Builders selling finished houses: A way out of the real estate mess?3 min read . Updated: 04 Sep 2018, 10:00 AM IST
As part of DLF's new business model, it has decided to sell apartments only when they are complete and get an occupancy certificate, to eliminate uncertainty associated with costs and delivery. Is this viable?
Ramesh Nair, Chief executive officer and country head, JLL India
Supply crunch will lead to high prices
Selling completed apartments is viable only if the developer has enough liquidity to complete the project.
If only completed units are sold in the market, it will increase the end users in the market as homebuyers will save GST (goods and services tax) cost.
However, at the same time, the buyer has to shell out 100% money to take the possession of the flat.
In an under-construction project, the buyer gets time to make payment till the building gets ready and has an occupation certificate in place.
It is not feasible for all the developers to follow this model due to liquidity crunch as most of these developers have multiple ongoing projects at a given time.
Considering every developer follows this model, the developer has to invest heavily in technology to accomplish faster completion of projects.
Given this business model, there will be shortage of supply in the real estate market, which in turn will escalate construction-linked costs, which again will push up property prices further.
Arvind Nandan, Executive director - research, Knight Frank India
Risks of delay will get eliminated
Selling completed apartments is a good practice which helps eliminate uncertainties of possession dates, construction timelines and finished product features. For the end-user, this makes the buying process simpler. The buyer would be more assured of what he or she is buying. The consumer is not exposed to the risks of delayed project completions or of any alterations in the project during the course of development.
However, investment during development stages, which mostly involves buyers’ participation in the risks, and thereby, entering at lower price points would be affected. The appreciation in capital values during the course of project development is one of the attractions that several investors take into account. With the entry point being shifted to zero-risk stage, the attraction of gaining steep capital appreciations during the development stage is removed. Despite this, it would be useful for the market and the buyers of real estate.
Niranjan Hiranandani, President (national), NAREDCO, and CMD, Hiranandani Communities
Builders with deep pockets will gain
The real estate market is sentiment driven. Recent sales trend is largely about ready for possession homes—post receipt of occupation certificate—which dilutes the threat of delayed possession and also gives homebuyers exemption from the 12% GST levied on under-construction homes. Developers need to strategise project funding, factoring in sales after occupation certificate is received. Developers who have deep pockets to withstand additional funding requirements will emerge as the real gainers. The new regulatory regime under RERA Act entails locking up to 70% funds in escrow account, which escalates additional financial burden on the part of the developers.
A homebuyer gets more choices during the launch period. Plus, the advantage of flexi payment schedules, rate appreciation, staggered bank loan payment schemes. However, ready-to-move property will come at a premium rate.
Shubham Jain, Group head, corporate ratings, ICRA
Strategy in line with current demand
The proposed model to sell ready-to-occupy apartments has its own merits and challenges. Given the regulatory tightening, the business model protects the developer from many of the penal clauses of RERA, should there be any delay in the project delivery. Likewise, under the proposed model, the developers need not necessarily maintain a separate account as required under RERA unless the bookings are commenced prior to receiving the occupation certificate. Further, with the project completion achieved, any escalation in the project cost can be built into the selling price, thus insulating their profitability to an extent. Moreover, such a strategy is also in line with the current market demand wherein customers are preferring finished inventory as the buyer is saved from GST and also doesn’t get exposed to execution/delay risks. However, the proposed model will necessitate developers to arrange funding tie-up for complete project cost to ensure smooth execution, either through own sources or in tie-up with a financial partner. Therefore, working capital requirements will increase.