Cracks in dream home

When the real estate market took a beating in Chennai for the last two-and-half years due to varied reasons, several first-time home buyers in and around the city are a frustrated lot as many of the apartment projects, including some by top builders, have been stalled. CREDAI claims that after their recent Fairpro, the market has picked up and all these projects are under construction towards completion. But many of the projects have well overshot their deadline and the customers are paying interest for the home loans that they have taken for years without getting possession of  the property. 

“It is true that there has been a delay in project delivery and we have been telling our members to keep up with the promised dates of delivery. The sales were not happening as expected in many areas and that stalled many projects. However, our unsold inventories are fast coming down,” said Suresh Krishn, President of Confederation of Real Estate Developers’ Association of India (CREDAI). 

As per rough estimates there are 20,000 units that are still under construction in Chennai and surrounding areas and most of them have overshot their expected date of delivery. “We are constantly trying to bring down the delay in delivery by not launching any new projects. So, the builders are not launching new projects and are completing the existing projects. Now in Chennai customers prefer to purchase flats that are ready to occupy,”  Krishn said. Builders say many contributing factors like the severe floods in December 2015, political instability following former Chief Minister J Jayalalithaa’s death, demonetisation and Cyclone Vardah affected the real estate business badly in Chennai. “Sales were not happening at the pace which we expected. We used to sell all blocks in a project together and when only a few of every block got sold and the rest remained unsold, there were issues with the cash flow and construction got delayed. Now we have impressed our members to sell one block after another so that such issues could be addressed,” V Jagannathan of Ramaniyam builders said. 

Some other builders say the issue was of supply exceeding the demand in many areas that had slowed down the sales. “If the demand was for 1,000 units, we provided 10,000 units in the same area and complained about lack of sales. This has happened in many areas in Chennai. When a builder manages to sell off all his units, another 20 builders will go to the same area and launch several projects. They do not consider the demand and supply dynamics and many projects remain unfinished,” said P Suresh of Arun Excello. 

Delay in approval of projects by CMDA has been another issue that delays the projects. Industry sources said that CMDA takes up to 15 months to approve multi-storied projects in the city. “We approach CMDA for approval after getting clearance from 14 other departments. Still they sit on the files for 15 to 18 months. Many customers do not purchase apartments unless the project gets the approval of CMDA and this also delays the deals,” another  builder said. 

Efforts by DTNEXT to get a response from C Vijayaraj Kumar, Member Secretary, CMDA, were not successful. 

While RERA is considered a highly-customer friendly Act that protects the rights of the buyer and would end the bad business practises in the construction industry, the builders say that the Act did not specify a time limit for providing approval for multi-storied projects and insist that the builder could only take 30 percent of the cost as advance from the customer till handing over the property. “This is surely going to put strain on the financial flow to the builder and he would be more dependent on banks for credit. 

This automatically escalates the cost factor and it is expected that the RERA factor alone could increase the price by Rs.300 per square foot,” P Suresh, managing director of Arun Excello said. 

The builders say if the GST put the construction industry in the 18 percent tax bracket,  the prices could easily go up by Rs.200 per square foot. The cost escalation would automatically be passed on to the buyer and any property buyer would be paying at least Rs.500 extra per square foot for an apartment he purchases post July 1. 

“It is not that the builder is going to get anything extra through this cost escalation. It is considered expenses and will be finally passed on to the customer,” Suresh said. 

The following regulatory mechanisms will be in place soon - RERA and GST. The impact on Real Estate is two sided. RERA to ensure that all regulatory compliances are followed by the property developers so that the home buyer is insulated from project delays, inferior quality and carpet area calculation. The developers will not be able to launch their projects until all regulatory approvals are obtained, thereby enhancing the capital cost for the developers. No pre launches will be permitted. This is bound to escalate the funding cost for the developer which ultimately gets passed on to the buyer. Prices as on date are bottomed out and any increase in input cost is likely to push price by about 10 %, post RERA is implemented. GST will replace the current taxes for an under construction project like service tax, VAT, etc., As on date there is no clarity about the actual rate of the GST on under construction projects.