Realty In A Morass?

Three undisputed and related facts stare the real estate industry in the face — a large number of undelivered residential projects, a significant drop in new launches and chary home buyers turning increasingly wary of investing in new projects. Together these ground realities have skewed the market sentiment of the realty industry.

Manoj Gaur, managing director of the National Capital Region (NCR)-based Gaursons India, feels the delays in possession of new homes have impacted market sentiment. A developer in Gurgaon says contractors have been asking for upfront money to restart construction work and laments that “funds are scarce”.

Supertech chairman R.K. Arora says developers are not solely responsible for delays in housing projects, but they are the ones who have to face customers. “A constant dialogue with buyers does help improve sentiments,” he says. Anil Sharma, chairman and managing director of Amrapali, believes that market sentiment will improve and buyers will pay their dues as soon as they get possession of their property.

Last year, a report by real estate analysts and researchers Knight Frank pegged the number of undelivered residential units at over seven lakh. This year, their report pegs the number at over 6.5 lakh units. Of course, builders, developers and real estate companies dispute these numbers and dismiss them as exaggerations.

Incidentally, several industry reports tell similar tales of delay and undelivered residential units. January data by real estate research firm Propequity, showed that about 7,300 residential projects of the 9,500-odd projects launched between 2008 and 2010 were still incomplete. More than 2,500 of the delayed projects were located in the Mumbai metropolitan region (MMR), followed by Pune, Bengaluru and the NCR.

It is now common knowledge that several developers have diverted funds raised from one project to another, leading to a cash crunch and pile-up of inventory. The total debt of listed developers hover around Rs 50,000 crore and the figure could be even higher for unlisted players in the market.

The slowdown in home sales has adversely impacted private equity (PE) investments, too. According to some reports, PE investments have dropped by as much as 42 per cent in the six months ended June, compared to the same period a year ago. According to VCCEdge data, PE funds invested about $954 million in real estate projects between January and June this year, compared to $1.66 billion in the first six months of 2015. “There is a drop in the number of new project launches, which is reflecting in the corresponding drop in PE investments,” says a senior executive of a leading brokerage firm. “Yes, access to money is a challenge. Banks will have to do more to infuse positive market sentiment. That is the only way unsold housing units can be sold and unfinished projects completed,” says Arora of Supertech, a leading developer in the Delhi NCR.

A Sorry State
According to a recent Knight Frank report, the Delhi-NCR has more than two lakh unsold apartment units. That is not the disturbing part, though. The worrisome part of the story is that it could take four years to push these unsold properties off the shelf. In a nutshell, neither a short-term nor a permanent solution to the housing mess is in sight. According to the report, Greater Noida and Noida account for more than half the unsold apartments in the Delhi NCR, followed by Gurgaon, Delhi and Faridabad. Home buyers have shown caution in Delhi, Gurgaon, Faridabad, Ghaziabad, Noida and Greater Noida. A 41 per cent year-on-year dip in launches is evident in the NCR too.

Shishir Baijal, chairman and managing director, Knight Frank India, says: “The NCR, one of the largest residential markets, has shown one of its worst performances in the past six to seven years, since we began analysing this market. Going forward, the realty market in the NCR will continue to remain muted in the second half of 2016.”

But Gaur does not believe in these reports. “We are not sure about their data collection method. It is impossible for the NCR market to have such a huge unsold inventory as most of the apartments are pre-sold before launch,” argues Gaur. Mohit Goel, CEO of Omaxe, does concede, though, that investors had moved out of the real estate sector, at least in parts of the NCR — and that realty prices were not rising. “But the situation will improve in the next three to four years,” Goel says.

“The NCR residential sector’s performance has been dismal,” says Rajeev Bairathi, executive director and head, Capital Markets at Knight Frank India. “Piled-up inventories and slow sales velocity have brought such stagnancy into the market that developers are unable to increase prices substantially. The market was already in a time correction phase for the past three years, and this is the first time that there is a decline in the quoted prices in the NCR,” he says.

The situation is grim and builders can at best, hope for a turnaround. Getamber Anand, president of the real estate lobby, the Confederation of Real Estate Developers’ Associations of India (CREDAI), is optimistic that the market will stabilise by Diwali. “Homebuyers have also realised that this is as low as home prices can go,” he says. “They are actually going forward and closing deals. The only thing is that they are choosy about the developers and the budget, but the bottomline is that transactions have started happening,” says Anand.

The Reserve Bank of India’s (RBI) housing price index indicates that housing price inflation has moderated at a rapid pace in the bigger towns, while the growth in housing prices has slowed down for the fifth consecutive quarter.

