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Home developers must treat buyers fairly to stop the bloodbath in India’s real estate sector

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Reuters/Adnan Abidi
Rays of hope?
  • Ritesh Kumar Singh
By Ritesh Kumar Singh

Corporate economic advisor

This article is more than 2 years old.

In the last 12 months, the Reserve Bank of India has reduced the key interest rate by 125 basis points. Roughly one-fifth of the bank credit disbursement has direct or indirect exposure to the realty sector. Yet, that doesn’t seem to help revive realty demand.

Unsold inventories are piling up in city after city, amidst complaints of prolonged delays in handing over possession of apartments, manipulation of carpet area, poor quality of construction, and the rampant use of black money.

Investors are deserting top realty locations. Worse, demand for a tough housing regulator is increasing to rein in unscrupulous builders and brokers. If one goes by the contents of the Housing Regulator Bill, recently cleared by prime minister Narendra Modi’s cabinet, a jail term could be a possibility for builders and brokers for cheating customers and breaching contract terms.

Apart from setting up a regulator, there’s not much that the government can do to help realty companies except smoothening the process of regulatory approvals—though that is easier said than done.

But, there are many things builders can do on their own to bring back home buyers. The best solution would be to reduce home prices, although many real estate developers wouldn’t agree with me citing the rise in cost of land and other inputs. Here are my suggestions to bring back home buyers and revive realty demand.

Get rid of one-sided contracts

It is the home buyers who are paying for delayed regulatory approvals—in the form of EMIs (equated monthly installments) and rent—because of one-sided contracts that builders force on them. Most builders have capped penalty payment for late delivery of apartments at between Rs5 and Rs10 per square feet per month.

Please voluntarily change—even if not forced by the housing regulator that may or may not come, despite what politicians say—the system of “one-sided apartment buyer’s contract” to make it balanced. That in effect means charging the same rate of penalty for both parties—home sellers and home buyers—for delaying possession and payment respectively. It will improve trust and induce prospective home buyers to think about buying under-construction properties, and provide realty companies an interest-free source of funding compared to unsecured debt papers, diamond merchants, loan sharks or private equity players that could cost them as high as 20% a year.

Be upfront about possession date

If builders can’t give the possession in three years and will actually need six years, then they should say that upfront so that home buyers and investors can factor it in their investment plans. In a country where owning a home is a dream, we can always get some buyers who would want to buy homes, and yet don’t need immediate possession.

If developers say they’ll give possession in say three or five years, then they must give it in three or five years. Otherwise, without even being asked for, just credit the penalty amount in your buyers’ account even for a two-week delay. Why not? After all, developers do extract penalty from buyers for even a two-day delay in payment of instalments. I’m not advocating that developers treat customers as king. I’m not so naive to believe in that age-old management crap. So please don’t laugh at me for suggesting that. But you should know that no business has ever survived by treating its customers unfairly. Soon, you’ll agree with me. The housing market’s bloodbath in India has just started.

Stop using misleading marketing gimmicks

I request realty firms to stop using all kinds of marketing gimmicks including compact homes (which are nothing but smaller homes, hence priced lower), celebrity endorsements (the endorsement fee is eventually borne by the home buyers), interest rate subvention (pay 20% now and balance 80% on possession, where developers incorporate the additional cost into the apartment’s price), manipulation of super area and carpet area, and bigger balconies and smaller living or bedrooms.

If your after-sales service is not good, no amount of advertisement and marketing will help. It will only cut into your operating margins. Given the exorbitantly high apartment prices, most homes are no longer affordable to middle-class households, so please focus on how to reduce home prices without the gimmicks of cheaper home loans or interest rate subvention. They will simply not work, and instead add to the cost.

Please remember: a 50 basis points rate cut on Rs50 lakh loan at an interest rate of 10% for 20 years means that the EMI will go down from Rs48,251 to Rs46,607 or Rs1,644 per month. Most people will not buy a home that costs Rs50 lakh just because the EMI is now down by Rs1,644, especially when one can rent that apartment for Rs10,000 a month in places like Noida or Gurgaon.

This post first appeared on LinkedIn.  We welcome your comments at ideas.india@qz.com.

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