Several real estate projects in India that were launched a few years ago have been delayed because of the liquidity crunch. Post meltdown, the lack of demand may delay new projects.
During the real estate boom, builders expanded extensively by utilising the proceeds of one project to purchase land in other areas and launch new projects. Today, many realty firms are doing away with the construction-linked payment plan and introducing time linked payment plans for buyers. This has the danger of not only exposing buyers to a high risk of late delivery but also increasing apartment costs.
This has now led to projects getting stuck mid-way. Realty experts say that a regulatory authority is therefore the need of the hour to ensure that funds are not diverted for other projects and delivery deadlines are met.
There have been many complaints pending before consumer courts against developers for delay in possession of property, and builders, too, have their own set of grievances. In their defence against the consumer forum, they often cite the mandatory approvals at various stages to be the prime reason for the delay in their projects.
Banks too have been over zealous in financing the real estate projects. Real estate developers have been hit by the funds shortage. Many banks have stopped overdraft facility and many are not disbursing sanctioned loans. Points out Anshul Jain, CEO, India, DTZ, a real estate advisory firm, “The high interest rates and non availability of funds for construction will have significant impact on development — it is anticipated that a number of projects will be delayed as developers will prioritise construction with limited resources at hand.”
Also, in the course of developing new projects, the developer is often left with no option but to sub-let the construction to sub- contractors, thereby causing more delays. This is because contractors, in an attempt to scale up, themselves face manpower constraints.
In western countries, occupancy is necessary to transfer a Construction Loan into a Home Loan that often has a low interest rate. So, when the construction of a house is delayed by a month or two, it automatically becomes a serious financial liability for builders. Builders here often start construction, only to learn later that they do not have the mandatory approvals in place.
There is, however, a silver lining in that the downturn in the realty market will help temper the land price expectations to more rational levels. The anticipated over supply situation in the commercial real estate sector, too, will ease as developers prioritise and reschedule their developments. This should also help cushion the downturn in the rental market, adds Jain.