Will 2016 be a year of execution & deliveries?

Vinod Behl

The passage of the tough consumer-friendly real estate regulation, aggressive activism shown by homebuyers, media and courts in the recent months and realty reforms to fast track approvals and ease funding, are likely to ensure that the current year turns out to be a year of execution and completion for the large numbers of pending projects, bringing in the much needed relief to distressed homebuyers.

The intensity of the problem of project delays/delivery defaults can be judged from a recent report released by PropEquity. According to which about 8.67 lakh units in 4,479 projects are stuck with average delay ranging from 20-30 months, with the highest number of 2.99 lakh incomplete units in NCR, followed by 2.39 lakh in Mumbai Metropolitan Region and 1.05 lakh in Bengaluru. The projects with delay ranging from one to one-and-a-half year, number 2,912 with 4.05 lakh units, with MMR topping with 1.08 lakh units in 950 projects followed by NCR with 95,718 units in 170 projects. These large-scale defaults and long delays in project completion are largely due to economic recession and allied factors.

The blame game

Developers hold authorities wholly responsible for project delays due to delayed sanctions. According to Anil Sharma, CMD, Amrapali Group, there are a number of factors beyond developers’ control like land acquisition litigation, NGT issues, fund crunch, higher construction cost which had badly hit the projects of developers like them in the Noida region. Prashant Solomon, MD, Chintels India, says, “What is a matter of concern is that even Real Estate Regulatory Act (RERA) will not be much effective in tackling the issue of delayed approvals as authorities, contractors, architects, structural consultants are not covered under it.” But what these developers conveniently overlook is over-leveraging and fund diversion by them which is one of the major reasons for the present mess.

In the current scenario when there is aggressive activism shown by home buyers, media and courts in the backdrop of newly passed RERA, it’s not in the interest of developers to delay projects. Also, unlike in the past, when developers and buyers would not mind delays as the property prices were appreciating, today the situation has reversed with stagnating or declining prices.

Moreover, developers are facing increasing pressure from buyers and courts to pay penalty@18 per cent interst (what they charge from buyers in case of payment default) and this provision is there in RERA. Farook Mahmood,CMD, Silverline Realty & President, FIABCI, also feels that it’s in the interests of developers to fastrack projects to boost confidence of buyers to invest especially as compared to customers money which has no cost attached to it, borrowing money is a costly proposition.

Tie-ups to tide over crisis

However, the financially stressed developers with stuck projects have found a way out. They are tying up with bigger and established developers or with specialised development management companies offering end-to-end solutions, to tide over the crisis. Bigger brands like Godrej, Tata, DLF, Mahindra, L&T, IREO, Piramal etc are entering into contracts with developers of stuck projects, in raising money, executing projects and selling under joint brand.

Development companies are helping those developers who have land and money, but lack capability to construct, market and sell homes. Godrej has taken up four projects, SARE has reportedly signed three projects and Tata, which has one project under its belt, is to take up four more projects this year.

It’s a win -win situation for both the stressed developers and established brands. Small players with land and project sanctions but without money and lacking project execution, marketing and selling capability, get necessary funding, brand equity and expertise to complete and sell project.

Bigger players, on the other hand, earn handsome revenue with this asset-light model for expansion. But Vineet Relia, MD, SARE, thinks that while PE funds and joint developments may help, yet, there will be some time lag before these can lead to the completion of projects that are already under construction.

Many developers are fast tracking their incomplete projects, especially breaking their bigger projects into smaller modules for easier execution as they do not want that their ongoing projects should come under the ambit of tough RERA law. As such they are identifying and taking up those projects where lesser work is pending. And in case where there are issues of cash crunch, they are selling the distressed projects or going in for joint development.

As RERA gets notified on May 1, 2016, developers will be forced to comply with it. Says Farook Mahmood, " Developers are worried that RERA will hurt them as they would be treated as defaulters and it is in their interest to put their act together now lest they land in a bigger soup”. Agrees Sushil Mittal, Founder President, Association of Certified Realtors of India (ACRI), “Developers are under tremendous pressure to complete pending projects before RERA gets implemented in states over a period of one year or so. Under RERA, they have to give full disclosures, including date of completion and will face tough time in selling as home prices will increase since under RERA, they are mandated to sell under carpet area only”.

Vineet Relia has the last word on whether 2016 turn out to be a year of execution and delivery, “In case of some projects 2016 may well be the year of deliveries. But it will not be a year of deliverance for the real estate sector as such because many projects continue to face various hurdles, impacting timely deliveries”.

But all said and done, this year will definitely turn out to be a positive year for project completion and deliveries.

Ray of hope

There’s a hope to tackle the serious problem of project delays as today there is greater liquidity in the market, especially as NBFCs and PE funds are offering cheaper debt money @ 16-18 per cent interest rate as compared to the interest rate of about 20 per cent which they were charging earlier.

Players like Piramal, Indiabulls Real Estate, Indostar, Altico, KKR have been aggressively funding real estate projects. Santhosh Kumar, CEO—Operations, JLL India, says that besides improved liquidity, many stressed developers are also liquidating their assets to ensure faster completion and delivery of projects, though they need to adhere to strict financial discipline. Solomon, however, believes that except for FDI, the issue of funding with regard to ECB, for group housing, funding against land and cheaper bank funding still needs to be addressed.