Simmering Discontent
Newspapers are full of reports of police action against builders that have failed to deliver homes to buyers after taking a substantial amount of money. The directors of a real estate company in Noida have, for instance, been booked for fraud, cheating and forgery on the orders of the chief judicial magistrate, after a group of home buyers filed a complaint. Reports say home buyers had alleged that the company had taken bookings for a project named Gayatri Aura on Noida Extension in 2011, but had not even excavated the ground to begin construction work. Recently, a Delhi builder was arrested on charges of duping over 450 investors across Faridabad, Gurgaon, Rewari, Kotputali, Chhatarpur and Haridwar.

All police stations across Maharashtra have been directed to register complaints against errant builders, who cheat flat buyers and violate building norms. In a circular issued early in July, special inspector general of police Prabhat Kumar instructed police commissioners in the state to take action against people who file such complaints. The circular stipulates action against developers who accept 20 per cent of the price of a flat but do not register the agreement, or those who fail to form a housing society within the specified four months after handing over flats to buyers. The circular says the police can even register complaints against builders that have failed to hand over property on time to buyers, or against developers who have delivered apartments without procuring the mandatory building occupation certificate.

The Maharashtra chapter of CREDAI has, however, described the circular as “disturbing”. “Holding builders solely responsible is a dangerous sign for business, especially when there are frequent changes in building rules and regulations. We will talk to the authorities and seek a clarification,” says a senior executive at CREDAI.

In Pune, the Kondhwa police booked two Mumbai-based builders and their nine associates early in July for allegedly taking money from homebuyers but failing to hand over apartments within the stipulated deadline. Recently, the Pune rural police booked Dehu Road-based builders for not executing a conveyance deed for flat owners at a housing complex on Dehu Road.

In June, the Consumer Disputes Redressal Commission in Chandigarh sentenced the managing director of a real estate firm to a three-year jail term and imposed a fine of Rs 10,000 each on two offenders for failing to comply with its earlier orders. The report said Sukhm Infrastructures of Chandigarh had floated a scheme for allotment of residential/IT/ITES/industrial plots at Mohali. The charges against the company include fraud and unfair trade practices.

Such news does not simply point to truants within the industry, but also to the growing discontent of home-buyers and their growing distrust of builders. Agitations, protests and complaints against developers like Unitech, DLF, Supertech, Jaypee Group, Amrapali and several others across Delhi and the NCR, Mumbai, Hyderabad and other real estate hot spots, are now rampant. Social media is helping customers connect and express their anger and frustration against errant developers.

The Malaise
BW Businessworld tried to get to the root of the malaise and spoke to developers, consultants and real estate experts. Supertech chairman Arora cites two specific reasons why projects have been delayed in the Noida and Greater Noida markets. “For two years, there was no land acquisition because of a court order. Then the order of the National Green Tribunal and restrictions on construction within a radius of certain kilometers added to the negative sentiment,” says Arora.

Vineet Relia, managing director, SARE Homes, points to a plethora of problems that plague developers. “Multiplicity of permissions required from different authorities and ensuring approvals, an extremely cumbersome and time-consuming process, is one aspect of the challenge. Rules and regulations that vary across states make matters even more complex,” he says.

Hemant Tikoo, chairman, Experion Developers, concedes that most developers fail to deliver on promises, citing delay in payments from buyers. Other factors too delay deliveries. “Sourcing of funds is key. With banks tightening credit conditions for the real estate sector, developers have to borrow funds at a very high rate of interest from banks and lending institutions,” says Tikoo.

Geetamber Anand of ATS Greens says customers too are responsible for the delays, as they fail to make payments of due instalments on time. “Defaults in these areas are a common problem. Sometimes, even banks that had agreed to provide funds, back out for a number of reasons. Every once in a while, contractors hired by developers fail to stick to timelines, leading to subsequent delays in delivery,” says Anand, who is also the president of CREDAI.

Shveta Jain, executive director, Residential Services at Cushman & Wakefield, cites two other reasons for undelivered projects. “Lack of proper planning and project management and delays in regulatory clearances are major factors that can lead to delays in project deliveries,” she says.

Abhishek Goenka, partner, Real Estate, PwC India, says in some instances investors had exited because of stagnant prices and low returns. “Lack of trained manpower and poor project management are common reasons too that add to delays,” says Goenka.

Other factors that delay projects include an overall economic slowdown, sluggish market conditions, slows sales and tightening of lending norms by the RBI and banks. Developers across India often cite such reasons for delays in delivery of housing projects. Other factors include stretched balance sheets of contractors, unavailability of steady labour, government policies, issues pertaining to land acquisition and regulatory clearances.

Some developers, though, are completing their projects. “We have realised that on-time delivery is a critical factor for homeowners and we, at Tata Housing, are giving top priority to this,” says a spokesperson for Tata Housing. “Technology not only holds the key to these issues, but also a promise for the sector to react more effectively and efficiently to the changing market conditions. It has also helped us ensure timely delivery of projects,” he says.

