April witnessed two important events that may have a big impact on the real estate sector in India. While the Economic Offence Wing of Delhi Police arrested Unitech managing director Sanjay Chandra and his brother Ajay Chandra for allegedly failing to develop a project despite receiving money from homebuyers, investors of Jaypee’s wish town project in Noida filed First Information Report (FIR) against several individuals including Manoj Gaur, chairman and chief executive officer (CEO) of Jaypee Group Infratech.
These two projects are not cases in isolation and the issue of delayed delivery is something that homebuyers across the country are facing at the hands of several developers. Data sourced from Liases Foras, a realty research company, show that 1.53 lakh housing units in 1,879 projects across 8 major cities are delayed by three years. The number of such housing units jumps sharply if one looks at projects delayed by two years or more, as a total of 2.34 lakh housing units are facing delays of more than two years in just two major markets — Delhi NCR and Mumbai.
Industry experts and insiders feel that new developments such as arrest by enforcement agencies and FIR against developers by homebuyers and investors will not only be a matter of concern for developers who have delayed their projects but will also force them to make genuine effort to complete their project. It is also likely to bring in efficiency within the industry, as developers will now desist from practices such as diverting funds meant for one project into land investment for another.
The data show that Mumbai Metropolitan Region (MMR) has the highest number of projects that are facing delays, followed by Pune and then NCR market. While MMR has 838 projects facing delays of over 36 months, the number for Pune is 254 projects. In the NCR market a total of 213 projects have been delayed by over 3 years.
“It is a factor of the total number of projects in the region. The NCR market has only around 900 projects and broadly the average size of projects in NCR is large. The MMR region has over 4,000 projects and the nature of most of the projects is small with one to two towers. Hence, MMR has a high number of projects facing delays,” said Akash Bansal, head the North India operations of Research and Advisory for Liases Foras.
Even as real estate sector is largely dependent on local factors such as state regulations, local demand and job environment, the delay of project has been a pan-India phenomenon and experts say that the reason for delays have also been similar. Industry insiders agree that while there are regulatory hurdles that also result into delay of projects, majority of the projects are facing delay on account of developers siphoning of one project’s money into another project. “Many developers siphon off the receipts of one project and buy land for another project in the hope that sales and cash flows would continue. However, as the cash flows dry, the projects witness delay,” said Bansal.
Impact on market
Delay in delivery hurts the end-user the most, as he/she has to bear the burden of both equated monthly instalment (EMI) and rental till such time that the possession is offered. While the investor sentiment on the real estate sector is at a low on account of high unsold inventory across major markets and stagnant prices, the homebuyer sentiment has dipped on account of long delays in delivery of projects by a large number of developers across the country. If delays of up to one year is taken as a normal affair by homebuyers these days, delays of two to three years have become a common phenomenon and that has impacted homebuyers in a big way.
Samantak Das, chief economist at Knight Frank, said: “Over the last few years, homebuyers have been badly exploited by the real estate sector as several developers have taken customers for a ride. This continued as no central or state authority took strict action against them. I think that these developments of arrests and FIRs against developers will force developers to change such practices and the market will evolve for the good.”
Some others feel that the entry of the real estate regulator will make it tough for non-serious players to operate and will systematically remove such practices out of the market. Industry players feel that a lot of such issues within the industry will get addressed once the Real Estate Regulatory Act (RERA) is implemented.
“With the implementation of RERA, we foresee delays in project deliveries to go down, as developers rush to complete previously launched projects to avoid penalties. We strongly believe that developers with good track record, strong financials and low leverage to external debt are expected to perform better in the current environment,” said Samir Jasuja, founder and CEO at PropEquity.
Some in the industry feel that while making arrests is fine if it is established that the developer had malafide intention, authorities should also look into genuine reasons for delays, as a lot of projects are also delayed because of various challenges faced by developers. “All cases should be looked into separately, as there may be various reasons for delay. However, if there is a malafide intention of the developer, he should be penalised,” said a major developer in the NCR region.