Roadmap to combat housing project delays
Oct 23, 2013
Source : The Times of India

 

KOLKATA: When Abhay Upadhyay applied for a 2-BHK row house in a project called Kolkata West International City in August 2006, he harboured the dream that his daughter, who was born a couple of months earlier, would grow up in a spacious, green and pollution-free environment.

Initially the date for handing over possession was June 2008. Today Upadhyay’s daughter is seven years old. The family continues to live in a highrise building, the larger part of which is occupied by offices. His daughter can’t go downstairs to play in the evening because far too many vehicles enter and exit the complex, often at high speeds.

To add insult to injury, the developer has not paid Upadhyay any compensation for the delay because a clause in the builder-buyer agreement (which Upadhyay was given to sign after 50% of the cost of the house had already been extracted from him) said that the penalty would be adjusted against the money that was due at the time of possession.

As the ongoing slowdown engulfs the real estate sector, delays are becoming the norm. At the end of July, 65% of the supply promised in 2013 had not been delivered in the top 15 cities, according to research firm PropEquity. “Delayed delivery of projects is leading to a high level of ire among customers,” says Santhosh Kumar, CEO-Operations, Jones Lang Lasalle India.

What causes delays?

Projects don’t get delivered on time due to a variety of reasons. Developers in India often undertake pre-launch sales, which means that they begin to sell apartments to buyers even before they have obtained the licence and sundry other permissions that are needed to develop a property. They also make over-optimistic estimates of how soon the permissions will come through.

When they don’t, the project gets delayed. Sometimes developers also mismanage their cash flows, which leads to difficulties in timely completion of projects. Some overexpand.

Instead of completing a project, handing over possession, and then going over to the next, they divert the money collected for one project to buy another piece of land. This allows them to begin raising money from buyers in the second project as well. This focus on raising money rather than timely completion tells on deliveries.

A developer needs to sell about 40-50% of the apartments in his project to have enough cash to begin construction. Amid the current slowdown, achieving this target is taking more time than usual. The rising costs of materials and labour have further compounded developers’ financial woes. Some experts are of the opinion that developers delay projects because they do not have the incentive to complete them.

Most buyers nowadays opt for the construction linked payment (CLP) scheme wherein the bank makes payments to the developer on the completion of defined stages of construction. The very purpose of the CLP mode is to offer an incentive to developers to stick to construction schedules. However, developers have found an ingenious way to hoodwink buyers.

Explains Sanjay Sharma, MD, Qubrex, a Gurgaon-based real estate consultancy: “The developer raises the superstructure on time. Once this is done, he collects almost 90-95% of the cost of the apartment from the bank. However, he would have spent only 40-45% of the total construction cost so far. It is at this stage-completing the interiors and giving the final finishes-that the delays begin.”

Instead of taking six months or one year, the developer drags this portion of the work for two years or more. The reason: the penalty he has to pay is paltry (1-2%), while the returns he can earn by diverting your money to other uses can be very high.

Nowadays, a delay is at times built into the design of payment plans. A recent project in Gurgaon advertised its payment plan as follows: 20% at the time of booking, 20% after one year, and 50% after 36 storeys have been cast, which, the brochure went on to add “could take a long time”.

Such payment plans are designed to attract investors, who like plans where the initial amount is low, and the payment schedule is staggered over a long period. Once the developer has collected money from investors, he can tout it before banks and raise more money from them. “Such staggered payment plans do not work to the end user’s advantage, since they inevitably lead to delays,” warns Sharma.

Poor project management skill, especially among new and inexperienced builders, also causes delays. The new land acquisition law, which requires that the consent of 80% of landowners be obtained, is expected to make the entire process of acquisition lengthier. Obtaining the consent of such a majority is difficult.

The impact

For developers delaying projects may be just another way of enhancing their profits. But delays cause immense distress to the hapless buyers waiting to get possession of their homes. For first-time buyers especially, a delay in possession entails financial hardship, for these people are simultaneously saddled with both the rent and the EMI on their loan.

Even for second home buyers, a delay leads to difficulties. At the time of purchasing, buyers calculate that after the stipulated period they will get possession and will rent out the house. The rental will take care of a considerable portion of the EMI. When delays occur, all these calculations go haywire.

What should you do?

Project delays have become so pervasive that most buyers treat a six- to 12-month delay as par for the course. It is only when the delay lasts longer that frown lines appear on the buyer’s brow. Since the problem is so endemic, there is no magic solution to help you dodge it. Nonetheless, taking a few precautions could improve your chances of avoiding the worst of it.

Before buying a house from a developer, check how many of his past projects were delivered on time. If there was a delay, what was its quantum in each project? Says Rajan Ahuja, executive director, Realty & Verticals, an NCR-based real estate consultancy: “If your investigation reveals that delays have been the norm in a builder’s past projects, it points to lack of intent on his part to deliver his projects on time.”

Examining a developer’s financial status can also offer a clue regarding whether he has the wherewithal to finish his project on time. In the case of listed players, information regarding their level of indebtedness can be easily gleaned from the balance sheet which is in the public domain. Before investing in a project, ask the developer if he has been able to obtain construction finance from a bank.

