The reason why hassled home buyers seem to have complete faith in the company is because it is a government enterprise
What if a real estate company offered you to deliver your house in three years? What if it said you can get your dream house by investing Rs 50 lakh over a period of three years? And what if it organised easy finance from banks? You would be tempted, as thousands of others, hoping to move into your own house within three years.
Now, what if you, like thousands of others, are still waiting to get your houses from the private real estate company ten years after you had paid up for it? What if you find out that it is not just about your house? What if you find out that your friends and peers have similar tales of unending wait to tell about their houses promised by other private developers? You will likely stop trusting private sector builders and most likely will be drawn towards government-owned companies to take these over and hand over the houses.
This syndrome may well explain why the public sector company National Building Construction Corporation (NBCC) is fast emerging as the homebuyers' preferred choice to take over beleaguered and much-delayed residential apartment projects.
Amrapali and Jaypee housing projects in Noida could be emblematic of this pattern. Experts say that a public sector character that comes with an ingrained sense of sovereign guarantee may well be behind this belief.
Logjam and solutions
As one of the possible solutions to the Jaypee Infratech mess, NBCC has submitted its proposed resolution plan to acquire the embattled firm and complete 20,000 homes.
Jaypee Infratech went into insolvency process in 2017 after the National Company Law Tribunal (NCLT) admitted an application by IDBI Bank-led consortium seeking resolution of the realty firm. In the first round of insolvency proceedings, a Rs 7,350-crore bid of Lakshdeep, part of Suraksha Group, was rejected by lenders.
Later in October 2018, interim resolution professional (IRP) Anuj Jain started a second round of bidding process to revive Jaypee Infratech on the direction of NCLT.
Earlier this month, creditors, including banks and homebuyers, rejected a bid of Suraksha Realty through a voting process, following which, the CoC decided to consider NBCC's offer.
In its revised offer, NBCC proposed an infusion of Rs 200 crore equity capital, transfer of 950 acres of land worth Rs 5,000 crore as well as Yamuna Expressway to banks and completion of flats construction by July 2023 in order to settle an outstanding claim of Rs 23,723 crore of financial creditors.
Later, the CoC decided to put on vote the revised offer of NBCC, with homebuyers favouring the voting process while bankers dissenting it as the bid was seen as conditional.
Clarifications from NBCC were sought in the wake of the Interim Resolution Professional (IRP) flagging to the lenders that NBCC's bid was conditional and non-binding. In its resolution plan, NBCC had stated that its plan would not be binding unless key relief measures such as extinguishing of income tax liability and exemption from seeking consent of YEIDA (Yamuna Expressway Industrial Development Authority) for any business transfer, were taken.
Ever since, NBCC has decided not to dilute the conditions of exemption from income-tax liability as well as from taking consent of development authorities for transfer of businesses.
In the Amrapali case, the apex court on May 8 had said that it may give ownership rights of all the 15 prime residential properties of Amrapali Group to Noida and Greater Noida Authorities as it has failed to fulfil its obligations towards 42,000 hassled homebuyers. But the authorities have informed the Supreme Court that they don't have the requisite resources and expertise to construct the stalled projects and favoured handing over the properties to a reputed builder under the supervision of a high powered committee. On May 11, the apex court reserved its order on a plea regarding projects of the embattled real estate Amrapali Group.
On January 25, the Supreme Court gave NBCC the go-ahead to complete two stalled projects of Amrapali Group.
Recently, the Supreme Court suggested that the government look into the possibility of taking over embattled real estate firm Unitech and complete housing projects to protect the interests of homebuyers. There is a possibility that these projects too may fall in NBCC's lap.
Saviour for stuck projects
If the government-owned NBCC undertakes construction of stuck projects, stakeholders' apprehensions about funding construction may just ease. Most stalled projects have considerable monetisable assets in the form of land banks and Floor Space Index (the ratio between the area of a covered floor or built up area to the area of the plot of land on which the building stands), which the NBCC can use to cover some of the construction costs.
Some experts are of the view that the company is like any other developer in the business of outsourcing projects to contractors. But the real issue is to do with funds – who will bring in the money if there is a shortfall? What will happen in the event of land banks not getting sold in a slow moving real estate market?
"It may be a liquid company but it is not putting money from its pocket. It has the capability to execute projects but what is required is an entity that will steer the ship from the problem areas to the coast line. There is also no clarity on who will bridge the gap in terms of funding, regulatory and legal issues," said a real estate expert on condition of anonymity.
One must also remember that every project is different with its own set of problems. A complete feasibility analysis for every project needs to be undertaken – how much has been completed, what is the extent of unsold inventory, additional land banks available, fresh plans to develop them have to be drawn up so that revenues can be generated.
