Business Today

Balancing act

Suman Layak, Shweta Punj and twitter-logoG. Seetharaman         Print Edition: March 17, 2013

Expect the unexpected from the realty sector. With both financiers and customers in short supply, thanks to the two successive downturns of the last few years, the industry has been forced to adjust - and fast. Even the mightiest have faced up to reality: in August last year, for instance, DLF, India's largest realtor, sold 17.5 acres of prime land it owned in the heart of Mumbai, the country's costliest real estate market, to trim its debt.

When survival is at stake, keeping up appearances becomes secondary - the equally high profile Lodha Developers, for example, which incidentally bought the Mumbai land from DLF, has in recent years junked its carefully cultivated premium-projects-only image. Half its residential properties are now in the Rs 30 lakh to Rs 80 lakh 'mid-tier' range.

There was a rush of foreign direct investment into Indian real estate when the sector was first opened, but that is now drying up. Private equity (PE) players, foreign and domestic, have greatly reduced their exposure - their investments in real estate fell by 36 per cent in 2012 over 2011, as compared to a 19 per cent reduction in such funding in India as a whole. And those still backing realty projects, such as Motilal Oswal PE or IIFL Private Wealth, have started offering loans instead of acquiring equity charging interest of more than 20 per cent and seeking collateral often twice the size of the loan. Finally, home buyers had better take care. In their bid to stay afloat, even reputed developers are now foisting one-sided agreements on customers in which the developers hold all the cards.

Photograph by Vivan Mehra & Shekhar Ghosh
The real estate boom had begun tapering off even before the first downturn struck in September 2008 with the collapse of global financial behemoth Lehman Brothers. In Mumbai, the average rent paid had already fallen from a high of around Rs 260 per sq. ft. per month in 2007 to Rs 200 in 2008. After the downturn it dropped even further to Rs 160 in 2009, thus declining 38.5 per cent in two years. In Delhi, the drop during the same period was 31.4 per cent. Housing prices too fell around 25 per cent in both cities in these two years. Since then commercial rents in Mumbai have fallen by a further 20 per cent, though in Delhi they have stayed constant. "In 2006/07, top developers were very bullish," says Navin Raheja, Chairman and Managing Director of Raheja Developers. "They miscalculated and invested most of their money in land and non-core assets. It was a time when every developer had started aspiring to be No.1."

The outcome? Of the top ten listed developers by revenues, seven had negative cash flows from operating activities in March 2008. Though most of them somehow rallied and managed to improve cash flows by the following March, they found interest expenses had soared. This, as Raheja noted, was due to their frenetic land buying during the boom years, even turning to non banking finance companies (NBFCs) for funds, which came at steep rates of interest, when banks showed some reluctance to go along with them. With few takers for properties post 2008, they were in trouble. Interest cost as a percentage of total income for eight of the top 10 developers rose almost four times within a year to 16 per cent by March 2009. While the benchmark Sensex on the Bombay Stock Exchange (BSE) shed 60 per cent between January 2008 and March 2009, the realty index tanked 90 per cent. It was doom and gloom all around. Some developers went in for qualified institutional placements to raise money. Some tried to line up equity issues, but very few of their initial public offerings (IPOs) went through. Meanwhile, banks had grown even more wary of lending to this sector, and customers preferred to wait and watch.

Yet against the odds there has been a distinct improvement in realty companies' fortunes since then - though a turnaround is still far away . By March 2012, all the top 10 developers had positive net cash flows from operating activities. In the past year, the BSE's realty index has risen 2.4 per cent against the Sensex's seven per cent.

Tweaking Business Models
How did it happen? Realtors learnt to innovate. Different business models are now being used. One of the most popular is that of setting up joint ventures with land owners, since buying too much land, developers have learnt the hard way, can hurt. There was a time when realty companies flaunted their 'land banks' - the bigger, the better - but no more. Even a veteran realtor such as the Mumbai-based Oberoi Realty, while venturing into the National Capital Region, has been looking for a local developer or landowner, so it only has to invest in the building of the project. Or take Nitesh Estate, a newcomer in the field, but one which has already done a successful IPO - it operates without any land assets.

"This model allows the realtor more flexibility as the developer is not paying interest on loans taken to buy the land," says Pranay Vakil, Chairman, Praron Consultancy, and the former founder-chairman of property consultant Knight Frank India. "He can go about a project building by building, selling one fully before starting on the next. It also gives him more holding power in a bad economy." He says that at least half the projects under construction now follow this model.

