The real estate sector was in a slowdown for the past 4-5 years, but its problems got aggravated in 2019 following the liquidity crisis triggered by the collapse of IL&FS. “Due to the liquidity crisis, NBFCs have reduced funding to buyers as well as to real estate developers,” says Sankey Prasad, CMD, Colliers (India). There are also complaints that banks withdrew loans given earlier to housing finance companies and to housing developers after the IL&FS crisis. Since real estate directly and indirectly affects ancillary sectors such as cement, steel, tiles, paints, electrical equipment and even furnishing, everyone wanted the government to step in.
Two months ago, the government announced a Rs 25,000 crore bailout package to revive stalled real estate projects. This will be routed through an Alternative Investment Fund (AIF), with the government contributing Rs 10,000 crore and financial institutions like LIC and SBI bringing in the remaining Rs 15,000 crore. The AIF will be managed by SBICap Ventures.
Will the bailout package help?
Real estate experts are optimistic about the measure. “I have great expectations from this step because more than five lakh apartments are stuck due to unavailability of last-mile funding,” says Niranjan Hiranandani, President (National), Naredco and MD, Hiranandani Group. Most of these stalled projects are in the Mumbai Metropolitan Region (MMR) and the National Capital Region (NCR) (see graphic).
This gargantuan amount is only seed capital and not a grant. To make sure that the Rs 25,000 crore comes back, the government has put several restrictions on how the money will be used. For instance, the AIF will only fund projects that are close to completion and with a positive net worth. There is also a price restriction (Rs 2 crore for MMR, Rs 1.5 crore for other metros and Rs 1 crore for non-metros). “Due to the price restriction, only 4.95 lakh housing units might benefit from this initiative and its positive impact will be more on markets like NCR, Chennai and Pune,” says Prashant Thakkur, Director & Head of Research, Anarock (see graphic).
As supply goes up, will prices dip?
Though this move will increase the supply of units, home prices may not come down. “Additional supply will come from the unsold inventory. Major portion of these projects, which are close to completion, are already sold off,” says Samantak Das, Executive Director and Head of Research, Real Estate Intelligence Services, JLL India.
Secondly, real estate prices have already corrected substantially in pockets like NCR and are undergoing time correction (where price is flat for a long time) in other markets. Though builders are not cutting rack rates, they are offering big discounts.
Third, demand is expected to pick up in coming years because the affordability, the key driver of housing demand, is slowly catching up. “Though overall demand is still weak, demand pick up is quite strong in the affordable and mid segments. Affordability is increasing in other pockets also due to the price and time correction,” says Shishir Baijal, CMD, Knight Frank India. Mumbai is still one of the costliest markets, but the affordibility has increased significantly.
High unsold inventory means it is still a buyer’s market
New project launches reduced in 2019 due to the liquidity crisis, while sales increased in the first nine months. But inventory is still very high.
Data is for first nine months of the year | Source: JLL
The Home Price Affordability Index (HPAI) across cities has risen significantly in the past eight years. The HPAI denotes the eligibility of the average household income for a loan equal to 80% of the price of a 1,000 sq ft flat. An HPAI of 100 means the average buyer in the city has the income required to buy the house. In Mumbai, this has risen from 47 in 2011 to 90 in 2019. So, while housing in the city is still very costly, it is more affordable now than in the past.
Ready possession is still king
The widespread delays in projects has made homebuyers avoid booking in new projects. Most prefer flats that are ready for possession. Also, most buyers now are end users and investors are out of the market now due to the poor returns from real estate. “Annual price rise was only in the range of 3-4% in the past few years. Since house prices are expected to grow lower than inflation in the next 2-3 years, there is no incentive for investors now,” says Das.
Though the revival plan has boosted confidence, most experts still favour ready possession. “If available as per your requirement, go for ready possession because there are no risks involved. Besides, there is 5% GST on under construction flats,” says Pankaj Kapoor, MD, Liases Foras.
Slow price rise and rising incomes have boosted affordability
The JLL Home Price Affordability Index, which denotes the ability to service a loan to buy a 1,000 sq ft house, has shot up across all cities.
*Includes Thane and Navi Mumbai. Source:JLL
The JLL HPAI denotes the ability to take a loan to buy a 1,000 sq ft flat in the city. The index value is the average household income as % of the required household income to service a loan equal to 80% of the price of the property. So, an HPAI of 100 means the household has enough to service the loan EMI. An HPAI of less than 100 means the household does not have enough income to qualify for the home loan.
