Home­buy­ers should still avoid buy­ing in­com­plete prop­er­ties

In the wake of the NBFC cri­sis, one of the few lend­ing sources for the real es­tate sec­tor has also dried up, which makes buy­ing an un­der­con­struc­tion prop­erty a risky move

Hindustan Times (Chandigarh) - Estates - - FRONT PAGE - Ash­wini Ku­mar Sharma ash­[email protected]

WITH LOW SALES VOL­UME, DE­VEL­OP­ERS WILL FACE SE­VERE CASH CRUNCH TO FUND THE PROJECTS AND OTHER COM­MIT­MENTS

The worse is not yet over for real es­tate de­vel­op­ers (es­pe­cially in the res­i­den­tial seg­ment) who have been fac­ing a slow­down since about five years now. Af­ter con­tin­u­ous slump in de­mand, reg­u­la­tory changes, court cases and in­sol­vency pro­ceed­ings, the non-bank­ing fi­nan­cial com­pany (NBFC) cri­sis has now come to hound the realty sec­tor. The cri­sis is all about as­set-li­a­bil­ity man­age­ment mis­match; many NBFCs are fac­ing liq­uid­ity is­sues and are un­able to pay off lenders as they gave loans to bor­row­ers for a longer pe­riod than the pe­riod for which they them­selves bor­rowed money.

The cur­rent cri­sis will cer­tainly im­pact un­der-con­struc­tion and up­com­ing projects ad­versely and prop­erty prices may take a fur­ther hit. Those who are plan­ning to buy a house in the near fu­ture need to be more cau­tious while mak­ing a de­ci­sion.

EX­E­CU­TION RISK

Typ­i­cally, de­vel­op­ers raise funds for a realty project through in­vestors, pri­vate eq­uity (PE) funds and banks, but in the last few years these in­vest­ment sources have dried up and even banks are cau­tious in lend­ing to realty firms ow­ing to sev­eral cases of de­lay and de­fault in re­pay­ment of loans. “Al­ready, lack of fund­ing in the form of bank lend­ing, PE in­vest­ments and low sales have caused mas­sive cash flow gap and fi­nan­cial cri­sis in the real es­tate sec­tor,” said Harinder Singh, chair­man, Re­al­is­tic Real­tors, a real es­tate con­sul­tancy and ad­vi­sory firm.

In re­cent times, NBFCs were prob­a­bly the only ones still lend­ing to the res­i­den­tial sec­tor. With NBFCs in trou­ble, it will be dif­fi­cult for de­vel­op­ers to meet their de­liv­ery com­mit­ments. In the ab­sence of liq­uid­ity, ei­ther con­struc­tion will stop com­pletely or de­liv­ery dates will be pushed by over a year or even more in some cases, added Singh.

In other words, this will im­pact the timely ex­e­cu­tion of projects. “NBFC cri­sis could lead to sub­stan­tial slow­down of fund in­flow for the de­vel­op­ers for at least next two to three quar­ters as NB F Cs have now be­come cau­tious in lend­ing. This may cause de­lay in com­ple­tion of un­der­con­struc­tion projects and we might wit­ness fur­ther con­sol­i­da­tion in the realty mar­ket,” said Samir Ja­suja, founder and manag­ing di­rec­tor, PropEquity, a Gur­gaon-based real es­tate, re­search and an­a­lyt­ics firm.

With low sales vol­ume, de­vel­op­ers will face se­vere cash crunch to fund the projects and other com­mit­ments. “The fi­nan­cial crunch that the NBFCs are fac­ing to­day will make it dif­fi­cult for de­vel­op­ers to keep fund­ing them­selves in ab­sence of higher sales num­bers,” said Ashish Ma­ha­jan, co-founder, PropS­tory, a Gur­gaon-based real es­tate in­for­ma­tion por­tal.

IM­PACT ON PRICE

For many de­vel­op­ers, the only way to tide over the cur­rent cri­sis would be to some­how en­hance the sales book and gen­er­ate cash flow. Re­duc­ing prop- erty prices can be an op­tion and ex­perts be­lieve that some de­vel­op­ers may go for it. “On a case-to-case ba­sis, there are likely to be cases where de­vel­op­ers of­fer lower prices to at­tract con­sumers and man­age liq­uid­ity po­si­tion,” said Arvind Nan­dan, ex­ec­u­tive di­rec­tor-re­search, Knight Frank In­dia.

Even if de­vel­op­ers do not re­duce prices, there is cer­tainly no scope for price ap­pre­ci­a­tion. “The sup­ply as well as the prices have been un­der pres­sure for some years now. The cur­rent fi­nan­cial crunch will cre­ate fur­ther stress on the sec­tor, es­pe­cially for de­vel­op­ers re­ly­ing on debt fi­nanc­ing. We be­lieve the price growth will not hap­pen for the com­ing 12-18 months,” said Ma­ha­jan. How­ever, some ex­perts be­lieve that the cur­rent cri­sis will es­ca­late the cost of con­struc­tion and de­vel­op­ers may try to pass it on to the home­buy­ers. “Such de­lays will fur­ther in­crease the de­vel­op­ment cost for builders as es­ca­la­tion of cost will trig­ger in,” said Singh.

WHAT SHOULD YOU DO?

Project de­lay can cre­ate a lot of fi­nan­cial trou­ble for end users as a lot of such home­buy­ers end up pay­ing both the rent and equated monthly in­stal­ments (EMIs) un­til they get posses­sion of their own house. “We would rec­om­mend buy­ers to look for ei­ther ready-to-move-in prop­er­ties or projects near­ing com­ple­tion from re­puted de­vel­op­ers only,” said Ja­suja.

There is a huge inventory ly­ing un­sold in each city, es­pe­cially in Na­tional Cap­i­tal Re­gion and Mum­bai Met­ro­pol­i­tan Re­gion.

Ac­cord­ing to a re­port by Li­ases Fo­ras, a Mum­bai-based real es­tate rat­ing and re­search firm, “Inventory in tier-I cities stands at 40 months as of Q2 18-19.” That means it will take 40 months to clear the un­sold stock at the cur­rent sales vol­ume. The re­port fur­ther states that an ef­fi­cient mar­ket main­tains 8-12 months of inventory. An inventory over­hang of 40 months in­di­cates a pres­sure on prices across all ma­jor cities in In­dia.

“In the cur­rent sce­nario, there are plenty of op­tions in the ready-to-move-iwn seg­ment of hous­ing to choose from. To top it up, these also come with easy fi­nanc­ing schemes and free­bies. Hence, an end user would be best po­si­tioned to buy into such a propo­si­tion,” said Nan­dan.

Apart from elim­i­nat­ing the risk of project de­lay, there are var­i­ous other ben­e­fits of buy­ing a ready-to-move-in prop­erty. Buy­ing a house is often the big­gest fi­nan­cial de­ci­sion, make it worth­while.

MINT/FILE

Re­duc­ing prop­erty prices can be an op­tion that some de­vel­op­ers may go for.

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