Why delayed real estate projects are a cause for concern

(Representative photo)
(Representative photo)

Year 2013. Mehta couple, both senior healthcare professionals with two teenaged kids, induced into booking an apartment in a Golf project in Noida through incessant advertisements, broker calls & allurements.
Year 2018. The doctors sought my advice. I advised them to seek a refund of their money from the builder as their home would never be made.
Year 2022. Their dream house hasn’t even seen the start of construction.

Let me also highlight four incidents from March 2022 before I share reasons of my pessimism and lack of confidence in several NCR builders.

  1. Delhi Police EoW (Economic Offences Wing) filed an FIR on another 30 builders who had scammed consumers in the name of land pooling.
  2. Haryana Govt. orders multiple probes about structural safety and damages in a residential project on Dwarka expressway, Gurugram.
  3. CREDAI issued a press release about their intent to ‘stop construction activity’ owing to high input cost of raw materials.
  4. Courts monitoring real estate development of builders who’re in jail.

There is one overarching reason for most of the above issues – The builder wasn’t selling a ‘real’ estate, he collected money against a financial product.

Let’s get into the respective roles played by the stakeholders.

  1. Inexperienced management

There were no entry barriers or regulations forbidding people from suspicious and susceptible intent and ability from becoming builders. Many planned real estate investments as some kind of ‘Chit-fund’ and sold it against future gains. Let’s compare three sectors which clock more than $100 billion turnover per annum. Real estate, automobiles, consumer products.

Nowhere is an investment solicited from end users before the product is conceived. For instance, a car is not promised after five years while consumer keeps funding the development in parts. Ownership is mistaken for management.

2. Longer the delay, more the buyer pays

Truth be told. No manufacturer would sustainably produce if the cost is higher than the selling price. Let’s do a simple mathematical calculation of the Mehta’s case. (Indicative only)

Cost of Land (per sq.ft) Rs. 800
Cost of approvals / OOP
(out-of-pocket expense)                Rs. 300
Cost of SAD expenses Rs. 500
(sales, administration & distribution)
Cost of construction                             Rs.2500                                                          TOTAL COST                                   Rs.4100 per sq.ft

PRICE OFFER TO MEHTA           Rs.2850 + 350 PLC (premium location charges)/ Other extras                 

The above illustration does not take into account the cost of delays and opportunity. Since more than eight years have elapsed, the said builder may not even start the construction unless he is able to sell the remaining inventory @ Rs. 7500 per sq. ft for averaging the profits.

Cost of inefficiency and delay results in debt. High cost of money is passed on to the customer.

3. Gullible buyers         

Do the same individuals pay for a car, in advance, without even assessing whether the features are value for money? I know there could be a counter argument about appreciating and depreciating assets; but the asset would appreciate only if you were in physical possession of it.

Retail investors cannot absolve themselves of the blame after a high-risk capital investment without formal due diligence. They played into the hands of builders & brokers with nefarious intentions. Blaming the government OR knocking the doors of justice cannot be a perennial solution to bad investment decisions.

4. Misrepresentation & accountability by other stakeholders

Be it online aggregators or broker underwriters, none mentioned the ‘completion commitment’ in their advertisements. Their responsibility ended after they collected approx. 30% sales value.

Other service providers and vendors, especially those without professional credibility, don’t necessarily bite the hand that feeds them.

One repeat victim is the NRI community who keeps pouring dollars into Indian real estate through the overseas operation of brokers and online mediums. In most cases, due diligence is more hearsay than documentation.

Lenders and bankers haven’t distinguished themselves by lending to projects based on inflated profitability numbers. Their investors as well as retail borrowers bear the brunt of loss of delayed execution.

It doesn’t help that the approving bodies have no periodic check of delivery or quality. Most just seek completion of paperwork before issuance of Completion Certificate (CC) & Occupancy Certificate (OC); no physical inspection is undertaken. Corrupted practices perfected over time don’t protect consumer investments. Builders often complain about bureaucratic delays impacting time, effort and cost. Quite rightly so.

Real estate industry needs the mentality of a manufacturer, where products are designed with the consumer in mind, manufactured on a timebound method and sold to customers on a fair market value basis. Builders became ‘Developer’. Nomenclature changed, processes didn’t.

Allow me to reassert that projects which are delayed beyond reasonable time are unlikely to be delivered with the promised quality OR features; unless manufacturer and customer mutually agree to protect each other’s interest. Legal intervention is bound to delay Justice. In many cases, denied.

The predictable knee-jerk reactions reminds me of the adage ~ It takes a disaster for the political will to act.

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