The Way Forward
Most developers are simply hoping that a miracle would change the buying-selling cycle. Relia of SARE Homes says, “In the days ahead, India’s real estate market is bound to become more professional and transparent, benefiting all stakeholders. Meanwhile, one needs to remain patient and positive while waiting for the market turnaround to happen.”

Going forward, prices are expected to rise modestly. The setting up of the Real Estate Regulatory Authority is now expected to ensure time-bound delivery of projects and more efficient and transparent dealings with developers. Logically, consumers should now be able to regain trust in real estate projects and return to invest in the sector. Inflation under control, low interest rates and a surging economy will undoubtedly induce faster growth in the residential real estate sector in the mid to long term. The most convincing signs of revival, though, should be visible by the second quarter of 2017.

The outlook for the real estate sector is more positive this year than last year. Developers keen to take advantage of the improving market dynamics still need to regain the confidence of consumers, though.

Novel Schemes
Sluggish sales have compelled developers to lure customers with lucrative schemes and marketing ideas. Ashiana Housing, for instance, offers trial homes where customers can stay for as long as a week before deciding to buy the property. Omaxe offered all-expense-paid trips to Singapore for a select group of customers who bought houses in their Grand Omaxe project in Lucknow. The Lodha Group in Mumbai offers rides in luxury cars for site visits, pictures at the site and refreshments. Piramal Realty, Mumbai, organised a flower show at their Vaikunth project. Developers in the Noida and Greater Noida area lure customers with on-site weekend festivals, where invited families are offered meals, refreshments and fun activities for their kids.

Ray Of Hope
More and more home buyers seem to prefer established and reputed brands like Tata Housing, Oberoi Realty, Mahindra Lifespaces and Godrej Properties, as these players deliver their projects on time.

“Last year, we delivered 3,000 homes and this year we plan to deliver another 5,000 homes across segments,” the Tata Housing spokesperson says. Tata Housing was among the first developers to set up in-house pre-cast facilities in Bangalore for quick delivery of quality homes for customers. “We have been frontrunners in deploying construction technologies, such as hollow block masonry, Plasswall, use of steel reinforced expanded polystyrene concrete panels as load bearing walls, Mivan formwork and use of bio-enzyme for subgrade improvement in internal road construction,” he says.

Approximately 31,200 residential units were launched across the top eight cities in India in the first quarter of 2016, which was a 27 per cent increase year on year, according to Cushman & Wakefield data. The market for residential property slumped in 2015, but witnessed a remarkable turnaround in the first quarter. Launches of affordable housing increased six-fold in the first quarter of 2016, as developers anticipated a greater demand in the price-sensitive segment of the housing market.

Both Arora of Supertech and Anand of ATS are confident that the Real Estate Act, 2016 would bring relief to homebuyers and restore confidence among them. So long, builder drawn sale agreements have tilted heavily in favour of developers. Developers were compelled to pay a fixed amount as penalty per sq. ft, in case of project delays, while homebuyers were liable to pay a high rate of interest for delays in payment. The Act will ensure parity in interest payable by homebuyers and developers in case of default by either.

The Act strives to establish speedy dispute resolution mechanisms through adjudicating officers and an Appellate Tribunal. It gives consumers the option of approaching consumer courts at the district level to redress grievances. The Act also prohibits promoters from changing plans and designs mid-way without the consent of at least 66 per cent of homebuyers, which would protect consumer rights.

“We are very hopeful that with the monsoon and GST coming in, the real estate market is going to do better and that by Diwali we should see a stable market,” says Anand of CREDAI. It appears that hope and prayers are the only solace left to homebuyers who are eternally waiting for their dream homes till cost of borrowing money eases for a fresh cycle of buying and selling to start.

A Must Checklist before Buying Property
Real value of property: Prospective buyers should assess whether the price of the property was commensurate with existing market value through brokers, the neighbourhood and the registrar’s office.

Resale Value: Buyers should purchase property likely to bring decent returns, so that should the need arise in future, the property may be sold. The infrastructure projects planned, current and future connectivity to other locations and social infrastructure comprising schools, colleges and hospitals and proximity to commercial or retail hubs, are upsides of a location.

Goodwill of the brand: A thorough background-check of the builder in terms of the number of projects completed, time taken to complete a project and the quality of construction, will help.

Legal Aspects: Lawyers proficient with transactions in the particular region should be hired to conduct due diligence on the ownership of title over the property or any encumbrances on the property.

Buyer Agreements: In the process of buying and negotiating, a buyer should be aware of all the clauses that protect his or her rights and those that safeguard the developer. Important issues that need to be carefully analysed, are interest charges, penalty, default charges for a buyer and clauses for refund of payments, should the project be scrapped or remain incomplete.

ashish.sinha@businessworld.in; @ashish_BW