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Journalism of Courage
Rajesh Mehta,a software developer,makes two payments every month: one is the equated monthly installment on the home loan for a flat he has bought in Eden Park,Indirapuram Ghaziabad,UP,and the other is the rent for the flat he lives in at present in Noida UP. His developer had promised to deliver the flat by December 2008,but so far it is not even half complete. Mehta is one of thousands of buyers across the country caught in the net of real estate developers who have taken massive advances but have not been able to adhere to the delivery schedule.
According to Mona Chhabra,Associate Director,Real Estate Practice,Ernst amp; Young,A number of developers are delaying construction as they are facing a liquidity crunch. She explains that these builders have spent a lot of capital on acquiring land banks at high prices in the last few years,and now it will take some time for them to be able to generate cash flows from them. Further,she adds that due to the economic slowdown sales have been affected,and that has made it all the more difficult for developers to find cash.
WHAT WENT WRONG
To understand why projects are getting delayed,you need to go back a couple of years to the time when the realty market was booming. Developers would buy land,get clearances,and then begin sales sometimes,unscrupulous ones began sales even without a plot of land. So high was demand that entire projects would get booked in less than a week.
Now,if you are naïve or a simpleton,you would imagine that the developer would take your money and start building your flat. No,by no means would he do that. Instead,he would use your money to buy another plot of land,start sales there,and gather even more money. Once this had gone on for some time,there came a stage when middle-rung builders had as many as 75-80 or even more projects to execute.
Alas,developing projects does not happen overnight. Having bought so much land and remember,land prices had shot up very high,the builder is in many cases not left with enough money to develop them. And then the boom ended,sales slowed down,and banks are wary of lending to the sector.
It is as if builders went on a binge and are now suffering from indigestion.
THE CONSEQUENCES
Most families,when they buy a new flat,want it delivered at the earliest,so that their ordeal of making double payments ends. When projects get delayed,their financial planning goes for a toss.
Such delays also affect the builders reputation. According to Dhiraj Jain,MD,Mahagun Developers,When people cannot move into their properties at the time they were promised,it affects the developers reputation. Adds Sunil Jindal,CEO,SVP Group: No reputed builder treats the aspect of possession casually in todays competitive real estate market. Alas,it appears that not too many care for their reputation.
Sentiments towards the entire sector get affected. When the number of delayed projects increases,it adds to the lack of confidence in the market, adds Jain.
WHAT BUILDERS NEED TO DO
To ensure that their projects get completed on time,builders clearly need to give up their habit of taking on more than they can chew. Projects need to be conceptualised after a rigorous demand-supply analysis so that they sell even in hard times.
Builders,who have too much on their platter,need to devise a strategy for getting out of the trap. According to Chhabra,they need to rationalise their asset portfolio,selling off land parcels that dont make for viable projects. And to get their finances in order,they could undertake debt restructuring and equity infusion.
Navin M Raheja,MD of Raheja Developers,hits the nail on the head when he makes the point about channelising cash flows from one project into developing that project. If a developer ensures that the cash flows from a particular project are utilised for the construction of that project only,there will never ever be a problem in delivering flats on time. The problems arise when developers route the cash flows of one project into other activities.
To ensure viability of projects,Bhim Yadav,CEO,Falcon Realty Services,stresses the importance of right planning. What matters for ensuring the viability of a project is where the land is located whether it is centrally located or 40 kilometres away from the city centre. According to him,the builders execution capability is another important factor in ensuring adequate cash flows.
GOVERNMENTS APATHY
The Ministry of Urban Development had drafted a Real Estate Regulator Bill in 2006,but it has not become law yet. The proposed bill imposes severe penalties on developers if they fail to adhere to project completion deadlines: he will have to refund the entire advance amount along with interest.
Raheja approves of the provision. If such clauses become mandatory in the purchase agreement,it will become tough for developers to default on their deadlines, he says. At present,in the absence of stringent regulation,barring top developers most do away with the penalty clause in the sales agreement.
WHAT SHOULD CUSTOMERS DO
On their part,customers too need to do a lot of due diligence in order to avoid getting stuck with builders who lack execution capabilities. Visit older projects of the developer from whom you plan to buy a flat,and speak to a few residents there. This will give you an idea of whether the developer had stuck to the deadline while building that project,his execution abilities,and his overall attitude towards customer service.
Buying projects from builders who are on the pre-approved list of a bank also helps. This means that the bank has done its own due diligence on the financial viability of the project and the builder and found it satisfactory.
Finally,the responsibility for choosing the right builder rests on you. Since such a large portion of your lifes saving is at stake when you buy a house,invest a lot of time and effort in choosing the right builder is worthwhile. Otherwise the price of negligence can be high. l
praveen.singhexpressindia.com
