RERA makes it mandatory for developers to deposit 70% of receipts through any kind of sale, in an escrow account. Photo: Ramesh Pathania/Mint
Mumbai: With the Real Estate Regulatory Act (RERA) making it mandatory for developers to deposit 70% of the receipts through any kind of sale in an escrow account, ‘apartment funding’ mode of raising funds from investors is likely to perish, according to property consultant Jones Lang LaSalle (JLL).
RERA, which came into effect from 1 May, requires developers to deposit 70% of payments through any kind of sale in an escrow account, which is to be used for project expenses and is not available to the promoter developer until completion of the project.
“Apartment Funding (AF) is a fund-raising structure where the involved investors acquire real estate units at deeply discounted prices. Such funding route will ensure quick sale of multiple units that would support their financial needs, and they have no restrictions on its usage,” JLL India Associate Director – Capital Markets Research Akshit Shah said.
However, with this regulation in RERA, the key benefit for developers to get funding upfront from apartment funds is lost, he said. “While the developers receive all the money, they can take out only a small part of it for purposes other than project-related expenditures,” Shah said. He further said that with GST being introduced, the cost of purchase has increased by 6.5–7% for under-construction projects. Earlier, developers were charging VAT plus service tax, which together accounted for around 5–5.5%, it will now be 12% post-GST.
As per the new GST norms, newer greenfield projects will get the benefit of full input credits, which can then be passed on to the buyer and to offset the additional tax cost. However, for under construction projects, since most of the projects were partially built in the earlier tax regime, only a portion of input credit could be availed, which will increase the cost of purchase, making it rather unattractive for investors who would earlier have considered apartment funding as an investment route.
“Since the basic purpose of the structure now effectively stands defeated, apartment funding and most similar structures are no longer feasible or even possible,” Shah added.