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However, there’s no need to avoid the under-construction segment altogether. “Recent reforms like RERA, the Supreme Court verdict giving home buyers equal right with the other creditors and cut in GST rates have made under-construction flats attractive,” says Baijal. There is also a greater chance of extracting a big discount when booking an under-construction flat. “While the first preferance should be ready projects with all approvals including occupation certificate, the second preferance can be projects that are almost ready (more than 75% completed) and which are offering good discounts,” says Prasad.
Checklist for buyers
Since under-construction flats are more complicated and riskier, here’s a checklist for buyers. Use this to know if you are doing the right thing by booking in a new project.
Is project RERA registered?
Go only for projects registered with RERA, because it is the first stamp of approval. RERA approves a project only if it has all approvals (from municipal corporation, electricity and water department) in place. However, these approvals are only for starting construction.
Are all details available?
Another advantage of a RERA registered project is that all relevant information will be available on the RERA website. Since housing is a state subject, implementation quality of RERA varies across states. Maharashtra has implemented RERA in letter and spirit, but many other states have not. In many cases, the data on the RERA website is not updated because builders are not furnishing details. “It is better to avoid projects if full data is not available on the RERA website,” says Abhinav Joshi, Head of Research, CBRE India.
Is builder financially strong?
Don’t be under the impression that the house will be delivered smoothly just because it is a RERA registered project. As mentioned earlier, RERA approval is only to start a project. The builder must be financially sound too. “In addition to checking financial situation of the builder, buyers should also check about other ongoing projects,” says Prasad. “Completed projects give an idea about the track record of the builder. Check whether they have delivered other projects on time,” says Joshi. Avoid builders that got into trouble with other projects. “Also, avoid builders embroiled in NCLT cases, if their borrowing is high and if there are a large number of consumer complaints,” says Kapoor.
Have you seen the locality?
Facilities available inside the projects (swimming pool, gym, etc) are mentioned by builders. However, buyers must do their own legwork. “Visit the site to make sure that the physical infrastructure matches your need. Don’t just sign in the agreement after visiting the builder’s office,” says Joshi. In addition to this, buyers must also see the social infrastructure surrounding the project. Irrespective of whether you buy the property for self-use or investment, find out about upcoming projects and hospitals, malls, educational institutes and entertainment options in the vicinity.
Is the timeline reasonable?
The approved completion date is mentioned on the RERA website. RERA imposes a stiff penalty for violating the deadline. To be on the safe side, many builders give a very long completion deadline and tell buyers that the project will be completed ahead of the deadline. Don’t take this bait. Go only by the deadlines given on the RERA website. “If you don’t find the official timeline feasible, don’t go for that deal. The long duration timelines given by builders is one reason why people are going for ready possession apartments now,” says Baijal.
Have you seen any progress?
Buyers also need to check the progress on the project before buying. “Check the construction speed of the project for 2-3 months before committing,” says Das. You can do this by asking the builder about the progress plan for the next few months and then check whether they have met the timeline. This should not be for one flat alone, but for the entire complex.
Is the price reasonable?
Make sure that the price you pay in the area is reasonable. Only a few metrics are available here. The most commonly used ones are the rental yield and EMI to rent ratio. “The rental yield is down now, but the price can be treated as reasonable if rental yield is around 3.5%,” says Kapoor. Similarly, the EMI to rent ratio is placed above four times (EMI is more than four times the rent in same place) compared to its value close to two during 2002-4 when the market was roaring. An EMI to rent ratio of close to two may not happen in the near future but it makes sense to insist that it should be close to three.
Have you asked for discounts?
The above-mentioned ratios (rental yield and EMI to rent ratio) are to check whether the rates are reasonable for ready possession flats in an area. It is reasonable to expect a discount because you are taking higher risk when buying an under-construction flat. “We are in a buyer’s market now and developers are ready to sell unsold inventory at a discount. So, bargain hard for a good deal,” says Das. Though it is difficult to fix how much should be this discount, experts advise you expect around 10% from leading developers and around 20% from middle level developers. This discount range is for projects that are nearing completion (more than 75% work has been completed). You can get a higher discount if the project has a lower completion rate.
Is your adviser independent?
Since the investment involved is very high (homes in some cities can cost upwards of Rs 1 crore), it always better to engage an independent property adviser and a legal expert. “In addition to checking documents with a good lawyer, it also makes sense to check the structure of the project with the help of a structural engineer,” says Das.
Do you see the future plans?
“Irrespective of whether you are going to buy the property for self-use or for investment, you should look out for future developments coming up in your area because that will increase your property’s prospects,” says Thakkur. These future developments may be a metro connection, a new airport or an upcoming IT park or shopping mall. Builders may highlight all the positive future development plans, but what about the negative ones like a land fill near the location. “To get a full picture about future development plans, home buyers should check with development authorities like DDA in Delhi,” says Joshi.