Ramesh Bhandula
'We have gone to their office, they say that permissions are not coming through. Only junior clerks are available at the office when you go there. In seven years, our money would have doubled anywhere else'Photo: Aditya Kapoor/
He booked two plots in Bhiwadi, on the Rajasthan-Haryana border, paying the developers booking amounts of Rs 3 lakh for the first and Rs 2 lakh for the second. He was promised them in six months. Nearly five years later he is still waiting, along with hundreds of others who paid similar amounts. None of them have written agreements with the company as they were told agreements would be signed after the plots were allotted.

Banks may still be reluctant to lend to realtors, but new ways of raising funds are being found. Hirco Plc, for instance, is using overseas funds in Indian projects in an ingenious manner. The company, launched by Priya Hiranandani-Vandrevala, is listed on the Alternative Investments Market (AIM) of the London Stock Exchange. Its projects in India, however, are built and marketed by a different company called Hirco Developments, led by Firdose Vandrevala, uncle of Priya's husband Cyrus. "Our model is to set up a special purpose vehicle (SPV), with Hirco Plc investing in it and getting preference shares," says Vandrevala, formerly with the Tatas and also an ex-chairman of Motorola India. "The Hiranandani family brings in the land and is allocated equity shares in return. Hirco Developments builds the products and markets them for a fee." It is currently executing one project at Panvel on Mumbai's outskirts and another in Chennai.

Firdose Vandrevala, CMD, Hirco Developments
We focus on who is responsible, instead of on what went wrong: Firdose Vandrevala
The equity market, on a bullish run, is also opening up for developers. Bangalore-based realtor Prestige Estates, for instance, raised Rs 365 crore through an institutional share placement in January. PE funds are down, but they have not dried up; they have, however, equipped themselves with safeguards. A Mumbai-based wealth management fund, for instance, which does not want to be named, has committed to buy 100 flats in Thane, on Mumbai's outskirts, from a developer on unconventional terms. While the market rate for flats in the area is around Rs 5,000 per sq. ft., the fund, by buying in bulk before the flats are ready, is getting them at Rs 3,750 per sq. ft. The fund in turn has pre-sold some of the flats to its investors at Rs 4,250 per sq. ft., the profit further reducing its own cost of acquisition. But the money to pay for the flats has been put in an escrow account to be released only in tranches as the construction progresses.

The developer, provided he keeps going, is thus assured of funds, while the PE fund too stands to gain - it will sell the flats at market rates once they are ready. "The financing situation has improved significantly for developers from what it was a few years back," says Keki Mistry, Vice Chairman and CEO, Housing Development Finance Corporation (HDFC).

Yet all such funding falls flat if properties do not find customers. Around 82,000 housing units remained unsold in 2010, rising by another 12,000 in 2011, according to a report released last December by Knight Frank India. Thus developers have been devising all kinds of schemes to woo them - one of the most popular being the "20:80 payment model" in which buyers pay just 20 per cent of the value of an apartment as booking amount, and nothing more until it is handed over to them to live in.

Mumbai-based realtor Indiabulls Real Estate has developed the model further - it seeks a mere 15 per cent as advance while booking a flat and another five per cent while giving possession - thereafter the housing loan, which too Indiabulls arranges if needed from one of its group companies, kicks in, and the buyer has only to pay equated monthly instalments (EMIs).

While selling some of its Mumbai flats, Lodha Developers tried another tactic. It offered them in a price band instead of at a fixed price, in much the way an initial public offering (IPO) does, and decided the final price only after receiving buyer responses. Much like a successful IPO, it drew twice as many applicants as the flats it had to sell. "It was a nice way of grabbing some of the demand," says Vakil of Praron. Flat allotees too were later chosen through an automated software programme, the way IPOs do.

Again, developers have been focusing more on the relatively affordable homes of late , the trend best reflected by Lodha Developers' shift of emphasis. "Most developers are now focusing on the broad segment of flats costing Rs 20 lakh to Rs 1 crore," says Pranab Datta, Chairman, Knight Frank India."