"Right now, NBCC does not seem to be taking any market risks. Which means that anybody can be brought in to do the job of managing an incomplete project," said experts.
Some experts are of the view that the company does not have the wherewithal to execute a project of the size of Jaypee. "The scale is daunting, they also do not have the mindset to handle 20,000 customers’ apathy or for that matter the legal issues confronting it. Handling all of this will be a challenge," said an expert.
NBCC needs to tread with caution since undertaking stalled projects may adversely impact balance sheets. There is also very less scope of demanding escalation costs from customers as a majority of them have paid almost 90 percent of the amount.
The most important issue is that of land monetisation. This may not be easy going forward in the present economic environment. Also, in this case potential buyers would have a choice between purchasing land from the authorities on easy terms by paying just about 10 percent upfront vis-à-vis the full amount if they were to buy land from Jaypee's eventual buyer.
It is worth noting here that in case of Jaypee, the land was given to it in lieu of construction of the Expressway on freehold basis instead of leasehold, which is the norm. The authority was set up to hold the title of the land.
Another challenge is to develop a master plan of the remaining land parcels that need to be monetised to raise additional funds. "The existing master plan and the land use for projects may not be feasible in the current environment. You cannot just build more houses there as there may not be requisite demand. NBCC may just have to bring in more partners to develop those land parcels and address the challenges of scale and meeting timelines," said an expert.
Should NBCC essay the role of saviour for every stalled project?
NBCC cannot be seen as handling all the distressed assets in the country. It is not something they undertake as a CSR activity but a serious business proposition.
NBCC is like any other corporation at the end of the day and they have to see if taking on a stuck project makes financial sense. They are not in it to do a CSR project, this is their business, said an expert.
There are other developers too who can take on such projects as the Jaypee bids have indicated.
Having said that, a single model cannot sustain for every project as all are different.
"A one-size-fits-all approach may not help. Some projects may be badly stuck and not viable at all," said an expert.
It is also essential that the bid process be competitive. Such projects should not be allocated unilaterally.
"Even if the government takes up a stuck project through NBCC and the exchequer ends up paying the money to complete them, it would in any case be through taxes paid by homebuyers," said another expert.
In some cases, the land was allotted on leasehold for 99 years by the authorities a decade ago. If for the remaining 88 years nothing transpires and the lease expires by default, land is bound to devolve upon the authorities who may then be tasked with completing the projects. One way to monetise such parcels could be to charge stakeholders for changing the title from leasehold to freehold. "The amount collected could be utilised for completing unfinished projects," suggest experts.
Besides, the government coming forward to complete every stuck project may set a bad precedent.
A look at the list of NBCC residential projects across the country shows that the company's order book is filled with projects across the country from Patna to Kochi, besides a clutch of projects in Delhi-NCR like NBCC Green View in Sector 37-D in Gurgaon, which is spread across 17.2 acres, while NBCC Heights in Sector 89 in Gurgaon is spread across 11.31 acres. The company's redevelopment project in East Kidwai Nagar in New Delhi is spread across 86 acres and cost of construction is over Rs 5,000 crore.
It is also involved in the redevelopment of four out of seven housing colonies in South Delhi located in Nauroji Nagar, Netaji Nagar, Sarojini Nagar, Thyagraj Nagar and Kasturba Nagar.
In the Jaypee case, the balance cost of completing projects is Rs 6,500 crore. NBCC is also constructing affordable housing projects in Alwar, Rajasthan and Rajarhat, Kolkata among others.
It is involved in the redevelopment of four out of seven housing colonies in South Delhi located in Nauroji Nagar, Netaji Nagar, Sarojini Nagar, Thyagraj Nagar and Kasturba Nagar. The cost of the project is around Rs 24,000 crore.
NBCC's annual turnover is about Rs 10,000 crore and has a salary bill of Rs 300 crore. It is preferred because time and cost overrun is nil compared to CPWD, which has a salary bill of around Rs 2000 crore. Rs 15,000 crore is its work execution turnover. Salaries for the latter are paid from the consolidated fund of India. HUDCO was set up for the purpose of financing housing and urban development programmes,” said an expert on condition of anonymity.
When contacted, NBCC declined to respond to queries.
Some buyers who are feeling the heat of delays in project completion may either depend on a public company such as NBCC, or a private player that can be brought in as a project management consultant. They may even consider completing the projects all by themselves.
In effect, rather than being victims, buyers could form their own groups, hire contractors and even consult with the government authorities about the process of completing their projects themselves, said Anuj Puri, Chairman – ANAROCK Property Consultants.
Successful self-completion also depends on the actual state of the delayed project – its stage of completion, financial health, size, land title, etc. Only smaller-sized projects (of 200 units per project or less) can be considered a safe option for buyers opting for self-construction.(This is part of a series of pieces on issues plaguing the real estate sector)