Real estate developers enticing customers with interest subvention schemes to tide over the slowdown have been largely successful. But companies and analysts say the risks inherent in such schemes would ensure that they cannot bank upon them endlessly.
DLF, for instance, raked in almost Rs 600 crore from its Crest project during January-March, as disclosed by it during the annual results. Industry experts say the stellar response came on the back of a competitive subvention scheme, wherein 15% of the price can be paid in three months (upfront) and 75% can be financed by a bank without any interest till applyin for an occupation certificate. The project accounted for over 80% of the company’s annual sales in FY15.
Mumbai-based Nirmal Lifestyle launched the 20-80 scheme for its project Lifestyle City. “After the launch of the 20-80 scheme in the last quarter, sales have increased by almost 50%,” said Dharmesh Jain, chairman and managing director of Nirmal Lifestyle. Similarly, Boman Irani, chairman and managing director of Rustomjee Developers, confirmed that the group witnessed a 50% jump in sales at its Thane project, Rustomjee Urbania, when it launched the subvention scheme.
Other companies offering such schemes include Kalpataru for Kalpataru Crest and the Dosti Group for its Dosti Vihar project.
Covert discounts, such as interest subvention schemes, flooded the market in 2013 with the RBI subsequently raising concerns around them. Typically in such schemes, buyers are required to pay 10, 15 or 20% upfront, as the case might be. In a construction-linked plan, the bank would have disbursed the money as the construction progressed. But in such schemes, the bank pays the developer the entire loan amount. Till the consumer gets possession, the builder pays the EMIs on behalf of the buyer. Developers get the entire funding upfront, instead of the banks disbursing funds at every stage of construction. The home buyer begins paying EMIs once he/she gets possession.
In September 2013, the RBI, while raising its concerns over such schemes, said in a circular: “In view of the higher risks associated with such lump-sum disbursal of sanctioned housing loans and customer suitability issues, banks are advised that disbursal of housing loans sanctioned to individuals should be closely linked to the stages of construction.”
While an interest subvention scheme does boost affordability, experts caution against several risks while locking a project at the current market rate. “In case of construction delays, which is common in India, the onus of the EMI comes on the home buyer. “After the RBI’s circular, consumers are more informed of the risks associated with these schemes than before,” said Gulam Zia, executive director at Knight Frank India. Experts say that if buyers can defer a home loan by four years after paying 20% upfront, it might lead to speculative activities in future, including tampering with prices.
Still, schemes like 20-80 have convinced buyers sitting on the fence to make purchases, said Zia. But companies cannot run these schemes continuously and in the absence of “real” demand in the market, the forecast for the year remains bleak. DLF’s Crest performance, for instance, is a one-time hit.
“Despite a good fourth quarter, we are not widely optimistic about the immediate year, going forward as far as overall sales are concerned,” said Ashok Tyagi, CFO, DLF. Any notable change in demand will have to be led by considerable optimism and salary growth, said Sandipan Pal, an analyst at Motilal Oswal. According to data published by Propequity, home sales declined in FY15 in the top seven cities, with some markets such as the national capital region and Thane registering 49% and 30% decline.
Following RBI’s rap, some companies re-engineered the agreement. For instance, DB Crown, a project by DB Realty, is being marketed as a 20-80 product, but the terms of the agreement do not include a tripartite arrangement. It simply gives buyers an option to pay 20% upfront and 80% on possession. Similarly, Omkar Realtors also sold flats in its 1973 project in Worli, Mumbai under a similar scheme.
Picnic won’t go on forever
DLF raked in almost R600 crore from its Crest project on the back of a competitive subvention scheme. Nirmal Lifestyle has seen sales rise 50% since the launch of 20-80 for Lifestyle City while sales have surged 50% for Rustomjee’ Thane project.
Experts say realty companies cannot run these schemes in the absence of real demand, and any notable change in demand will have to be led by considerable optimism and salary growth.
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