Underwriting homebuyers’ trust

Ever wonder why prices are going up in spite of low sales and slowdown? The answer lies in the clever marketing tactics that developers are using in association with the under-writers

A Delhi-NCR based developer recently launched a residential project at Rs3,500 per sq ft in an upcoming location. There has been nothing much to talk about except the promise of the developer that the price will appreciate to no less than Rs4500 within the next 12 months. Prima facie it looked like any other developer making tall claims about the appreciation potential of his project. But on being probed through some marketing channels, it became evident that the developer had the bespoke marketing strategy for his investors and under-writers to book profit during the construction stage of the project.

As a matter of fact, the developer had sold nearly 40 per cent of his inventory to the under-writers at a price of Rs3500 per sq ft, thus making them book a profit of nearly 30 per cent by the launch itself. This is the kind of property appreciation that hurts the homebuyers the most in this part of the world; often causes imbalance in the price index of the given market; and earns an overall bad reputation for the sector. Of course, the developer finds it convenient in the process to offload the inventory and gets liquidity which also helps him to retain nearly one-third of the apartments on hold to sell these only when he manages to manipulate the prices to appreciate sharply.

Though it is a pan-India phenomenon in a broader sense but the track record of the developers in Delhi-NCR is the worst. A recent report by PropEquity also points to the fact that the NCR cities occupy the bottom rankings in the list of investment destination with Gurgaon at the 10th position and Noida, Ghaziabad, Greater Noida and Faridabad at 11th, 12th, 13th and 14th position, respectively. The primary reason why the NCR has suffered the most is because there has been a flight of investors in a market where nearly 50 per cent of the sales are investor-driven. And hence, the desperate developers are devising new ways and means to attract the investors.

No choice for homebuyers

It is not that the homebuyers are not aware of this reality of the housing market. But they have no choice in a market that continues to be sellers’ market despite low demand, thanks to the momentum traders with black money. A survey by Track2Realty in 10 key housing markets, including Delhi, Noida, Gurgaon and Chandigarh revealed that the homebuyers carry a general feeling that a nexus of greedy investors, speculators and under-writers is responsible for the price index to shoot up during the bull run and this greed-driven housing economy often leads to the market collapse.

Price mismatch

These investors, speculators and under-writers are defined as ‘Momentum Traders’ by the homebuyers who maintain that they are the catalytic force behind the home prices shooting up to unrealistic levels— to a point where there is no co-relation between the per capita income of the given city and its housing price index.

When many of the developers — some even with a pathetic track record of delivery — announce the entire newly launched projects being sold on the day of launch itself, it defies the conventional wisdom of economics in a market where beyond the demand-supply gap stands the gigantic issue of affordability.

Artificial appreciation

Real estate project underwriting in its broader context means the developers’ nexus with the operators of black money in the market where the brokers/financiers underwrite the given project, in many cases with the condition that henceforth they will control the marketing strategy and the price points.

Of course, with the deep pockets that they have, it is easier for them to make money by the huge gap between the launch price and the artificially inflated price. Average buyers living under the illusion of property prices appreciating and the brokers’/under-writers’ discounted price being offered (which is much higher than the launch price) are easy prey and the under-writers make money through this channel.

This gap in price point between launch price and developers’ revised price is what is being projected as the appreciation of the property wherein the gullible buyers with ‘now or never’ psyche fall prey. Whereas the actual end users who have booked at the time of launch hardly find a market to exit at that level.

Play of paradox

It is a strange paradox that property prices keep on moving up despite the sluggish economy and demand. Various research agencies in recent years have reported about the amount of unsold stock lying with the developers and how it has increased over the last quarter or year. This gives hope to the end users that prices might come down to a reasonable level. However, demand or no demand, prices of residential properties in India move only in one direction and that is up.

Developers nevertheless have their own defence. David Walker, Managing Director SARE Homes, does not agree that property appreciation is just a notional appreciation. He asserts that property is a real asset on land built from steel, concrete, bricks and mortar. He says as a real asset it is an excellent hedge against inflation. Over time prices increase faster than growth in the economy and as such it is an excellent investment in addition to providing a home.

“A lot of developers offer an inaugural discount to the launch price in order to attract attention and buyers. In the short term the secondary market prices may not appreciate as high as the revised price, but over a medium to longer time period, true appreciation will take place for developments that are executed in accordance with plans and are delivered on time,” says Walker.

Ravi Saund, COO, JMS Buildtech, defends the sector saying so far the Indian realty market has hardly witnessed a notional appreciation. Indian realty continues to grow with the metros particularly their submarkets expanding and the smaller cities trying to catch up with the economic growth.

“Indian middle class has been investing in property for ages considering it to be the surest bang for the buck. Property prices have grown four times in the last decade. Various factors determine the appreciation in real estate, including the dynamics of supply and demand, infrastructure, inflation, home loan interest rates, population growth etc,” says Saund.

In nutshell, the price appreciation in the wake of overall slowdown in the economy is also a sign of distress; it shows to the market the colour and clout of black money. This is something that helps the greedy investors who are manipulating the housing market in connivance with the developers, but it hurts the end users for whom affordability is the prime concern in buying a house.

Black money angle

When a developer advertises that ‘No Black Money or Cash Component Accepted’, it is often a covert invitation to park black money. A builder thus offloads his stock to under-writers and then the under-writer sells the stock to end-users or investors. Based on the artificial demand created, the builder keeps on increasing the prices repeatedly and the under-writer then sells the property at a lower value than the current builder price.

The premium charged by the under-writer is usually paid in cash by the buyers and this leads to a circle wherein unaccounted income/cash component/black money is flushed into the real estate market.

Some analysts maintain, while requesting anonymity, that this artificial appreciation may send a signal to the market that ‘All is Well’ but plays havoc with the demand-supply equilibrium of the given city. That is precisely the reason why there is a huge mismatch in the capital value appreciation and rental yields.

Black money angle

When a developer advertises that ‘No Black Money or Cash Component Accepted’, it is often a covert invitation to park black money. A builder thus offloads his stock to under-writers and then the under-writer sells the stock to end-users or investors. Based on the artificial demand created, the builder keeps on increasing the prices repeatedly and the under-writer then sells the property at a lower value than the current builder price. 

The premium charged by the under-writer is usually paid in cash by the buyers and this leads to a circle wherein unaccounted income/cash component/black money is flushed into the real estate market.    

Some analysts maintain, while requesting anonymity, that this artificial appreciation may send a signal to the market that ‘All is Well’ but plays havoc with the demand-supply equilibrium of the given city. That is precisely the reason why there is a huge mismatch in the capital value appreciation and rental yields.

— The writer is CEO, Track2Realty