Trends

Scheming Schemes

Call it the tricks of the trade… After the RBI’s advisory aimed at curbing 80:20 subvention schemes, ingenious developers have tweaked their offered schemes to attract prospective buyers and have come out with 50: 50, 60:40 or 70:30 schemes just to skirt around the regulatory stipulation.

While the Reserve Bank of India’s (RBI) move besides affecting home prices – will definitely reduce the risk borne by buyers as well as banks, experts feel the move will surely lead to price correction because of oversupply of units, delayed completion of projects and will adversely harm the popularity of under-construction projects, dissuading investors or short-term buyers which in turn will prevent price escalation.

In a bid to motivate buyers psychologically, if not financially, the developers, therefore, are coming out with some innovative schemes to lure buyers. For instance, NCR-based realty firm Unnati Fortune Group, in association with Tata Housing Finance Ltd, has recently introduced a 10: 80: 10 subvention scheme for its wannabe investors in an exclusive project. The company asks its investors to pay just 1 0 per cent of the property value of a home he or she had dreamt of at the time of booking, and 80 per cent home loan will be taken care by Tata Housing Finance and the remaining 10 per cent the customer will pay at the time of possession.

Nor is the Unnati Fortune Group alone in this-with so many in the sector worried about their long-pending inventories, and thereby seeking to sell off by floating new and attractive schemes for buyers. As the current fundamentals and pricing in the realty sector are yet to correct, experts feel these attractive freebies to buyers, perhaps, will give limited cushion to the developers in terms of demand spurt.

“Such schemes are popularly called flexible plans and are actually more of time-linked plans where the payment milestones are calibrated against a time scale as against construction milestones. This does impose a lot of financial burden on the developer and calls for a very meticulous planning and execution of the projects. As for the buyers, it provides them a longer span of time to plan for the finances to service the forthcoming demands. However, the initial payment for the property becomes high and poses to be a major deterrent for the home buyer,” says Ashim Bhanja Chowdhury, head, Research & Analytics, BOP.

But Ankur Dhawan, vice-president, Prop Tiger Data Labs, slightly disagrees on the new trend and says these schemes are very attractive from the customer’s perspective as the customer is paying only a part of the total cost and is also assured that the next payment is due only when possession is offered.

“Contrast to this with the scenario where the customer pays 95 per cent of the payment when the structure gets completed and waits one-and-a-half year to two years for the final completion of the project and the subsequent possession offer. Developers offering such schemes are adding strength to their intention of delivering the project,” he adds.

After the central bank’s move, sales demand has been observed to be as low as ever before. The home prices have also seen correction to a certain extent because of the curb that leads to oversupply of units and delayed completion of projects. Will it adversely harm the popularity of under-construction projects?

“We see this cycle already being played out. When the prices start falling, customers are not sure of the bottom it will hit. Customers who would have otherwise jumped on the rising price cycle will now wait longer in the hope that prices will further deteriorate. That is why such schemes are good to attract genuine buyers who will lap up an attractive scheme and block the unit now and wait for the uptrend in prices,” adds Ankur.

What Experts Say

Such schemes are popularly cal led flexible plans and are actually more of time linked plans where the payment milestones are calibrated against a time scale as against construction milestones. This does impose a lot of financial burden on the developer and calls for a very meticulous planning and execution of the projects. As for the buyers, it provides them a longer span of time to plan for the finances to service the forthcoming demands. However, the initial payment for the property becomes high and poses to be a major deterrent for the home buyer.
ASHIM BHANJA CHOWDHURY, Head, Research & Analytics, BOP

Contrast this with the scenario where the customer pays 95% of the payment when the structure gets completed and waits one-and a-half year to two years for the final completion of the project and the subsequent possession offer. Developers offering such scheme are adding strength to their intention of delivering the project.
ANKUR DHAWAN, VP , PropTiger Data Labs

• What the 80:20 schemes mean
Under such schemes, buyers need to pay 20% of the full value of the house upfront after which they don’t need to pay EMI’s for two years. Bank pays the remaining 80% in lump sum to the builders upfront at initial stage of construction.
• Why RBI is trying to curb such schemes
To promote more transparency between the buyer and developers, according to RBI, these schemes can be risky for banks as well as home buyers since developers are under high financial pressure.
• Why developers initiate alternative schemes to float in the market
When such alternatives schemes come into the market, it may be a reflection of fund crunch. As the current fundamentals and pricing are not correct for the sector, these freebies will give limited cushion to the developers in terms of demand spurt.
• How it is a risk for home buyers
There is the risk of delayed projects for home buyers as it will affect buyers financially and emotionally. A two-year EMI-free period or the kind sounds attractive, but what if the developer’s delays the EMI’s it is supposed to pay on your behalf. As credit information bureaus will not hold the developer responsible, the buyer’s credit score will suffer to some extent.
• How it is a risk for banks.
Banks run the risk of diversion of funds since developers are in financial crunch. Delays in construction or default on payements can cause disputed between the borrower and the builder. In other words, the bank’s money could get locked in dispute.

