real estate sector. The establishment of a Real Estate Regulatory Authority (RERA), coupled with stringent compliance requirements imposed on developers, has had a positive impact on the sector and helped in improving stakeholder confidence. However, some of the act’s provisions have posed serious challenges to financing of real estate projects.

Given that large real estate projects demand significant capital outlay upfront, developers now have to explore new funding methods for meeting construction costs as opposed to traditional methods of raising funds through “soft-launch” or “pre-launch” schemes. This is because the statute prescribes that all projects have to be registered with their respective state RERA before any offer or advertisement can be published. One of the significant challenges, from a financing perspective, is the provision which stipulates that 70% of the amounts realized for the real estate project from the allottees must be deposited in a separate account to be maintained in a scheduled bank to cover construction and land costs.

Whether cost of financing will form a part of land cost and construction cost has been a subject of debate as the act is silent on this. The Maharashtra RERA has clarified that only interest payable on construction costs is to be added to the total cost of construction, thus implying that 70% of the project revenues cannot be used towards repayment of principal payable in respect of financing of land and construction costs and interest payable towards land costs.