Four years back, after the implementation of RERA, a new homebuyer-friendly business model Build and Sell emerged in the real estate sector. But, COVID-19 played spoilsport.
Globally, the concept of off-the-shelf homes has been in existence for several years. However, in India developers could not adopt the build and sell model as land has historically been expensive and forms a major portion of the project cost. Moreover, with land buying not being funded by banks, construction finance from banks and NBFCs drying up , developers have to settle for expensive capital from private lenders.
This model, it should be noted, took root after RERA was implemented in May 2017.
Real estate major DLF Limited initiated the concept. Under RERA, developers were barred from launching any project without registration and regulatory approvals in place. So, before launching any project, they were required to buy land and incur regulatory compliance cost that included acquiring licenses for the project.
They were also restricted from raising money from investors/home buyers through pre-launches and could not divert money from one project to another due to the escrow account mechanism in place.
Under these circumstances, build and sell became a viable model, especially as developers could save marketing costs as buyers could directly book ready-to-move-in homes.
This model suited DLF as they had land banks and healthy cashflows supported by regular income from office rentals. The model suited buyers as well as they could make a safe investment without getting shortchanged in terms of space, quality and price escalation, not to mention that the property was ready.
They could avoid development risks and save on high transaction costs (12 percent GST applicable on under construction homes, now reduced to 5 percent).
As the Build and Sell received traction for a few years, DLF put in place a self imposed embargo on residential sales during which they developed a housing stock pipeline of ready homes. It also generated healthy demand from home buyers. According to Anarock, in their first ready to move project, Ultima in Gurgaon, the group sold 376 flats on the very first day. This consisted of almost 75 percent of their total inventory of 504 units.
Another real estate firm Imperial Holdings floated by aviation entrepreneur Manav Singh also took to the Build and Sell concept for its maiden project, a 100-acre luxury township located in Naldehra near Shimla.
A leading boutique developer from Gurgaon, Silverglades, also launched its Hill Home luxury project in Kasauli under the Build and Sell model. The 6 acre project comprised 40 floors and villas and was spread over one lakh sq ft.
But, before this new real estate marketing model could take root, the pandemic crippled the real estate sector, dealing a deadly blow to this model. Even big developers found themselves under financial strain. So much so that they had to take to asset sales to lessen the impact of the financial pain.
Even DLF had to take to divesting its non-core assets including those in the hospitality sector and exiting non-core markets , instead focusing on residential and commercial real estate to pay its debt. DLF's revenue from residential and retail arm suffered a setback.
However, the company could manage to bring down its debt from Rs 12,000 crore in Q3 FY18 to Rs 5100 crore in December 2020 quarter. The group is now talking of retiring its complete debt in 2022, after the launch of its proposed REIT.
In post-COVID-19 times, DLF has revised its Build and Sell strategy and has now adopted a two-pronged marketing strategy of ready-to-occupy as well as under-construction homes. The group will take a call on which of the two to launch in the market and at what stage of the cycle, keeping in view opportunity and demand.
Imperial Holdings too has taken to the hybrid model for its second phase and is marketing both ready homes as well as under-construction homes. Silverglades continues with the model for its project and is targeting to deliver 15 units in phase 1 within a year.
In the current economic environment, the uncertainty over the future of the Build and Sell model prevails. There is still a large inventory of unsold ready homes in the market. According to Anarock, there are more than 6.38 lakh unsold units across top 7 cities, of which 17 percent (about 1.06 lakh) are ready-to-occupy homes. This year another 18 percent of unsold homes will get completed.
Moreover, the continuation of central government's favourable policies like interest subsidy under PMAY, Rs 1.5 lakh principal deduction under income tax for affordable and mid-segment housing, lowering of GST on under-construction homes to 5 percent, have kindled the interest of home buyers in under- construction property. Especially those who have better risk appetite and want to avail cost benefit of early stage buying.
And while the housing segment is gradually gaining momentum, experts such as Sanjay Dutt of Tata Housing, are of the view that the pure Build and Sell model may not gain foothold in near future especially as 50 percent of sales by default pertain to ready-to-move inventory. This model may not be feasible for high rise and metro markets due to high land and holding costs.