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Soaring woes: delivery delays dog developers

Soaring woes: delivery delays dog developers
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First Published: Sun, Jun 08 2008. 11 56 PM IST
Updated: Sun, Jun 08 2008. 11 56 PM IST
New Delhi/Bangalore: When a Bangalore-based media executive visited the site of Prestige Kensington Gardens, a residential development in the city’s northern suburb, where he is buying a two-bedroom flat, he found that he would be getting his keys at least two months later than promised.
“I was not informed of the delay,” says the 28-year-old, who did not want to be named pending delivery of the apartment for which he is paying Rs33.5 lakh. “I came to know about it accidentally when I recently visited the construction site. They should have at least told me.”
Not just Kensington Gardens, which is now slated for completion in the third quarter of 2008, but nearly all the projects taken up by the Prestige Group are running behind schedule, says Zafar Sait, general manager for business development, adding that delays in getting government approvals, labour shortage and rising prices of construction material were responsible.
“The delays are not deliberate on our part because every builder borrows or uses capital for his projects and he would want to finish it and sell it off at the earliest,” says Sait.
But the delays also illustrate the crunch that Indian developers are now facing after a five-year boom. A shortage of funds means they are struggling to complete projects and start new ones while soaring inflation and interest costs are cooling demand for apartments and houses that seemed insatiable a year ago.
Developers such as Omaxe Ltd, Sobha Developers Ltd, Nitesh Estates and Alliance Group say that they are behind annual targets of delivering space by between 20% and 30%. “We have missed the delivery target,” says Vipin Aggarwal, executive director at Omaxe, which, according to its website, has 54 residential and commercial projects under development. “We are facing a shortage of funds because customers are not making payments on time. How will we complete projects until customers pay us?”
Real estate values soared fourfold between 2002 and 2007, according to industry figures, fuelled by strong economic growth, an expanding and aspirational middle class with higher disposable incomes, easy credit and government measures to encourage home ownership through tax incentives on loan repayments.
That also led to speculative buying and an overheating of the property market, and forced the central bank to step in to curb banks’ exposure to real estate.
Inflation & interest costs
Benchmark central bank interest rates, that have jumped to a six-year high of 7.75%, and inflation, that has surged to a near four-year high of 8.24%, made it more expensive for consumers to fund property purchases. Bank interest rates on home loans, the single biggest segment of retail credit, have shot up from 7.5% in 2005 to 12%.
“If you see the macro picture, home loan interest rates are not softening and inflation is not coming down either. This is really affecting demand,” says Shailesh Kanani, an analyst at Angel Broking, a Mumbai-based securities firm.
A customer can typically buy a flat either with a one-time payment that may be delivered by his financing bank to the builder, or in instalments that are linked to the progress in the construction of a project.
While developers can ask for the bulk of the home payment upfront, buyers have been less forthcoming with the money—some of it having been lost in the stock market slide since January, resulting in less of it sloshing around to part with.
Residential sales in the New Delhi suburbs of Gurgaon and Noida have fallen by between 20% and 25% in the last six months, according to property brokers. A report by real estate consultant Cushman and Wakefield says residential prices in Gurgaon have fallen by 9% from last year to Rs6,375 per sq. ft in the first quarter of 2008. Noida prices are at around Rs6,100 per sq. ft.
In Bangalore, prices increased marginally by 2-13% over the last year in the first quarter of 2008 and are expected to remain stagnant, according to Cushman and Wakefield. Mumbai residential prices rose 8-24%.
Cement and steel prices
Developers had already been grappling with a surge in the prices of cement and steel, the basic raw materials used in construction, part of a global commodities uptrend that pushed up building costs.
Between January and April the prices of construction steel such as thermo-mechanically treated steel and wire rods rose by more than 36% and hot rolled coils by more than 40%. Cement prices in north, west and east India have risen by Rs2-5 per bag this year and wages have jumped in line with inflation.
“Cost structure has gone haywire,” says Aggarwal of Omaxe. “We have also been facing a shortage of commodities because of which construction work is getting delayed.”
Omaxe fell short of its delivery target by 30% in the fiscal year gone by. The firm delivered only 4 million sq. ft by March.
“We could have done much better during this period. But the overall slowdown in the real estate market has impacted the growth of companies like ours, disabling us from delivering what we had set out for,” says J.C. Sharma, managing director of Sobha Developers, which has 25 ongoing projects spread across nearly 10 million sq. ft of development in the pipeline.
Bangalore-based Sobha delivered 2.35 million sq. ft of space in fiscal 2008, at least 20% less than the firm’s target. According to Angel Broking, the estimated delivery for Sobha was 3.3 million sq. ft.
And it seems, size no longer matters. DLF Ltd, India’s largest developer by market value, delivered 9 million sq. ft of space in the fiscal ended 2008. While the company’s delivery target figures are not available, analysts concur that what the company delivered is less than what they had expected. DLF next year plans to deliver as much as 22 million sq. ft.
Supply targets
The sales slowdown will have a dampening impact on volumes this year, say experts. Builders will set more realistic supply targets and fewer projects would be launched during 2008-09, says Pranay Vakil, chairman of real estate consultancy firm Knight Frank India. “The volume of transactions has already shrunk by 50% compared to last year, so builders, unlike last year, will be cautious to go ahead and announce new projects,” says Vakil.
And even cities such as Mumbai, that seem to be constantly catching their breath to meet ever-increasing demand, may get a much-needed pause.
Mofatraj Munot, chairman of Kalpataru Constructions and chairman of Maharashtra Chamber of Housing Industry, says volumes will be considerably less in 2008 compared to last year with sales down by 40% in Mumbai.
Not all local developers agree. Mumbai-based developers such as Akruti City, Ajmera Group and Lodha group claim that though sales have been down, they did manage to meet their targets.
While developers have so far resisted price cuts, they may be forced to go that route to stoke demand, say analysts.
“Developers are not cutting prices though they are not selling at the current price levels,” says an analyst with an international financial services group who did not wish to be named. “Demand for properties will not pick up unless real estate prices drop to realistic levels.”
Some developers are also blaming delays in securing local government approvals for their projects running behind schedule.
Bangalore-based Alliance Group had set a target of building 1,000 residential units spread over four projects for the fiscal year 2008. “We couldn’t meet the deadline because we still haven’t got the required approvals. We are hoping to get them in the next 90 days,” says Manoj Namburu, chairman of the group.
For now though, it seems delays are becoming the new reality in India’s real estate market.
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First Published: Sun, Jun 08 2008. 11 56 PM IST