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Bargain Time

Real estate sales are yet to pick up. The market is throwing up some great deals that you can go for

 Renu Yadav   
Bargain Time
Illustration by Raj Verma

Owning a house provides a sense of security to many. But the astronomical rise in property prices in years leading up to 2007 had made buying a home a distant dream for many. Still, lakhs of people who stretched their pockets to book a house never got it as developers struggled with funds and complex regulations and failed to finish projects. "Residential real estate launched in or before 2013, that is stuck at various stages of non-completion, is collectively worth a whopping Rs 4.64 lakh crore. A total of 5,75,900 units are yet to be delivered to their buyers," says Anuj Puri, Chairman, Anarock Property Consultants.

This sums up the grim picture of the real estate sector. The developers are in great financial stress as sales are happening at a very slow pace compared to their peak. "Housing sales soared to 3.5 lakh units in 2014 (the best between 2013 and 2019) but fell to a mere 2.1 lakh units in 2017, post demonetisation. The sales started to show some recovery during the past one year but are far lower than the peak levels. Homebuyers perched themselves on the fence, awaiting more favourable market trends, and investors backed out completely," says Puri. Property prices have either corrected or remained at the same level over the past few years. The developers have little bargaining power. This has made houses affordable for many.

The government has used the slowdown over the past several years to bring in several regulations, including the Real Estate Regulations and Development Act (RERA) Act, apart from new Consumer Protection and Benami Property laws, to make the industry transparent and customer- friendly. This is apart from the implementation of the goods and services tax (GST). Apart from this, interest rates are falling due to economic slowdown and low inflation, which will further improve affordability. The festive season, too, is around the corner and developers have started rolling out various schemes and offers to attract buyers. All these factors make it a good time to buy a house.

Consolidation Working Well

The past few years have been tough for real estate developers, but the recent liquidity crisis, which started in September last year with IL&FS defaulting on interest payments, has worsened the situation. Although the government has taken steps to improve the situation, its measures will take time to show results. "The NBFC crisis has added to the headwinds being faced by the real estate sector. It had added to the existing liquidity crunch. This is happening in the backdrop of already slowing sales due to demonetisation and exorbitant GST rates. All this is impacting affordability and causing a dip in sales. With the receivables cycles getting stretched, developers are facing the double whammy of liquidity crisis and approaching delivery deadlines," says Nabil Patel, Director, DB Realty. "This situation has led to a resurgence of private equity and consolidation and a growing cost burden on end- users," says Sudhanshu Kejriwal, Co-founder, EverVanatage.

The slew of reforms and the liquidity crisis will ensure consolidation in the industry. Only developers with credible track record who follow good practices will remain in the market. Anarock Research says that out of the total new supply of approximately 1,39,480 units in the top seven cities in H1 2019, over 53 per cent (73,930 units) were launched by branded developers and 47 per cent by non-branded entities. In H1 2018, branded developers' share was 52 per cent and during H1 2016, that is, before demonetisation and RERA, it was 60 per cent (95,600 units) of the total 159,090 newly-launched units in the top seven cities. Branded developers accounted for 63,490 units (40 per cent) of the total supply during the period. Branded developers include listed developers, players actively operating for 10 years or more, newly-formed entities of large conglomerates and players with sizeable areas under development either locally or pan-India.

Rising Ready-to-Move Share

Given the lower risk of possession delays and benefit of zero GST (GST is levied only on underconstruction properties), people are preferring ready-to-move-in properties. Also, the recent liquidity crisis has ensured that the developers are focussing more on completing existing projects rather than launching new units. As per the data provided by Liases Foras, the share of ready-to-move has more than doubled from 12 per cent to 26 per cent between 2013/14 and 2018/19.

Making Houses Affordable

The government's focus has been on affordable housing to achieve its vision of Housing-for-All by 2022. For this, it has announced a slew of measures ranging from tax breaks for first-time buyers in the affordable category and giving infrastructure status to the sector to relaxing the minimum area requirement for tax subsidy under the Pradhan Mantri Awas Yojana (PMAY) and reduction of GST rates for affordable houses. In the recent Budget, the government announced another tax break of Rs 1.5 lakh on interest paid (over and above Rs 2 lakh available to everyone) for first-time homebuyers in the affordable segment. The affordable segment now accounts for a majority of sales. "The largest new launches were in Rs 25 lakh to Rs 50 lakh bracket. This segment accounted for more than one-third (38 per cent) of total units launched during the June 2019 quarter," says a report by Liases Foras.

Experts say the existing supply won't be enough to meet the demand for affordable houses. "If we talk strictly about affordable housing as defined by the government, the supply is very low, not only Delhi-NCR but in other areas of the country, too. To qualify for affordable housing, the area should not exceed 850 sq.ft. and price should be within Rs 45 lakh. If we look at this definition, the total new supply is 6,970 out of 21,600 units in Delhi-NCR. The figures are worrying as the highest demand is in affordable housing and the shortage is to the tune of 19 million houses," says Pradeep Aggarwal, Co-founder and Chairman, Signature Global, and Chairman of the ASSOCHAM National Council on Real Estate, Housing and Urban Development.

There is a need to address certain issues in order to increase the supply. One is availability of land for building affordable housing near big cities. "Top priority should be given to controlling the cost of the land. The states can do that through various means. For instance, we can see the unutilised land in bigger cities under various departments. This land can be given to developers at cheaper rates, especially for development of affordable housing," says Pradeep.