To ensure that the project does not get embroiled in land-related litigation, ask the developer to show you the title deed to the land on which he is developing the project. To avoid delays arising from lack of approvals, one, avoid investing in a project at the prelaunch stage. And two, ask the developer to show you his licence and proof of other clearances for developing the project.

Avoid investing in an area where the infrastructure is unlikely to be ready by the time possession will be offered in your project. In the Dwarka Expressway area in the National Capital Region (NCR), developers are delaying handing over possession in projects on the specious plea that even if they were to offer possession, the buyer would not be able to live in the apartment since the main highway and other infrastructure are not ready.

With delays becoming widespread, you could try your luck in the secondary market, where apartments are often available at a discount to primary-market rates. However, as Kumar of JLL India cautions, “The buyer needs to have higher initial liquidity. Many developers also impose heavy transfer charges for sale before the completion of a project.” Kumar adds that developers in financial distress are now offering attractive CLP plans where a large portion of the total cost of the house has to be paid after possession. Opt for such plans as they provide a hedge against delays.

In case of extreme delays…

If the delay runs into several years, the buyer needs to assume a proactive role. Get together with the other buyers in the project to form an association. The latter should then hold regular meetings with the developer and put pressure on him to deliver the project at the earliest. If this doesn’t work, the association could try to highlight its case in the media. Most real estate companies are wary of negative publicity. If none of this works, the association could file a case in a consumer court. For a case involving a sum of up to Rs 20 lakh, one goes to the district court; for up to Rs 1 crore, the state-level court; and for amounts above Rs 1 crore, the national level court.

If the builder has exploited his dominant position, buyers may take their case to the Competition Commission of India (CCI). You can also opt for a market-linked solution. According to Pradeep Mishra, head of Sainik Estates, a Gurgan-based real estate consultancy, “If three years have passed since you invested in a project, in all probability its cost would have appreciated. See if you can sell and exit at a profit.” If the real estate regulatory bill is passed, there could be easier and faster redress for buyers’ woes (see box: How will the real estate regulatory Bill help?).

Early pointers to a delay

- Is the developer launching too many projects? He is probably diverting buyers’ money into other projects. – Ask for a detailed construction schedule. Monitor the project. – If two or three stages are not completed on time, it points to eventual delay. – If you have an early hint of delay, you can sell and exit, perhaps at a profit. – Once news of the delay spreads, the premium in a project vanishes.

How will the real estate regulatory Bill help?

- The Real Estate Regulation and Development Bill 2013 has been referred to a Parliamentary Standing Committee on Urban Development for review. – The regulator will have a web site where all developers will have to upload information regarding the permissions they have obtained. Buyers will be able to invest only in projects that have the permissions. – Pre-launches will not be allowed. – Developers will have to deposit a large portion of the money collected for a particular project in an escrow account. Diverting money will become difficult. – The regulator will have the power to adjudicate on disputes between the developer and the buyer, with the power to impose fines.

Getting the developer to pay the penalty is tough as they use a variety of ruses to escape paying the penalty for delay in delivery.

- If there is a delay in the delivery of a project, the developer is supposed to pay a penalty to the buyer. This penalty ranges from Rs 2-5 per sq. ft. per month. Compared to the price of the house, the penalty is a pittance (see table: Penalty paid is a pittance). Imagine that you buy a house of 2,000 sq. ft., which is priced at Rs 4,000 per sq. ft. The total cost of the house comes to Rs 80 lakh. A lot of times the delay happens at the finishing stage, when the superstructure is ready, and 90% of the cost of the house has already been disbursed by the bank to the developer. Thus, the penalty that the developer pays you as a percentage of the money you have paid him is a meagre 1.67%. This penalty usually falls short of the rent you would be paying. If the developer has deployed your money to complete the construction of another project, then what he’s paying you is pittance compared to the interest rate on construction finance (18% and above).

- Often the developer inserts a clause in the builder-buyer agreement that enables him to avoid paying the penalty. Consider this clause: “The company will not pay any compensation or penalty in case the delay is because of any reason beyond the control of the company. In this case, the company will be entitled to a reasonable extension of time.” Among the reasons cited as being beyond the developer’s control, you could have a slowdown in the real estate sector, escalation in the cost of raw materials, difficulty in finding labour, and so on. One or the other of these contingencies is bound to arise over the two to three years it takes to develop a project. The developer then cites this clause to deny compensating you.

- Developers weave in a clause in the builder-buyer agreement that says: “The company shall endeavour to complete the construction of the apartment within 36 months from the date of allotment of the apartment as per the allotment letter.” Note that no date for handing over possession has been mentioned. Instead, the builder links the possession date to the date of allotment. Since different buyers enter a project at different dates, their dates of possession vary. This helps the developer avoid, or at least postpone, paying the penalty.

- Instead of paying the penalty in cash, they offer to increase the super area. Since the super area includes a lot of common areas, there is ambiguity in its calculation. It becomes difficult for the buyer to tell whether he has received extra space. The developer may also not pay you the penalty if you are not the original allottee, or if you have been late in making even a single payment.

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