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Real estate: Delivery delayed, resale looks better

Sep 28 2013, 09:05 IST
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Most buyers do budget for delays of a few months for there are genuine problems that a developer cannot control. Most buyers do budget for delays of a few months for there are genuine problems that a developer cannot control.
SummaryHome buyers looking to settle in their dream home this year, have to wait longer.

Home buyers looking to settle in their dream home this year, have to wait longer. Studies show that for the year 2013, developers on an average would be able to deliver only a third or even less of the units they had committed for this year.

The performance of the National Capital Region has been the worst across major cities. Data from PropEquity, a real estate research firm says that only 21,371 residential units have been delivered until July, out of a promised 91,558 units, a rate of 23 per cent.

“In terms of average delay across India, more than 25 per cent of the committed supply has not been able to hit the market as per the schedule,” says Santhosh Kumar, CEO-Operations, Jones Lang LaSalle India. Markets in south have fared better in comparison to markets in north, says Kumar.

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He adds that for Gurgaon, that ratio is one-third, while for Noida region the ratio has fallen to a dismal 20 per cent. “Cities in the south and west such as Pune and Mumbai have had much better performance in terms of delivery committed supply of 2013. Pune and Mumbai could so far score deliver more than 40 per cent of committed supply of 2013,” says Kumar.

Assuming the average time period of construction at 3-4 years, the projects should have been launched during the period 2009-2010.

FACTORS WITHIN CONTROL, AND WITHOUT

Most buyers do budget for delays of a few months for there are genuine problems that a developer cannot control such as supply of critical raw material such as cement. “There are many factors are responsible for these delays. At the one end are factors that are created by developers and at the other end are factors outside their control,” says Venkatesh Panchapagesan, head of the Century Real Estate Initiative at the Indian Institute of Management, Bangalore.

He identifies four factors created by the developers: One, shortage of capital, as capital for construction is tightening since banks no longer lend to this sector freely. Private equity firms are worried about currency risk and have not been able to exit their legacy investments profitably, and schemes such as 80:20 that allowed developers to borrow using customer’s credit has also been effectively banned by the RBI.

The second factor is over-leveraging. “Many developers had borrowed a lot in the past to buy land banks. Now that demand has slowed down and interest rates have gone up, they are stuck servicing large amounts of debt which sucks out most of their cash flow. They don’t have too much money left for development,” says Panchapagesan.

Third, the shortage of land, and announcement of projects where land had either not been acquired or some land title issues had not been resolved, and fourth, incomplete approvals and the over ambitious announcement of projects especially when all required approvals have not been obtained.

All this leads throws the buyer’s plans off track. When the house isn’t delivered by the promised date, there are additional costs, both upfront and hidden that the buyer has to foot. There is the EMI payment that goes on regardless of the extension of the delivery timeline, and the additional rental expense until the house is delivered.

There are then the factors that are outside developers’ control. First, slackness in customer demand. “Many developers had gotten used to financing construction with deposits made by early customers. Slowness in booking has reduced this liquidity. Many developers did not plan for this to happen. Also finished houses inventory has gone up considerably costing developers quite a bit,” says Panchapagesan.

Kumar says that pan-India inventory is now well above the comfort level of 14-15 months. Mumbai has an inventory of close to 48 months, Delhi of 23 months and Bangalore of 25 months. “These are close to the levels of 2007, when the residential real estate market’s inventories were at an all-time high,” says Kumar.

The second factor is increase in land prices. “Those who have to depend on buying land for development are the ones that have gotten mostly hit in this rapid land price increase. Those who do joint development with land owners are better able to weather it,” adds Panchapagesan.

Then comes the increase in input costs such as cement and steel and the fourth is the increasing rate environment and the currency depreciation that has hit developers who borrowed locally and overseas, alike.

“Prolonged delay is seen mostly in tier 2 and 3 cities where developers have launched the project and due to market conditions they failed to sell. Certainly, consumption pattern of the local market is very important for real estate development as most of housing requirement is local or from peripheral areas. Large projects in tier-2 or tier-3 cities are facing huge problems due to slow movement of inventory,” says Navin Raheja, president, National Real Estate Development Council.

BARGAIN HARD, BARGAIN WELL

Given that delays are par for the course, there is another less explored arena — the resale market — that has the prospect of good deals, especially if the purchase decision is geared towards end-use.

“People who invest in depressed markets are always in advantageous situation and make good returns on capital investment despite paying higher interest rates,” says Raheja.

The current slowdown in demand and high interest rates has also hit investors hard and this segment of the buyers are losing their holding power and are looking to offload them as soon as possible, says a director of a leading brokerage who declined to be identified. The only participants in the market now are end-use buyers and for them, the situation looks promising. Unverified data from industry sources point to a decline in the range of 10-25 per cent across metropolitan markets.

“This is mainly due to the inability of investors to keep up with high costs. Most were looking to cash in on the boom, and have now put their houses up for sale,” says Advitiya Sharma, co-founder, Housing.co.in, a real estate portal. Sharma adds that the number of resale listings covering metropolitan markets across major portals has gone up by 30 per cent over the last six months.

Kumar too agrees that the resale or secondary market has good opportunities but buyers should factor in higher capital requirements and also additional costs.

“Secondary market in current real estate outlook seems more promising as a buyer can get better price points. But the buyer may need to have higher payment thresholds. Also since in many of the projects, developers have put in prohibitive measures such as high transfer charges before the completion of project, valuation might also not be that attractive in some cases.”

Panchapagesan advises the buyer to bargain hard, for there are deals that can be got. “Buyers must aggressively bargain to get good already constructed properties at a discount rather than book now and wait for ever for development to happen. My mantra for prospective buyers is bargain hard after doing research.”

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