Since the deadly COVID 19 pandemic, everyone in the real estate industry is talking about a big price fall, but is this really possible? Let us assess the facts on the ground in Mumbai, especially for the co-operative housing society redevelopment projects.
During 2008 to 2014, the real estate market was booming. Demand was so high that developers could sell the flats even on the news of being appointed for a redevelopment project. As a result, the developer could begin the project with practically no investment.
Developers were too greedy
The boom led to a race among developers to bag the available redevelopment projects at wafer-thin margins in anticipation that prices would increase over time.
The developers committed many mistakes. For instance, they usually started the process of redevelopment without arranging finance for every step of the process. They sometimes vacated the building and started paying rent even before receiving the necessary approvals. They miscalculated costs. In some cases, they failed to properly understand the rules and regulations governing open spaces, fungible Floor Space Index (FSI), Land Under Construction (LUC) tax, MCGM/MHADA premiums etc. Disputes between society members often led to court cases and delays and there was no contingency planning for such cost escalations. In many cases the developers sold the initial flats to investors at a break-even price or less, to generate initial liquidity for the project.
In the later stages of the boom, the developers realised that house prices were coming down. To complete the project and keep their reputation intact, the developers borrowed money from finance companies at a high rate of interest and piled up inventory.
Once the moratorium period of the project finance ended, developers failed to pay the instalments, the Housing Finance Companies’ debacle started and the stark realities of the real estate market were exposed.
The government also to blame
The fault also lay with the government. The state government increased Ready Reckoner rates year after year to augment their revenue, without looking at the ground reality. The BMC doubled Development charges, increased scrutiny fees, LUC tax every year and as all premiums were tied up with the Ready Reckoner rates, all premium costs increased.
In November 2016, demonetisation came into effect and the real estate business being heavily dependent on cash for unaccountable expenses, under-the-table payments for approvals and speed money, was impacted the most.
In May 2017, GST was implemented which resulted in a 7% increase in tax (earlier VAT was approximately 5%, while GST was fixed at 12%) As the developers had already incurred heavy construction cost, they didn’t pass the input tax benefit to the buyers and that resulted in an increase of the cost for the buyers.
In July 2017, RERA(Real Estate Regulatory Authority)was established in Maharashtra with a view to bringing transparency in the Real Estate Sector. The RERA Act contained some salutary provisions, but there was also a provision for a dedicated bank account for a project and that the developer could utilise only 70 percent of the amount lying in that account. This stipulation increased the investment cost and therefore the finance cost of a given project for the developers as they were not able to entirely utilise their own money for the project and had to look elsewhere for the required finance.
Banks & NBFCs approved loans without checking the feasibility of the project, based on historical figures and inflated unsold inventory stock valuations.
Of course, there was some support for the authorities, such as discounts in premium and lower interest rates but they came too late in the day. Most of the measures by the Government to ameliorate the situation are like locking the stables after the horses have already bolted.
Is there a solution to the problem?
The current stalemate cannot be solved only by providing liquidity and the problem needs a multi-pronged solution. Some of the solutions are:
1. Reducing the housing loan interest rate.
2. Relaxation in strict eligibility criteria and requirement of collateral security.
3. Increase in the tenure of housing loan up to 30 years.
4. Revising the upper limit for interest rebate paid on housing loan under income tax.
5. Special window to cover all type of projects including projects which are in litigation, where there are lender/ financial institutions issues
6. One window for all pending approvals with full approvals in 7 days.
7. Tax holiday on Stamp Duty for all sales in stalled projects.
8. GST holiday for all sales in stalled projects.
9. Heavy discounts or no premiums to be charged depending on the project feasibility.
10. Increase in FSI, if possible to make a project feasible.
11. Payment of premium to be paid in a staggered manner or preferably at the time of possession/Occupation Certificate.
12. If premiums have already been paid, then credit note for a refund of premium to be issued which can be traded in the open market.
13. Liquidity to be made available to complete the project without interest.
14. LUC Tax holiday for all stalled projects for 3 years.
The reality of the realty sector is that the situation will go from bad to worse if remedial steps are not taken soon, leaving homeowners, developers banks and housing finance companies in the lurch.
(Nayan Dedhia is a Self-Redevelopment Coach with Toughcons Swanirman.www.stalledprojectsjaago.com)