But developers have different say on such innovative schemes. They feel that the schemes like 80:20 provide ease to buyers and sellers both and such schemes let the buyers not to be overburdened with EM Is, while at the same time allowing access to the builder for liquidity on lower terms, which results in low cost project and which in the long run is good for the buyers.

Agreeing to the fact that the RBI’s directives are geared to eradicate the prevalent ill-practices in the realty sector , Vikas Gupta, joint managing director , Earth Group, says: “In fact, other trends will emerge and such examples are the 50: 50, 60:40 or 70:30 schemes. The market is never going to stop, so transformation is obvious. Lower sales demand was bound to happen and 20-30 per cent correction was obvious. It in fact, favours both the genuine buyers and sellers. Now the new schemes will, I think, be able to generate demand this time as well.”

On the home prices front, most of them believe that the correction is not at all inevitable, rather it will give an appreciation despite the low sales.

“In 2013, in most of the areas and especially in NCR, property prices have appreciated by 40-50 per cent. Whenever there is such a sharp increase in prices, the next nine months to one year, prices do not escalate and even sales also decline. In such situation, if there is delay in under-construction projects, sales of such projects further decline to some extent and builders cannot escalate the price,” says Rajesh Goyal, managing director , RG Group.

“There is a lot of demand for residential or commercial projects which is still unsatisfied and not catered to. Any project with quality construction and timely delivery wi ll do very well in the market. From an end user to any investor , for the both, the returns are the best when they invest in the realty sector ,” says Sushant Muttreja, managing director , Cosmic Group.

Developers further believe that although this rise in inventory and delay in possession has not affected the under-construction projects much, now-a-days, each new project has something new to offer , which may suit a specific audience which again does not spoil the popularity of the fresh launches or under-construction projects.

“The short-term buyers and investors are smart enough to invest in what is right for them and at the suitable time. Most short-term investors go for ready homes or about-to-be-completed homes so that they receive immediate appreciation on property,” says Rupesh Gupta, Director, J M Housing.

WHAT DEVELOPERS SAY

In Noida, there is no oversupply, rather we feel that the region still has a lot of untapped potential. A few years ago, we were the first to enter into luxury housing and the demand was astonishing. So, it’s not about oversupply, it’s about the right kind of supply and catering to every segment of demand.
PRASHANT TIWARI, CMD, Prateek Group

In 2013, in most of the areas and especially in NCR, property prices have appreciated by 40-50% . Whenever there is such a sharp increase in prices, the next nine months to one year , prices do not escalate and even sales also decline. In such situation, if there is delay in under-construction projects, sales of such projects further decline to some extent and builders cannot escalate the price.
RAJESH GOYAL, MD, RG Group

“In Noida, there is no oversupply, rather we feel that the region still has a lot of untapped potential. A few years ago, we were the first to enter into luxury housing and the demand was astonishing. So, it’s not about oversupply, it’s about the right kind of supply and catering to every segment of demand,” says Prashant Tiwari, chairman and managing director , Prateek Group.

Lastly, it is observed that while the RBI move poses immediate problems for projects where such schemes were prevalent, the developers are playing new tricks to trap their investors in some way or other. Will the RBI’s decision force developers and banks to be more transparent in explaining the benefits of the scheme to buyers? That, of course, is the million-dollar question.

What Developers Says

In fad, other trends will emerge and such examples are the 50:50, 60:40 or 70:30 schemes. The market is never going to stop, so transformation is obvious. Lower sales demand was bound to happen and 20-30% corredion was obvious. It, in fad, favours both the genuine buyers and sellers. Now the new schemes will, I think, be able to generate demand this time as well.
VIKAS GUPTA, JMD, Earth Group

There is a lot of demand for residential or commercial projects which is still unsatisfied and not catered to. Any project with quality construction and timely delivery will do very well in the market. From an end user to any investor, for the both, the returns are the best when they invest in the realty sector .
SUSHANT MUTTREJA, MD, Cosmic Group

The short-term buyers and investors are smart enough to invest in what is right for them and at the suitable time. Most short-term investors go for ready homes or about-to-be completed homes so that they receive immediate appreciation on property.
RUPESH GUPTA, Director , JM Housing