There is also a growing bias towards residential projects rather than commercial. (Three quarters of the real estate market in India, in any case, has always been residential. Vakil puts the residential demand at seven times the commercial.) "We want to primarily do residential projects because it has instant cash flows," says Vikas Oberoi, Chairman and Managing Director of Oberoi Realty. "Commercial ones have a long gestation period and are cash intensive." J. C. Sharma, Vice Chairman and Managing Director of Bangalore-based Sobha Developers echoes his view.

"With residential projects, developers start getting cash flows from the day they are launched," he says. "With commercial properties returns come in only after completion."

The Lodha Group has even converted two of its projects in the Mumbai Metropolitan Region from commercial to residential. How well are such efforts working? It is early days yet for a clear answer. However, in 2012, the gap between new launches and sales dropped sharply to 32,000, says the Knight Frank India report. Simultaneously, banks have become a little more accomodating towards home loan seekers. While growth in home loans fell from 13.2 per cent in the December 2009 to December 2010 period, to 11.9 per cent for the corresponding period in 2010 /11, it recovered to 12.5 per cent for the corresponding period in 2011/12. Home loan defaults have also been declining since 2010, down from almost four per cent in March 2010 to less than three per cent in March 2012.

Bipin Kumar Mishra
'There is malafie intent. Flat prices in the area have risen and they want to re-sell my flat at a higher price'Photo: Aditya Kapoor/
He booked a flat in Supertech-Eco Village II in Noida Extension in the National Capital Region in May 2010, paying a booking amount of Rs 3 lakh. He was promised delivery in July 2012. Within months, construction in the area was put on hold, following an the order of the Allahabad High Court. He had opted for a construction-linked plan, but though there was no construction activity, the builder kept sending demand letters for payments. Finally, he got a letter saying his allotment could be cancelled because the booking amount he had paid was short by Rs 1,966. Business Today’s queries to Supertech went unanswered.

But fewer residential project are being launched now. Such launches fell 30 per cent in 2012 compared with the year before, while the fall in 2011 had been just seven per cent over 2010. "Less than 10 per cent of the launches between 2007 and 2013 in Mumbai have taken off," says Abhinandan Lodha, Deputy Managing Director, Lodha Group. But this has been a blessing in disguise - developers' inventories and interest costs have come down.

Dubious Methods
What is regrettable, however, is that in their drive to stay afloat at all costs, some developers have not been averse to mistreating customers. Take, for instance, the fate of Bipin Kumar Mishra, a 38-year-old chartered accountant who booked a flat in a large project promoted by leading developer Supertech Group Ltd in Noida Extension, part of the National Capital Region, in May 2010. He paid an initial booking amount of Rs 3 lakh, but work on the project soon stalled following land acquisition problems, which culminated in a stay order from the Allahabad High Court.

Anand Gupta
'I started writing letters in 2009, and have even sent a legal notice, but there has been no response. They have become so brazen they don't even bother responding' Photo: Aditya Kapoor/
He booked 40,000 sq ft of store space in the proposed mall called Omaxe Connaught Place in Greater Noida in the National Capital Region in 2007. He entered into a nine year lease with Omaxe, paying Rs 37 lakh. Six years later, the mall is still far from complete. His letters to Omaxe get no response. But Business Today's queries did. Rohtas Goel, Omaxe Managing Director says: “We will hand over the mall in six months. The delay is related to the time it took to get the occupation certificate."

Though he had opted for a construction linked plan and was thus not required to make any more immediate payments since construction had stopped, Supertech continued to send him notices seeking payments. And 15 months after booking, he got a letter saying his allotment would be cancelled, because his booking amount was short by a paltry Rs 1,966. He alleges he was never informed that the booking amount had been increased. "There is malafide intent," he says. "Flat prices in the area have risen and they want to re-sell at a higher price." Repeated calls and emails from Business Today to Supertech went unanswered.

Abhinandan Lodha, Deputy MD, Lodha Group
Less than 10% of the launches between 2007 and 2013 in Mumbai have taken off: Abhinandan Lodha Photo: Nishikant Gamre/

Mishra is not the only one. The Competition Commission of India (CCI) has been flooded with similar complaints - 75 of the 300 complaints it has taken up since it began functioning in May 2009 have been against realtors. They include a large group of home buyers from the same Noida Extension area who in January this year, echoing Mishra, charged that builders there were harassing them with demands for extra payments and threatening to cancel their allotments. "We are getting a lot of information on the practices of real estate companies," says Ashok Chawla, Chairperson, CCI. "Builder-buyer agreements are often one-sided and arbitrary."

