Moneycontrol
Source: Moneycontrol.com

Financial indiscipline is forcing small developers to take extreme steps

Real estate experts say that the biggest challenge faced by developers today is that of falling sales and prices more or less remaining stagnant.

Financial indiscipline is forcing small developers to take extreme steps

Vandana Ramnani

Moneycontrol News

A 36-year-old property developer allegedly committed suicide by shooting himself with his licensed pistol in southwest Delhi's Dwarka area. Reports said that Sumit Aggarwal was depressed since he had incurred financial losses in property investments made in Jaipur.

More than a year ago, Thane-based builder Suraj Parmar had shot himself in a flat in his under-construction project and had left behind a 13-page suicide note, in which he had named some corporators for allegedly harassing him. Later, two of the four corporators were charged with driving the builder to commit suicide by alleging irregularities in his buildings.

The Parmar episode had forced developer associations to push for a single-window clearances for projects. The Confederation of Real Estate Developers’ Association of India or Credai at that time, in a letter to Mumbai commissioner, said that “the suicide note left by him is a painful indictment of our system.”

Developers are concerned that smaller developers, especially those who are broker-turned-builders and who have absolutely no experience in the construction business, may have diverted money collected from homebuyers into acquiring more lands and may succumb to pressure, especially now that the Real Estate Regulation & Development Act, 2016 has kicked in.

Under RERA, developers have to deliver projects as per the timelines promised to homebuyers. While the Act does not demand developers to reveal his funding, it does monitor whether the developer has registered an ongoing project with the regulatory authority and named his brokers and the architects.

It is all about streamlining the sector and ensuring that developers who follow unethical practices go out of business or face penalty.

Real estate experts say that the biggest challenge faced by developers today is that of falling sales and prices more or less remaining stagnant.

Residential sales across top eight Indian cities has been falling and unsold inventory is on the rise. According to the research firm Liases Foras, the unsold stock in top eight cities across the country stands at almost 9 lakh units with maximum unsold inventory in NCR market at 2.61 lakh followed by  Mumbai Metropolitan Region (MMR) at 2.26 lakh and Bengaluru at 1.13 lakh.

“Many developers are victims of their own decision making. The market crashed after the Lehman crisis and has been slow after 2012. A handful of developers, that form barely 0.1 per cent of the sector, have all along resorted to bungy jumping. They are the ones who have used customer advances to acquire more land banks and not concentrated on completing projects,” Pankaj Kappor of Liases Foras said.

Until now for most projects at least 60 percent to 65 percent cash flows came from customer advances. In a slow moving market, reduction in sales has resulted in customer advances going down.

"In most cases, these developers, especially those who are broker-turned-builders, have bought land at a high price from private money lenders. They are now victims of borrowing money at high rates. They are the ones who had betted heavily on huge profits and never envisaged a situation wherein sales could be slow and customer confidence low,” he said.

“It is financial indiscipline of some developers that is forcing them to take this extreme step,” said an expert not wanting to be named.

Also, many people saw real estate as an opportunity to make a fast cash – local property dealers jumped into the business, some even left their corporate jobs to get into property brokerage, without realising that while there was money to be made, there could be enormous pressure in a slow moving market, the expert added.

“With RERA coming in, developers will come under a lot of pressure. Those who cannot adhere to norms such as registering incomplete projects or the delivery timelines promised, will either have to pay penalty or suffer imprisonment. Even today, many of us are unable to register projects as some states do not have a website or even the rules in place. Our sales have been impacted because we are unable to sell without registering our projects. But we are hopeful that things will streamline in six months or in a year,” says Parveen Jain, President NAREDCO.
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