Will the 20:80 formula click

Written by ENS Economic Bureau | Updated: May 18 2013, 14:14pm hrs
PaymentDevelopers are wooing hesitant buyers with seemingly attractive payment schemes. (Reuters)
Payment schemes such as 20:80 introduced by developers have made some impact in offloading inventories. Its success hinges on the price point and most important, track record in delivery, say a cross-section of experts

Developers, saddled with huge unsold inventories, are wooing hesitant buyers with seemingly attractive payment schemes.

Earlier, buyers kept off the sales counter as the price points were high, and the global slowdown resulted in delayed deliveries, and in many cases, projects not taking off at all. While price points do not look like they would witness a correction, developers are aggressively advertising payment schemes, the most popular being the 20:80 scheme and its variants such as the 25:75 or 35:65, with an aim to keep their sales counters abuzz with activity.

Under this scheme, the buyer pays 20 per cent of the unit price upfront and 80 per cent on possession, with the EMIs (equated monthly installments) in between being handled by the developers. This is usually advertised as no pre-EMIs for a certain duration. Such developers undertake to pay the EMIs for up to two years, with the assurance that the buyer will get possession of the unit by then.

For example, if a flat costs Rs 40 lakh, the bank will pay Rs 30 lakh (80 per cent of cost) to the developer, say at an interest rate of 10 or 11 per cent. The developer will pay around Rs 25,000 per month to the bank for two years.


It is a huge gamble for developers who are taking the responsibility for interest payments on behalf of the buyer for a designated period. For some developers, however, it appears the move is yielding dividends. Enquiries are increasing, which has led to increased sales. Deferred payment schemes like 20:80 and their variants have emerged as a major tool to stimulate sales. In Delhi NCR, developers like CHD, Indiabulls, Nirmal Lifestyle and Bdi, are offering the subvention scheme, which has resulted in improving their sales, says Rohit Kumar, head of India research at DTZ, a property consultancy.

Raheja Developers, a leading player in the Delhi NCR market offers 50:50 payment schemes for some projects under development, says sales have picked up. Sales have gone up by 50 per cent in the Gurgaon market, after the implementation of this scheme, says Harinder Dhillon, a spokesperson for the company.

Schemes like 20:80 have existed in the market, but they started becoming popular since last year. 2012 was a difficult year, which witnessed slow sales amidst liquidity crunch being faced by developers. Such attractive schemes and offers were launched and profusely marketed by developers to help boost sales, says Samir Jasuja, CEO, PropEquity, a real estate research firm.

The scheme has shown results in the Mumbai market, at least for some developers. Sales have surely picked up in Mumbai (of course limited to specific projects only) after stagnating or narrowing through 2011 and 2012, says Abhishek Kiran Gupta, real estate analyst at Bank of America -Merrill Lynch.

Gupta, however, adds that one should not become exuberant as this is not yet verified by clear findings. We shall get greater clarity once the second quarter figures for the calendar year come in by June-end. The first quarter definitely looked better, but I would not get too excited too early as historically the fourth quarter and the first quarter of each calendar year are typically good due to festive seasons.


Yet, such schemes are not the determining factor in influencing purchase decisions, for the Indian home buyer is equally discerning. The Indian residential real estate market is currently at a phase where sales are subject to the baseline attributes of projects proper pricing, good location in relation to workplace hubs, capital value and very importantly, immediate availability or advanced state of completion, says Santhosh Kumar, CEO-operations, Jones Lang LaSalle India.

A banker says that the scheme has swelled home loan portfolios, but cautions that it carries risks as well. The scheme seems to have taken off quite well. Banks are safe as the property is mortgaged and they can recover their money. If the builder refuses to pay up mid-way during the two-year period, the customer will end up paying the money. Not all developers are into this scheme. Some of the reputed ones who have deep pockets have stayed away from it, said the former chairman of a leading nationalised bank. Kumar adds that when the fundamentals for a project are in place, such schemes positively influence sales.

Other analysts say that on the face of it, such schemes appear to be a win-win proposition for the developer and buyer, but did not really take off in the manner it should have. The 20:80 payment scheme hasnt been fully endorsed, especially considering what happened in Noida Extension- there is an element of uncertainty as not all projects get completed on time, says Harinder Singh, MD, Realistic Realtors, a Gurgaon-based property consultancy.


The key attribute that determines the success of this scheme is the price point. It is not very successful in cases where prices are above Rs 1.5 crore, says Mamta Gakhar, MD, Bricston Realtors, a property broker based in Gurgaon. The main reason being that the subvention scheme of 2 years costs 16-18 per cent extra to the builder and is built in the price list. So investors generally avoid this scheme and book properties in a normal construction-linked plan. That way, it becomes easy for them to liquidate their investment after the third or fourth instalment with a little profit on the amount invested.

Gakhars experience shows that the attractiveness of the scheme is maximum for price points that range between Rs 25-75 lakh. This category attracts the salaried class of buyers who are buying their first home. So this scheme saves them from the burden of paying EMIs along with their monthly rents.

As Singh adds, Home loan repayment is a long-term process, whether a concession during the initial years will prove to be beneficial or not. This means, the buyer would have to keep an eye out for the track record in delivery, for that is the only determining factor.