Most complaints are still being investigated, but at least one builder has been indicted by the CCI - ironically, the biggest of them all, DLF. Customers at one of the DLF's projects, called Park Place - in Gurgaon, on Delhi's outskirts - alleged the company changed the original plan of the project after having sold them their flats, and added 10 more floors across buildings without informing them. In an order passed on January 10 this year, the CCI upheld the complaints and noted that DLF appeared to have broken other laws as well during the construction. DLF did not respond to a detailed questionnaire and repeated phone calls from Business Today.

The Future
Are more structural tweaks possible to make it easier for the real estate sector to get funds? Some industry experts feel giving it industry status - which it is still denied - would help. Others maintain realty players themselves need to display greater transparency and adopt higher governance standards. They note that those which do so, are able to both get finance and sell their products at a premium. "Corporate governance is not very high in this industry," says Anuj Puri, Country Head, Jones Lang LaSalle. "Realty companies belonging to reputed groups such as the Tatas or Godrej have been able to attract private equity." Legislation in the form of a Bill forcing realty companies to follow norms could also help.

Navin Raheja, CMD, Raheja Developers
2006/07 was a time when every developer had started aspiring to be No.1: Navin Raheja Photo: Shekhar Ghosh

Vandrevala of Hirco believes real estate deserves not only industry, but also infrastructure status, which would make it one of the core sectors of the economy. He notes that while home loans cost around 10 per cent, loans to developers, even from the banks, come for 16 per cent or more, while NBFCs and PE funds charge higher than 20 per cent. "You are boosting demand and restricting supply," he says. "When a project is delayed the focus is always on finding out who is responsible, instead of asking what went wrong. When a car's brakes fail and someone dies, should you punish the driver or should you first find out why the brakes failed and then maybe punish the carmaker?"

But realty companies too need to learn to live within their means and not over-leverage. At an analyst meet in February, DLF announced it intended to slash its debt from more than Rs 21,000 crore to around Rs 11,000 crore. "Things are getting better for the stronger developers and worse for the weaker ones," says V. Hari Krishna, Director, Kotak Realty Fund. "Banks are also going the extra mile to lend to the stronger companies."

Praron's Vakil stresses the need for funds focused solely on real estate which can buy up and develop both offices and homes, and rent them out. In countries like the United States, they have made a big difference. "A company like Post Properties in the US owns 500 complexes of 300 to 500 flats each. But to succeed in India such funds should be able to evict tenants easily.

Residential yields also need to improve and rental housing should have a separate floor space index," he says.

For the time being, it is only with prudent and innovative strategies that this sector can hope to keep going.
Pooja Chandra
Pooja Chandra

  • Before buying any property you should: Check the title of the property. Find out who owned it for at least the last 14 years. Ensure all previous mutations are complete.
  • Ensure it is free of any sort of litigation or mortgage. Physically verify the original chain of documents.
  • Verify it has all the statutory approvals - for instance, for its building plan and certifi ed map - as well as environment clearances, change of land use approvals, completion certifi cate, etc.
  • Ensure all previous dues such as electricity bills, property tax, water bills, etc, have been paid in full. Satisfy yourself about construction technicalities of the property - the plumbing, the electrical connections, the power supply, etc.
  • While signing the agreement of sale or contract, ensure the schedule of payments is realistic and the date of registration and date of possession are clearly mentioned.
  • Check out the credibility of the builder by verifying his past performance.
  • If buying an apartment, ensure there no ambiguity about the covered area, the super built-up area and the total built up area.
  • Read the contract agreement carefully and insist on deleting clauses you are uncomfortable with. Pay special attention to the clauses pertaining to penalties, delays in construction, delays in case of late payment of EMIs, refund in case of delays, etc.
  • Maintenance cost is a huge recurring expense for the buyer. Find out the amount beforehand. Be wary of schemes such as assured returns, no payment of EMI till possession, sharing of EMI, etc.
  • Do not be taken in by the glossy brochures many builders publish. Ensure the amenities mentioned in the brochure are included in the contract. Ensure the stamp duty computed at the time of registering the sale deed is correct.
The author is Partner, PCA Law Firm

Additional reporting by K. R. Balasubramanyam

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