Will CCI crackdown against GDA, DDA hit real estate companies?
Despite the lunatic traffic on Vikas Path, the building of the Ghaziabad Development Authority (GDA) is easy to locate. It towers over the street as the most impressive piece of architecture in a town that gets all its ideas from Delhi, next door. The Authority, too, borrows its mandate from Delhi Development Authority (DDA).
Both are being probed for anti-competitive conduct by India’s fair market regulator, the Competition Commission of India (CCI). Except this time it is GDA that has scored a first of sorts as a government housing agency. On the last day of February, it was slapped with an over ~10 million fine by the fair market regulator.
The regulator held GDA had unfairly quadrupled the price of flat it sold to those meant for weaker income groups. It is an “anti-competitive conduct”. The order is a first against a government housing agency.
The CCI is investigating the DDA for a similar cause. Since GDA has earned the stiff penalty, chances are DDA, too, might not pass the test. The order has significance for private sector real estate companies also, who are eagerly eyeing the low-cost housing market, after it has been given the status of infrastructure sector.
The impact of the order is, thus, potentially big. It will cascade through the board rooms of most real estate developers. A typical complaint against these companies is how they jack up prices after they get bookings for the flats. The CCI frown could make it very costly to make those revisions now. That could be welcome news for the central government that has made providing shelters for all of India’s homeless by 2022, a major governance plank. The urban development ministry estimates the urban housing shortfall at 10 million, though an earlier estimate for the 12th Five Year Plan takes it close to 19 million. Either way those are big numbers.
What is the case against GDA that the CCI has upheld? In 2008, GDA had floated a housing scheme for low cost residential flats, or economically weaker sections, in Ghaziabad. One of those who got lucky in the lottery among the applicants was one, Satyendra Singh. The price of the flats was pegged by GDA at ~200 each, in its allotment letter of May 2009. But there has been a delay of eight years and even now “as on date the status of delivery is not known”. Yet, GDA in November 2015 told Singh and others to pay up ~700 to claim possession. Otherwise they would forfeit their claim. Singh complained to the competition regulator.
“The Commission observes that there has been an inordinate delay of more than eight years in the delivery of flats to the allottees of the Scheme. It is observed that (GDA) has not been able to provide a reasonable explanation for the delay in giving possession of the flats…,” the CCI noted in its order.
Fixing the reasons why the CCI thought GDA should be penalised, the order notes “that for the allottees there is no provision for compensation for the delay in delivery of possession of the flats…as well as (redress against) the imposition of unfair condition in the sale of services”. So, by asking for more money GDA has abused its dominant position and made the transaction with the flat buyers “one sided and unfair”. It is a fairly stiff set of observations.
Experts agree. Anuj Puri, chairman of Anarock Property Consultants (formerly Jones Lang LaSalle Residential), notes, “GDA raised the prices of EWS flats by 3.5x from 2008 to 2015, which is a massive hike, and that too without any enabling provision either in the brochure of the scheme or allotment letter.
In addition, the condition for levying penal interest @ 10.5 per cent per annum in case of delay in the payment of the quarterly instalments by allottees without a corresponding provision for GDA in case delay in giving possession of the flats is being one sided and unfair”.
That the GDA has erred is not in doubt. Its officials said they were studying the order. Would the CCI verdict serve as a warning to the private sector real estate companies too? Puri thinks it would. “Private developers already build in clauses to safeguard themselves against such type of orders and are likely to continue doing so considering the stringent norms and presence of an active watchdog in the form on the CCI”.
There are reasons for the CCI to be worried. While the loans from EWS customers for banks are not big, yet as house prices in this segment surge those could add to loan delinquencies. Low-cost housing projects are expanding across the cities with attendant implication for bank loans. An India Ratings report notes that affordable housing projects witnessed a rise in their contribution to the overall sector sales to 20-40 per cent rise in FY18. “The uptrend is likely to gain momentum, with bank credit drifting towards the affordable segment”.
Another report from Crisil in December 2017 notes “delinquencies in the loan against property market are set to rise 70 basis points (bps) to 3.3 per cent this fiscal, even as underlying risks stemming from moderating growth, intensifying competition and falling yields come to the fore”.
Ravi Sodah, senior vice-president (equities) at Elara Capital, agrees that the CCI order would make the companies “more cautious to build in safeguards”. But he is not sure if this order would make them fall in line immediately. “The cement case shows how these orders can be dragged for years. It was appealed against in the tribunal and then there is the Supreme Court”. Most real estate companies plan to construct houses for weaker sections in cities on land parcels obtained through private public partnership projects. Those plans are in turn vital, to the smart city projects. If the competition regulator looks bleakly at price increase for houses built there, the estimates for those projects would have to be redrawn.