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 hasn’t 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.”
Gakhar’s 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.
Old Mahabalipuram Road favours home owners most because of moderate property prices and high rental values. While Tambaram and Medavakkam have low property prices and rental values, Porur and Kolathur make a strong case for renting because of low rental values. Chetpet is the least affordable locality with high property prices and rental values. OMR and Tambaram offer a better lifestyle because of larger residential spaces.
At 6.85 sq. ft per Rs. 1 lakh, Chetpet is the costliest locality while OMR is the cheapest at 28.9 sq. ft per Rs. 1 lakh. These are some of the findings of a new report on Chennai’s real estate market conducted by ArthaYantra.com, an integrated personal financial services company.
Based on average property prices, a professional needs to save for four years to afford the down payment for a house in Medavakkam, Tambaram or OMR, compared to seven years for a house in Ashok Nagar, eight for T. Nagar, 10 for Anna Nagar or Adyar, and 10 years for Chetpet.
Other key findings include Chennai’s rise of 209 per cent in index value from 2007, with Kolathur scoring the highest rise, followed by Chetpet and Ashok Nagar.
The report attempts to provide a quantitative and merit-based answer to the question of buying vs. renting a home, says a press release, and analyses the costs of both options across 13 locations ranging from Adyar and OMR to Anna Nagar, Chetpet, T. Nagar and Tambaram. The research considered three important factors: rental value, property price and gross income.
Is it a mirage? or is it real?, and current scenario from the experts
Metropolitan cities in India are fast becoming a hub of industrial parks, high rises, residential complexes, sprawling malls and huge commercial complexes, which are gradually but steadily transforming their skyline. If you are commuting on the busy and packed streets of Delhi, Mumbai, Bangalore, Hyderabad, Kolkata or any other tier I city, you will come across brightly colored cranes, rubble, construction and hordes of workers scurrying up and down the towering skyscrapers. This surely urges you to contemplate on the explosion of real estate sector in India.
Is it a mirage?
How real is the influx of investments by speculative and long-term profit makers? Are the commitments by oversized private equity firms, overseas investors and domestic financial institutions adding to the hype and frenzy created in the concrete world of real estate?
Astute watchers in the property sector feel that the bubble is not as big as it seems. According to prominent investors, brokerage firms and property developers, there are certain factors which are failing to add the right tempering to the real estate markets in India.
It is quite evident that the funds brought in by the foreign investors are only a small percentage of the promised amounts.
Price resistance from real estate purchasers and the soaring prices of land are cutting deeply into the investor’s margins, making real estate ventures less lucrative than expected.
Bureaucratic lethargy coupled with red tape, opaqueness in regulations and the absence of insurance title prove to be other concerns for real estate investors.
According to reports by Cushman and Wakefield, there has been a 15 per cent drop in the valuation of private equity deals in the first nine months of 2012. Their observations are based on the following:
Investors are putting their money in residential deals rather than commercial ones.
PE players are showing an increasing preference towards the metros rather than class II cities in the hope of better liquidity and higher returns.
The investments are being made on the basis of the assumption that real estate prices will not change in the near future.
Investors are looking towards projects which have all approvals and licences in place and are expected to have short cycles. The assurance of quick and stable returns is guiding their purchase and investment decisions.
They are also having a greater say in the prices of projects. This is decreasing the scope for automatic price correction or defining of prices by the developers.
The current situation is raising fears of an overheated economy and real estate bubble. This has inspired the central banks to initiate a lender cutback on the amounts sanctioned for real estate loans. The act has caused an upward escalation in the rates of interest and lowered the attractiveness of home financing for consumers. As a result, the cost of home and office rentals along with their purchase price has ended up touching unprecedented heights.
So where does this scenario leave the investors and property purchasers?
A majority of Indian real estate companies are privately held and do not disclose their financial health to investors and buyers. The inability to read the right signals in the absence of readily available information on products such as retail outlets, industrial property, residential apartments and offices is causing grave concerns in the minds of the investors.
Rumors related to the misfiring of a large deal or reports of distress sales by prominent property developers is further adding to the confusion in investor sentiments.
The prices of property in the Indian markets are being stoked by the following factors:
Numerous speculative deals taking place in the hope of making faster and better gains
The rising cost of construction with respect to raw material, labor and other costs
An unexpected hike in the excise prices
Increase in service tax rates
The escalation in land prices
The present scenario in the Indian real estate markets is raising concerns with regard to future profit margins for foreign investors. Contrary to the figures in the past two years, when increasing valuation in property yielded returns as high as 30-40% on investments, the expected returns in the days to come are not expected to go higher than 15-20%.
Foreign investors are now looking towards other emerging markets such as those of Latin America and Eastern Europe.
According to analysts, this is a good time for purchasing real estate intended for long-term investment and end use. The cyclical nature of the markets is expected to push up the residential property rates in the next three years. If the investment horizon is greater than this period then it makes good business sense to invest in property in metros and other fast developing cities.
The decision to purchase property in the emerging areas should be backed by a complete analysis of the demand-supply forecasts and infrastructure plans for the region. As far as capital appreciation and rental yields are concerned, mid-range houses are expected to provide better returns than luxury apartments or premium property purchased at discounted prices.
It is has been a long and winding road for buyers. To buy their dream home, home buyers work their bone out. In present scenario, they are forced to strike a deal with the developers; putting their money at risk and paying exorbitant price for buying sweet home. But the pain does not end there; delay in project, deviations in the proposed plan, poor quality of material used is a real mental agony. Finally, a home buyer ends up living in a house with an adjusted mindset and cramped space; just to see his dream house vanish in thin air. There is no such thing called dream house until he is satisfied, when he actually lives in the bought house at peace.
There is no real guy to tame the horse called real estate; and real estate regulatory will be that one guy who can straighten things up for the all home buyers. The government is planning to put up the real estate bill for resolutions which has been pending since 2009. It seems that government is in a hurry with a general election in 2014. Better for home buyers; if the bill is passed in the current session. The real estate regulation bill proposes to create a regulatory authority which will monitor all the real estate activities. The proposed regulator will make it mandatory for all the real estate developers to launch the projects only after getting all the clearances for those particular projects from the relevant authority. To make it transparent all the clearance will be displayed in the developer’s website.
It is good news indeed for the home buyers who make lot of sacrifices to own a house and feel safe. This will address the major concerns of fraudulent acquisitions and pending clearances.
Some developers don’t talk about the carpet area and hide it under their carpet. They mislead the buyers and confuse them by using the term like, super built up area. This bill makes it mandatory to specify carpet and developers cannot sell a house using the term super area
If the bill is passed, then real estate owners cannot advertise a project before getting all the actual clearances to boost up his project image. Moreover the developers cannot collect any
money before getting all the clearances. It will be a big relief for home buyers who have to churn out cash even before seeing the project go live. It will definitely reduce the mental stress substantially.
Some developers use the projects done abroad as advertisement tool for local housing projects. This cannot be done any more.
The bigger picture is that it will increase transparency and accountability which has been found wanting for so long time. The buyers will start to know and understand better real estate terminology and clearances needed for their home. Awareness is the key point here.
Home buyers need to welcome the real estate bill with open arms
Do you think these measures will bring change; drop your comment