The coronavirus outbreak has forced businesses to innovate, embrace technology, and rewrite the rules. Barter, exchange, or port are not the terms usually associated with the real estate sector but some brokerage firms and developers have come up with a string of property swap schemes as incomplete projects pile up.
They allow homebuyers and investors stuck with incomplete projects to exchange their residential or commercial properties with ready-to-move-in units by restructuring original contracts.
Brokerage firms say it is a win-win for both sides, as they offer a quick exit to both homebuyers hit by delays and developers strapped for cash.
Investors Clinic (IC), a large brokerage firm in Uttar Pradesh's Noida, had closed Rs 750 crore such "barter" deals worth Rs 750 crore ever since the scheme was launched in July 2020, co-founder Sunny Katyal told Moneycontrol.
Some buyers with completed units have also used it to upgrade their properties. "IC has been able to revive almost Rs 150 crore worth of stuck investment for its 3,000 customers,” Katyal said.
Is it as good and easy as it sounds? What is in it for customers and how can they avoid repeating history? Here are some answers:
How does it work?
Suppose Customer A bought a property worth Rs 50 lakh and paid the developer Rs 15 lakh at the time of the purchase but has been waiting for more than 10 years. The Rs 15 lakh paid to the developer gets adjusted against the new ready-to-move-in property that the customer buys from a builder, who is part of the swap scheme.
The customer exchanges the so-called dead property for a ready-to-move-in home. In the case of a commercial unit, the buyer can also be offered assured returns —the buyer is often offered a property, say a shop, that is already on lease and is up and running. The new developer gets a sale on the books, which means fresh cash flow.The previous developer gets to buy back their unit, which can be completed and sold at a higher price later or the brokerage firm buys that property at a rate agreed with the developer.
The customer’s old loan against the first property is closed and a new one sanctioned.
The exchange works best when a group of buyers seek out a brokerage house, which approaches the builder who has not been able to complete the project for reasons like liquidity crunch. The two strike a deal under which the developer either buys back the incomplete units or transfers them to the brokerage at an agreed bulk price that does not include the brokerage fee.
The buyer is handed over a discount note or a voucher for the amount paid to the developer.“There is an algorithm at work here. The idea is to bring in two-third of fresh inflows for the new developer offering a completed and healthy project,” Katyal said. So far, business worth Rs 750 crore has been closed under the scheme across both residential and commercial properties, he said.
He said customers facing issues with undelivered projects can upgrade their property through contract restructuring. "We have partnered with five builders in NCR with over 10 projects in their kitty, which makes it around 40 completed commercial and residential projects in all. These include developers such as M3M, Migsun Group, Supertech, Bhutani Group and Home and Soul," Katyal said.
As easy as porting number?
A brokerage firm in Gurugram has gone a step further and is not only facilitating the barter but also promising a 50 percent profit on the incomplete property, which is being swapped, once it is completed and sold at a later date.
Under M3M Group’s “Port Your Property” scheme, customers stuck with undelivered projects can upgrade their property by opting for a new project from its portfolio. The money paid to the previous developer gets adjusted in the new project, lowering acquisition cost.
The company earned revenues close to Rs 700 crore since the launch of phase 1 and would be clocking close to Rs 1,200 crore by March-end when the scheme closes, M3M director Pankaj Bansal said.
“The scheme has done well. Of the 420 cases which we have onboarded, 151 are from Gurgaon, 80 from Noida and Greater Noida and the balance from Bengaluru, Jaipur, Punjab, Haridwar, Kolkata, Panchkula, Dehradun and one from Dubai,” he said.
Customers who had paid 20 percent in earlier projects chose to swap their stuck property with a ready-to-move-in or an under-construction M3M projects, Banal said
At least 80 percent of the revenue under the scheme was from residential and 20 percent from commercial units. The scheme was a win-win for both the customer and the builder, he said.
According to real estate consultancy firm Anarock Research, Delhi and its neighbourhood have the maximum “stuck” housing units at 1.9 lakh worth nearly Rs 1.2 lakh crore. These are at least seven years behind schedule. A total of 1,90,120 units worth Rs 1,19,291 crore were stuck in the Delhi-NCR as of 2020-end. These flats were launched in 2013 or earlier.
The Mumbai Metropolitan Region has the second-highest number of such units at 1,80,250, worth Rs 2,02,145 crore. Across seven major cities, 5,02,340 houses worth Rs 4,07,005 crore were lying incomplete at the end of 2020.
These barter schemes are allowing buyers and developers to exit and also address the issue of completing projects, one of the biggest problems facing the sector.
The brokerage firm can strike a deal with the builder and buy the units at almost half the price and sell them at a profit once the project is completed.
Last year, almost 60 percent of the sales were through this scheme. If it works well in NCR, it can be tried in other regions as well.
“Also, if this consolidated distressed inventory can be revived, it will lead to massive value creation in a slow-moving real estate market, bring in much-required liquidity into the system and also ensure that a large number of NPAs are cleared in the process and the inventory that is consolidated can be completed and monetised at a later date,” says Anckur Srivasttava of GenReal Advisers.Brokerage firms’ revenue from such transactions is certain to be upwards of 10 percent of the underlined transaction value, he added.
Watch your step For buyers, caution and lots of it is called for. Buyers should try and negotiate the price for the new unit and make sure the property is complete and all documents are in place, say experts.
“Check for completion certificates, occupation certificates and make sure that the developer has paid the dues to the authorities,” said Srivasttava, adding always try and inspect the property personally before agreeing to a deal.
“As beneficial as it may sound, it is very important for customers to exercise abundant caution while opting for these schemes,” Arun Kumar, Partner, IndusLaw, a multispeciality law firm.
The customers were required to pay 70 percent to 80 percent of the cost of the new property, he said. “This has led to some challenges. For instance, the unit cost of the housing options that are provided to the customers for ‘swap-in’ are 30 percent to 40 percent higher than the current unit that the customer wishes to ‘swap-out’ from,” Kumar said.
Moreover, schemes are modelled to suit customers who have paid 10 to 20 percent of their costs and are willing to pay the remaining amount that they would have had to pay for their original unit. It doesn’t suit customers who have paid half the price or more for their original unit.
Customers should be careful if they swap into another under-construction project of the same builder. Ideally, exchanging a delayed and under-construction project for a fully built and ready-to-move-in project of a reputed builder makes sense.
Customers opting for these schemes must pay special attention to the fine print, he said. Kumar warned against signing a document that restricted their consumer’s rights or waived liabilities of the developer.
If signing up for an under-construction project, do not waive any liability of the developer in case the possession of the new unit is also delayed, he said.
Customers should discuss the shifting of loans with their lenders before signing up for the exchange. Most lenders are studying these schemes and their risk analysis may vary, so will the loan offers.“Double-check for any hidden costs like processing charges, including any fees involved in case of shifting of loans by the lenders,” Kumar said.