Norm on 70% money in escrow to affect cash flow of real estate firms

Norm on 70% money in escrow to affect cash flow of real estate firmsEven as the ‘70 per cent sale proceeds to escrowaccount’ norm in the Real Estate Regulation Bill cleared by the Cabinet is expected to reduce malpractices among developers, it could pose serious cash flow risks for them, as they are mostly dependent on pre-launches, said analysts and consultants.

Normally, developers presell their apartments at lower price points to buyers before obtaining approvals to part-fund land acquisitions and divert proceeds to complete ongoing projects.

“This (the new norm) may result in longer cash flow cycles, as developers await approvals prior to the launch. In our opinion, the markets of National Capital Region (Delhi-NCR) and Mumbai Metropolitan Region (MMR), that have elongated approval cycle and dependent on “prelaunch” sales, will be affected more than the southern markets of Bengaluru and Chennai,” said Adidev Chattopadhyay, an analyst with Elara Securities.

Amit Goenka, chief executive, Nisus Financial Services, said the challenge is more in metros where land costs are high.

“If money allowed to be taken out is 30 per cent, in metros, developers will face a lot of challenges as land costs are over 50 per cent of the project,” said Goenka.

“I think small developers will be finished, as their cost of operations will go up and borrowings will increase,” said Om Ahuja, chief executive-residential at Bengaluru-based Brigade Group.

Chattopadhyay of Elara says although the Bill advocates provision of 70 per cent of project cash flows (50 per cent in the earlier draft) in an escrow account, it gives leeway to state governments to reduce this percentage at their discretion. “As a result, the intent of preventing diversion of cash flows may not be fulfilled.”


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