Assess the developer’s financial situation before booking an apartment in an under-construction project
Lack of funding to developers will directly affect the completion of projects that are under construction
Last week’s Supreme Court order giving homebuyers the status of financial creditors in the Amrapali group case was a welcome move, on the face of it. However, peel off a few layers and you will find it hides a new challenge for both homebuyers and the already-stressed-for-liquidity developers. Now that banks and financial institutions can’t have the sole claim on the money recovered from errant developers, they would be doubly cautious before funding projects. This may hit the supply of new units as well as the execution of under-construction projects. We tell you what this means for homebuyers, but first let’s understand what is this liquidity crunch all about.
“The impact of ongoing issues in the form of a slowdown in project funding by banks being felt over the past few years will get more stringent as a result of the Supreme Court decision," said Niranjan Hiranandani, national president, National Real Estate Development Council (NAREDCO).
But Renu Sud Karnad, managing director, HDFC Ltd, doesn’t think the SC order will affect the entire sector. “Basically the Supreme Court order was against the errant banks that failed to carry out their duties. But if a bank is doing things in the right way—making sure that construction is going on, the borrower is genuine and it is a genuine loan, then I think banks should have the right on exercising the mortgage (claim on land and apartments), otherwise how are we going to lend. I don’t think it can become an example, otherwise all lending will stop," said Karnad.
The SC order is only one of the factors that is squeezing liquidity for developers. Fund flow to residential projects is at an all-time low. According to a report on private equity (PE) investment in real estate by Cushman and Wakefield India, a real estate consultancy firm, “Investments in residential segment during H1 (first half) 2019 were the second lowest in the last five years (since 2015), at just ₹5,610 crore."
While individual and institutional investors have stayed out of the market since long as there is nil or negligible return in the sector, banks also stopped directly funding developers two to three years ago. Also, non-banking financial companies (NBFCs), which were funding real estate developers for the last few years, have their own credit problems to deal with. “Liquidity crunch is the main issue at present; banks and NBFCs are reluctant to lend money to real estate sector," said Pankaj Goel, secretary, Confederation of Real Estate Developers Association of India (CREDAI), at the annual conference NETCOM, held in Tel Aviv, Israel from 5-7 August.
According to a recent joint survey by real estate consultantKnight Frank India, Federation of Indian Chambers of Commerce & Industry (FICCI) and real estate self-regulatory body NAREDCO, “Weak demand, inventory overhang, developer defaults coupled with the worsening of the NBFC crisis has dried up funding, which in turn has increased the borrowing cost and impacted finances for the already strained sector. In the current scenario, stakeholders meaning to do good business are also finding it tough to convince lenders."
The government’s move to restrict subvention schemes by housing finance companies (HFC) has only added to the woes of developers. The National Housing Bank’s (NHB) issued a circular last month asking HFCs to “desist" from offering loans under subvention schemes, wherein developers pay home loan interest on behalf of the homebuyers for a certain period, typically for the time the project remains under construction. “The NHB decision to ban lending by HFCs under subvention scheme was ‘impulsive’ and should be rolled back to boost sales," said Jaxay Shah, chairman, CREDAI.
Most experts believe the crisis will continue for some time. “The residential segment is likely to face a further period of strife as NBFCs struggle with liquidity woes," said Anshul Jain, country head and managing director, Cushman and Wakefield India.
A liquidity crisis doesn’t just spell trouble for the developers but also for the homebuyers. Lack of funding will directly affect the completion of under-construction projects. “Developers are not able to achieve the requisite sales momentum without investor-led capital and that will reduce the supply pipeline and developers will struggle to complete even their existing projects," said Anuj Puri, chairman, ANAROCK Property Consultants Pvt. Ltd.
Only bigger developers are being able to stomach the crisis. “In this scenario, execution of under-construction projects is happening based on the financial stability of the real estate developer," said Hiranandani.
However, there is good news for homebuyers too. “In such a market scenario, developers not only desist from increasing prices but give deep discounts to genuine buyers," said Puri. According to Knight Frank’s sentiment index report, “Sentiments regarding residential price appreciation also look lacklustre with 75% of the stakeholders opining that the residential prices will continue to remain muted".
As a buyer it is crucial for you to ascertain the financial position of the developer before booking an apartment in an under-construction project. It is also important to evaluate the demand for the project; stay away if the demand or sales are low. As far as investment in residential real estate segment is concerned, most expert don’t see much appreciation in the short to medium term.
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