Regulatory Support

Experts believe that the recent regulations should increase the confidence of people to take the plunge and buy a house. "Policy reforms such as RERA, GST and IBC (Insolvency and Bankruptcy Code) have played a key role in strengthening the real estate sector and bringing in transparency. What's encouraging is that most of these reforms have not gone into the dormancy mode and are actively being reviewed/revised by the government to ensure that they remain relevant and address the concerns of stakeholders involved," says Abhinav Joshi, Head of Research, CBRE India.

RERA was implemented in 2016 and mandates maintenance of an escrow account by the developer to prevent misuse of buyers' funds, setting up of a regulatory authority to redress complaints of homebuyers and provisions to penalise developers in case they fail to fulfil their promises.

However, implementation issues need to be resolved. Adhir Ranjan Chowdhury, Minister of Housing and Urban Affairs, said in the Lok Sabha on July 4 that so far 30 states and Union Territories (UTs) have notified the rules under RERA. West Bengal has made its own Act - West Bengal Housing Industry Regulation Act, 2017 - instead of implementing RERA. Out of the 30 states and UTs, 28 have set up regulatory authorities; and 43,938 projects have been registered under RERA across country.

Shohit Chaudhary, Advocate-on-Record, Supreme Court, says the biggest issue with RERA is that even after an order has been passed in his favour, the homebuyer is required to file an execution petition for its implementation. This gives the real estate developer another opportunity to litigate and delay the process. The regulations are new and are likely to improve over time.

"It is not the magic wand it was hoped to be. However, over the past two years, RERA has brought more sanity - and return of consumer power - than seemed possible in such a short time. The real estate sector is still struggling with it and it is very much a work-in-progress in many states, but RERA nevertheless hangs like a Sword of Damocles over the previously unregulated industry. Eventual compliance across the board seems inevitable," says Puri.

Recent judgments against developers have shown that things are moving in favour of homebuyers. A recent Supreme Court judgment on cancellation of RERA registration of the Amrapali group of companies and handing over of its projects to NBCC for completion have given a ray of hope to the homebuyers. It is also a good lesson for the errant developers.

In another judgment, the Supreme Court has upheld the amendment in IBC that gave homebuyers the rights of financial creditors. This means the buyers can file their cases under Section 7 of the IBC, which provides for initiation of corporate insolvency and change of management by financial creditors.

The recently passed Consumer Protection Bill 2019 will also strengthen the rights of homebuyers. "As per the new Act, consumer courts are being restructured with revised pecuniary jurisdiction and new Central Consumer Protection Authorities (CCPAs) are bring created. The CCPA may take preventive action against frauds. Earlier, a complaint could have been made only against the company or the promoter, but now action can be taken for misleading advertisement, too. The new law allows consumers to file their complaint with the court from anywhere. It also enables the consumer to seek a hearing through video conferencing, saving his money and time," says Virag Gupta, Partner, VAS Global, a New Delhi-based law firm.

Low Interest Rate Scenario

The Reserve Bank of India has cut the repo rates by 110 basis points this year to 5.40 per cent, a nine-year low. Although banks have been slow in passing on the benefit to the borrowers, the RBI has made it mandatory for banks to shift to external benchmark-linked lending rates, which is expected to improve the transmission of rate cuts. With interest rates at multiyear low and additional tax breaks under the PMAY, the interest cost for the buyers will go down substantially. However, experts believe that as home loan is a long-term contract and interest rates are likely to go through cycles, one shouldn't delay buying in anticipation of a further fall in rates. "Deferring your purchase due to interest rates is not a wise decision. Since the rates are floating in nature, the change will happen in a few years as the market condition changes, therefore, customers will get the benefit," says Shaji Varghese, ED & Business Head, PNB Housing.

Buy or Rent?

The government has also proposed a model tenancy law to boost rental housing. However, the choice of whether to rent or buy should depend on a variety of factors, including your financial health. "One should evaluate one's cash flows, liabilities and future financial goals before deciding to buy a home. Long-term goals like retirement and kid's education should not be affected. There should also be a limit to what is to be paid for EMIs. The EMI should not exceed 40 per cent of the monthly household income. One should still save at least 20 per cent income after EMI and other household expenses," says Nitin Vyakranam, Founder and CEO, Arthayantra.com.

If property prices are high and beyond your reach and you can find a desired accommodation at a relatively affordable rent, it makes sense to live on rent. However, if the price is within your reach after considering the low interest rates and income tax advantage, it makes sense to take the plunge. "The prevailing interest rates in the market, which are in the range of 8.3-8.5 per cent, make homebuying cheaper along with the tax benefit. These rates are set to go down further after the latest repo rate cuts," he says.

However, if you are thinking of investing in a house property, the proposition may not be that attractive in terms of the overall return. "For end-users, who are planning to buy for living and not investment, the time is ripe. This is a buyer's market where they have the widest menu of projects available for purchase within their desired budget and requirements," says Shaji Varghese, ED & Business Head, PNB Housing.

Beside the financial calculation, when it comes to buying a house for living, there is an emotional factor involved, too, as having your own house brings a sense of security and satisfaction. "Owning a home for self-use comes with a certain non-quantifiable mental comfort as well as the ability to participate in potential price appreciation over a longer time-frame. Therefore, the rent versus buy decision must be thoroughly analysed," says Raj Khosla of MymoneyMantra.

@renuyadav08