Does un­der­writ­ing lead to ar­ti­fi­cial short­age of hous­ing stock, cre­at­ing pseudo de­mand and push­ing up prices?

HT Estates - - FRONT PAGE - Jee­van Prakash Sharma

Can a de­vel­oper sell 800 apart­ments of a group hous­ing project in just three days, es­pe­cially when the realty mar­ket is slug­gish and faces an over­sup­ply of hous­ing stock? Seems highly im­prob­a­ble yet un­der­writ­ers are mak­ing this pos­si­ble and, in the bar­gain, putting home­buy­ers at a dis­ad­van­tage.

Take this case of a de­vel­oper who claimed to have sold 90% of his in­ven­tory within a few weeks of the launch of his real es­tate project in Noida. Then he in­creased the ba­sic price of the re­main­ing stock by 10%. At the same time, a property bro­ker­age firm is­sued news­pa­per ad­ver­tise­ments an­nounc­ing the sale of hous­ing units in the same project - with a 5% dis­count on the ba­sic price. Not only that, the un­der­writer promised more fa­cil­i­ties and ameni­ties than what the project of­fered.

Realty ex­perts strongly ad­vo­cate a thor­ough scru­tiny of the the builder-un­der­writer nexus and their mar­ket­ing gim­micks which more of­ten than not ‘trap’ con­sumers into buy­ing apart­ments at prices higher than the mar­ket rate.

A north In­dia phe­nom­e­non

A num­ber of real es­tate ex­perts feel un­der­writ­ing is equiv­a­lent to black mar­ket­ing. They draw an in­ter­est­ing distinc­tion be­tween black- mar­ket­ing of es­sen­tial com­modi­ties vis a vis black mar­ket­ing of apart­ments.

“When there is more de­mand and short sup­ply of es­sen­tial com­modi­ties, let’s say onion, deal­ers hoard the stock and sell at a price higher than the mar­ket price. Ex­pect just the op­po­site in real es­tate. When there is a huge sup­ply of hous­ing stock and not enough de­mand, then the de­vel­oper, in col­lu­sion with the un­der­writer, tries to cre­ate ar­ti­fi­cial de­mand by al­lo­cat­ing a large stock of in­ven­to­ries to an un­der­writer with an un­der­stand­ing of share of profit,” says a real es­tate de­vel­oper, re­quest­ing anonymity.

Since the de­mand-sup­ply mis­match ex­ists mostly in the north In­dian property mar­ket, par­tic­u­larly in Delhi NCR, the un­der­writ­ing model is adopted by realty play­ers only in this re­gion. “The pro­por­tion of in­vestors is high in the realty sec­tor in north In­dia com­pared to other parts where end-users con­sti­tute close to 70% of the buy­ers,” says Ganesh Va­sude­van, CEO, In­di­aProp­erty.com.

The de­vel­op­ers also take the help of un­der­writ­ers to cover their risks. They are given the as­sur­ance by un­der­writ­ers that the stock would be sold in a cer­tain time­frame and what­ever re­mains would be bought by them (un­der­writ­ers).

Gen­er­at­ing black money

Ac­cord­ing to Man­ish Agar­wal, MD, Satya De­vel­op­ers, real es­tate un­der­writ­ing should be dis­cour­aged as it gen­er­ates black money and cre­ates pseudo de­mand. “Un­der­writ­ing gen­er­ates black money in the real es­tate sec­tor as the builders sell their prop­er­ties to un­der­writ­ers who then sell it to end-users. Due to this an ar­ti­fi­cial de­mand is cre­ated and the builder continues to hike the prices of his prop­er­ties. The end-users who usu­ally buy the units pay the pre­mium in cash and in this way unac­counted money flows into the mar­ket. The un­der­writ­ers also keep on buy­ing hous­ing stocks in black and it keeps cir­cu­lat­ing,” says Agar­wal.

Vishal Gupta, man­ag­ing di­rec­tor, Ashi­ana Hous­ing Limited, agrees, adding, “In the ab­sence of reg­u­la­tion in the realty sec­tor, un­der­writi ng of­ten causes mul­ti­ple prob­lems in the in­dus­try such as ( a) fi­nan­cial mis­man­age­ment, (b) de­lay in de­liv­ery due to di­vert­ing funds to some other project or un­der­writ­ers tak­ing on too many projects and be­ing un­able to han­dle them, (c) lack of un­der­stand­ing of the need of the end-user, (d) in­flated pric­ing or price bub­bles and last but not the least (e) fre­quent lit­i­ga­tions due to de­lay in project ap­proval.”

Ex­perts are also wary of the fact that the me­moran­dum of un­der­stand­ing be­tween the builder and un­der­writer is nor­mally not a reg­is­tered doc­u­ment, and can lead to le­gal dis­putes be­tween the two at any point in time.

“By un­der­writ­ing the property, the de­vel­oper thinks his in­ven­tory is sold out and tends to take fur­ther ex­po­sure on the based ex­pected cash flow from such un­der­writ­ing. In case the un­der­writer is not able to sell the un­der­writ­ten property or the mar­ket faces a slow­down, the un­der­writer backs out of the deal and/or stops fur­ther pay­ments. This squeezed cash flow brings the project cy­cle to a halt,” says Ra­jesh Goyal, MD, RG Group.

Alak­nanda CR Park De­fence Colony

East of Kailash Greater Kailash Kalkaji

La­j­pat Na­gar Malviya Na­gar New Friends Colony


An un­scrupu­lous un­der­writer is likely to charge more than the mar­ket rate (for an apart­ment)

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