The real cost of freebies
Apr 07, 2014
Source : The Times of India


DELHI: Indians always await an auspicious time to conduct financial transactions, especially the purchase of assets including real estate — so, what time would be more opportune than festival seasons like Navaratra in March-April and in October-November, which extends up to Diwali and further on to Christmas.

“Traditionally, Navaratra is considered an auspicious time to invest in real estate by Hindus. As a result, though transaction activity visibly increases during these periods every year, most of the buyers are those that have already made up their minds to purchase their units on this festive occasion so that their investment brings them good fortune. Naturally, customers expect developers to offer discounts and subvention schemes during every such auspicious period,” Shveta Jain, the executive director (residential services) of Cushman & Wakefield, says.

Of course, developers also turn proactive in enticing fence sitters—who keep planning to make a large ticket investment, which is required to buy real estate, but back out owing to various reasons—and give special discounts on their products. But the issue is: should the investors bite the bet.

The discounts vary from relaxed payments schedule to gift vouchers, gold coins, free fitments like ACs and free home furnishing to tax benefits. Developers say that as a large number of buyers are almost ready to invest during the festival time, only a slight prompting makes them take the plunge. Therefore, by putting up the same amount of advertisements to prompt buyers to invest, developers reap far better result in the festival season than during normal times.

Sachin Sandhir, the MD of RICS (South Asia), says that it is worth mentioning that Indians traditionally look to buy properties under special schemes, as evidenced by the number of freebiesrelated schemes currently present in the market.

But these schemes are framed to lure homebuyers. The freebies and inducements range from cash discounts on upfront payments to assured tax benefits, customization of flats, free home furnishings, free parking, club memberships, waiver on registration charges, interest subvention, luxury cars, and even international holiday packages. Extensions of such schemes are the 80:20 or 60:40 variety.

However, before buying property in order to take advantage of the discounts, one must do a proper research. During normal times, developers give substantial discounts on the rack prices of their apartments, villas or plots. But many of the developers withdraw the normal discounts when they offer special festival discounts. Therefore, one must compare the discounts offered by the developers during the normal time with the ones during festival seasons.

For example, take a case where a builder is offering a 50:50 scheme on a house costing Rs 1 crore. Under this scheme, the developer offers a payment plan where a buyer is asked to pay 50% of the price at the time of booking and the rest 50% when possession is given. Consider the prevailing interest rate in the market to be 10% and assume that the builder delivers the flat in three years.

Now, the buyer will have to borrow only Rs 50 lakh from a bank at the time of booking to pay 50% of the total amount and the rest 50%, which is also Rs 50 lakh, he needs to borrow after three years, at the time of delivery. The buyer pays an interest of Rs 5 lakh in the first year, Rs 5.5 lakh in the second year, and Rs 6.05 lakh in the third year—in total, he pays Rs 66.55 lakh in interest plus the principal. If the delivery is given in the third year, he will have to again borrow Rs 50 lakh to pay up the rest of the amount to the builder. So, after the three years, the total cost of the apartment for the buyer is Rs 116.55 lakh (Rs 1 crore 16 lakh and 55 thousand).

If the developer were not offering any such scheme, the apartment would have cost Rs 133.10 lakh to buyers. However, if the builder gives an upfront discount for a cash down payment for the entire amount, the situation can be different. A simple calculation will tell you that if the builder is giving you an upfront discount of 12.5%, you would have paid an amount of Rs 87.50 lakh only. Even with the compound interest rate of 10%, this amount become only Rs 1,16,46,250 which is less than Rs 1,16,55,000. So in this case, the upfront discount is better.

But, if the prevailing interest rate is more than 10%, or the scheme is 40:60 under which upfront payment is only 40% and the rest 60% is required to be paid at the time of delivery, or the developer delivers the house after three years, the normal upfront discount should be more than what is illustrated in the above example.

Such schemes are also helpful in reducing the pain of delay in delivery of possession of the property. At the same time, in the intervening period between booking and delivery, if your income increases, it will be easier to borrow the rest of the amount. Also, as you have to pay the rest of the amount at the time of delivery, you can shift to your new house and save yourself from paying rentals. This will increase your capacity to service the loan.

Therefore, it is advisable to go for such schemes but only after a proper cost benefit analysis. You must accept a special festival discount offer only if it is profitable—or go for the normal discount.

Sandhir says such schemes are marketing gimmicks, as these tend to put the burden on consumers at a later stage of the repayment cycle. Buyers should exercise caution by not falling for these schemes blindly.

Currently, the Indian real estate market, especially residential real estate, has been witnessing challenges in the form of poor sales and high inventory of unsold units. With the current glut in the market, it is expected that sales will remain subdued for the next two quarters and prices will move up only marginally in coming months, Sandhir said.

Thus, due to the current challenges, developers would be under pressure to sell at discounted rates. Therefore, prospective buyers might benefit by striking a deal at reasonable rates.

Sandhir also cautionedproperty buyers saying that it is essential to evaluate the options and assess the feasibility and viability of the project as a whole, rather than base one’s decision only on the quantum of discounts and freebies on offer.

More often than not, such freebies have strings attached and not all freebies are offered together. For example, projects offering freebies will have the rates slightly increased. Also, most of these freebies typically tend to be time constrained and offered only on select projects.

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