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Can you afford a cheap home?

The house pegged as ‘affordable’ may not be worth the price you are paying. Consider its location and sundry charges before picking up one.

Today the buzzword in the real estate industry is ‘affordable’. Till about 18 months ago, the operative term was ‘premium’ or ‘luxury’. The reason for the change in focus has nothing to do with philanthropy. What most people don’t realise is that while builders were taking the buyers for a ride by terming any project ‘luxury’, they are still making more than their fair share of profits by selling ‘affordable’ flats.

“Affordable housing is not about box-sized, budget homes in farflung places, where there is no connectivity to work places and little basic infrastructure. Affordable housing should be able to cut across all income segments and should make economic sense in terms of proximity to work place,” says HDFC chairman Deepak Parekh in a letter to the HDFC shareholders.

Parekh knows what’s happening in the real estate market today. It does not take much to figure out that houses are affordable because they are 30 km from the main city without proper approach roads, or because they are 600-sq-ft spaces being sold as three-bedroom apartments with box-sized rooms. This has been an accepted practice in places like Mumbai, where real estate is notoriously hard to acquire.

Watch out for...
Apartment size: A three-bedroom house can be tiny (900 sq ft super area).
Usable area: The difference between super area and carpet area is higher.
Extra charges: High PLC, parking charges compensate for lower price.
High penalty on delays or defaults.
What you should do...
Check out resale flats in the same location: Bigger flats sold by investors in the same location may be cheaper.
Avoid ‘affordable’ flats that are part of premium projects: Maintenance charges may be higher due to expensive, sometimes mandatory, common facilities.

But in relatively more spacious metros such as Delhi and Chennai, where city limits are being stretched by the day, it’s suspiciously like a rip-off when three-bedroom apartments take up all of 900 sq ft (super area). To put things in perspective, till about two years ago, the standard two-bedroom apartment in Delhi was upwards of 1,000 sq ft, and a three-bedroom apartment, at least 1,300 sq ft.

“What developers are doing today is bringing down the ticket price of their projects by adopting measures like reduction of flat sizes. This opens up the same land area to more buyers. It is something like the FMCG companies reducing pack sizes,” says Rohtas Goel, CMD, Omaxe. This seems like sharp business dealing. But the problem, to continue Goel’s analogy, is that developers are reducing the size of the contents and advertising the size of the package. That is, the quoted area is invariably the super area; the usable space is at least 20% less than this.

To make matters worse, developers charge you extra for almost anything that you want. A preferential location charge (PLC), club membership, parking, etc, all cost more than the advertised price. “A PLC was supposed to be only for a small number of flats, but nowadays developers charge a park-facing PLC and a pool-facing PLC in a building which has a pool on one side and a park on the other. This means all the buyers pay the PLC,” says Chennai-based real estate consultant, Prabhudas Swain.

There is also a growing trend where developers are asking the buyers for full upfront payment on start-up housing projects under the guise of offering substantial discounts. Calling them “hawa mahal (castles in the air)”, Parekh says, “There are instances where home buyers have made the entire payment despite the developer not having commenced construction.”

14% is the average decrease in the size of a two-bedroom apartment.
12% is the average decrease in the size of a three-bedroom apartment.
5% is the average decrease in the size of a one-bedroom studio apartment.
82% of the units launched were priced at Rs 1,500-3,000 per sq ft.
28% of the units were in the form of individual floors in low-rise housing.
30% was the average absorption rate of affordable housing projects.
Figures for residential projects launched in the NCR in the past six months; Source: DTZ Research

Project delays can be especially disastrous for those banking on flipping property. Some investors buy affordable houses as a short- to medium-term investment, hoping to sell the current investment at a premium and later buy a bigger house. In an ideal world, this makes sense. However, these days, with most developers strapped for cash, project delays are more than a possibility.

“For developers, the problem is of cash flow, so those whose existing projects are stuck for cash will use the money generated from the sale of affordable projects. This raises the chances of project delays, unless markets revive fast,” says Swain. Also, because some of these ‘affordable’ locations may be at places which will take time to develop, finding buyers will be tough. For an investor, as much as for a buyer, location is key.

But how can you get a more realistic assessment of what you’re paying for? As we have just seen, location and proximity matter. Also, take into account the maintenance charges. Even if you have got your apartment cheap, if it is a part of a bigger project with common facilities, you may have to pay a higher maintenance fee than you had bargained for. As you are just a part of the project, you will not be in a position to negotiate later.

Experts also suggest that, where possible, check the resale property market in the area where a new project has come up. “If a developer is offering flats, even if smaller, at lower ticket prices, sellers’ expectations in that location will be muted. That is where a serious buyer can drive a hard bargain,” says Swain. A resale property also scores because it would have a bigger usable area than a new project in the same area, as it was built before the slowdown in the real estate sector took hold.

Always remember that when it comes to such expensive buying decisions as houses, your motto should be caveat emptor—let the buyer beware.