In these COVID-19 times, a few brokerage firms and developers have launched property swap schemes to help homebuyers and investors stuck with projects for years to exchange their residential or commercial properties with a ready-to-move-in project through contract restructuring.
The property swap schemes are being marketed as customer-focused and customer-friendly options with a view to help customers make good their dead investments in housing projects that have been facing inordinate delays in completion.
Brokerage firms claim that the scheme, called Mission Azadi, is a win-win for both parties as they offer a quick exit to both the stuck homebuyers as well as developers strapped for cashflows.
Investors Clinic, a large brokerage firm located in Noida, has managed to close these ‘barter’ deals worth Rs 750 crore ever since the scheme was launched in July this year, co-founder Sunny Katyal told Moneycontrol.
"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," says Katyal.
“Two more builders from Mumbai may come on board soon,” he adds.
“The strategic tie-up will enable customers to reach out to developers for upgrading or exchanging their properties. We help in restructuring investments either within the same developer or by shifting to another developer. We help builders realise the potential of their investments that are dead wood right now,” he says.
How does the scheme work?
If customer A had bought a property that has been stuck for over 10 years for Rs 50 lakh from developer X and paid Rs 15 lakh to the builder at the time of purchase, the Rs 15 lakh he paid to the developer gets adjusted against the new ready-to-move-in property that he buys from builder Z.
Once that happens, the customer gets an exit through a ready-to-move-in property for which he can also be offered assured returns in case of a commercial unit, while the new developer gets a new sale in his books which means fresh cash flows, and the previous developer gets to buy back his units which if he wants he can complete and sell at a higher amount later or he hands them over to the brokerage firm at a price agreed between them.
The customer’s old loan against the first property is closed and a new one sanctioned.
The scheme works best when a group of buyers stuck with unfinished units approach the brokerage house facilitating the deal. The brokerage house then approaches the builder who has not been able to complete the project due to liquidity or other issues and strikes a deal with him under which he either buys back the stuck units or transfers the units to the brokerage firm at a bulk price agreed between them that does not include any brokerage fee.
The buyer is handed over a discount note or a voucher which is worth the value he had paid 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 explains, adding so far business worth Rs 750 crore has been closed under the scheme across both residential and commercial properties.
Another brokerage firm active in Gurgaon 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.
M3M Group, a Gurugram-based developer, has introduced a 'Port Your Property' scheme to help buyers stuck with projects both in housing as well as commercial real estate properties.
Customers facing issues with undelivered projects can upgrade their property, by opting for a new project from the portfolio of M3M. The amount paid to the previous developer would get adjusted in the new project, thereby lowering his acquisition cost and giving a way out for a property which was stuck, the company said.
According to real estate consultancy firm Anarock Research, there are approximately Rs 82,200 crore worth of stuck assets in NCR itself.
Under such a scheme, buyers and developers who had no room for exit earlier are getting an opportunity and the biggest issue of completion risk is getting addressed.
The brokerage firm in this case may strike a deal with the original builder or vice versa to buy the stuck units at almost half the price which may later be sold in the market at a profit once the project is completed.
Today, almost 60 percent of sales in the market have been through this scheme. If it works well in NCR, it could potentially be rolled out 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.
The brokerage firms’ revenue from such innovatively structured transactions is certain to be upwards of 10 percent of the underlined transaction value, he adds.
Here’s what buyers must keep in mind before signing on the dotted line
Exercise caution. Try and negotiate the price for the new unit to the fullest. Make sure the property is complete in all respects and all the documents are in place.
“Check for completion certificates, occupation certificates and make sure that the developer has paid his dues to the authorities,” advises Srivasttava, adding that one must 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. For one, the customers opting for such schemes are required to pay 70 percent to 80 percent of the cost of the new property. 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,” explains Arun Kumar, Partner, IndusLaw.
Moreover, the scheme is modelled to suit customers who have paid 10 percent to 20 percent of their cost until now and are therefore willing to pay the balance 80 percent to 90 percent cost that they would have anyhow paid for their original unit and does not suit customers who have paid anything above 50 percent to 60 percent for their original unit.
Customers who are swapping out from an under-construction project must be careful in case they are swapping into another under-construction project of the same builder or even a different builder. One does not want history to repeat itself all over again here, he warns.
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 study the scheme documents thoroughly and pay special attention to the fine print that the developer and at times the property broker are asking them to sign, he says.
One must not sign up to any document that restricts one’s rights as a consumer or waives any liabilities of the developer. For instance, if a customer has signed up for an under-construction project in lieu of his/her existing delayed project, then the customer must make sure that opting for this exchange scheme does not waive any liability of the developer in case the possession of the new project is also delayed, he adds.
It is recommended that customers also speak to their lenders and discuss the shifting of loans before signing up for the exchange. Most lenders are in the process of studying these schemes and based on their risk analysis their opinion on continuation of the loan may differ from project to project and builder to builder.
“Double check for any hidden costs like processing charges, including any fees involved in case of shifting of loans by the lenders,” adds Kumar.