Should developers build and sell? : The Tribune India

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Should developers build and sell?

In the current real estate landscape marked by large number of stalled under- construction housing projects, with lakhs of homebuyers risking their investments, the business model of ‘Build & Sell’ has emerged to bridge the trust deficit between developers and homebuyers and to provide the much-needed momentum to home sales.

Should developers build and sell?


Vinod Behl

In the current real estate landscape marked by large number of stalled under- construction housing projects, with lakhs of homebuyers risking their investments, the business model of ‘Build & Sell’ has emerged to bridge the trust deficit between developers and homebuyers and to provide the much-needed momentum to home sales.

It is the real estate giant, DLF that has taken the lead in adopting ‘Build & Sell’ model. The company has announced that it has revised its marketing/sales strategy and is now focusing on selling only completed residential projects, targeting to sell ready-to-move flats worth Rs15000 crore over the next 3-4 years.

In line with this strategy, DLF, for over a year, had stopped the sale of its residential units to create enough completed inventory and currently, 11msf of development is underway Incidentally, a North Indian real estate player Imperial Holdings had successfully introduced this model in the first phase of its 100-acre luxury township project — Auramah Valley at Naldera, on the outskirts of Shimla. The emergence of ‘Build & Sell’ model has raised the questions about its need, suitability, advantage , business economics, prospects and challenges.

According to DLF CEO, Rajeev Talwar, in order to avoid a situation under RERA where developer gets heavily penalised for delayed delivery and has to even refund money to buyers with interest, (even if the delay is on part of authorities), developers have to take to selling when the project is fully constructed or in advance stage of construction.

According to Vineet Relia, MD, SARE Homes, the current scenario is favourable for this model due to increased demand for ready-to-buy homes. Ready homes have remained a preferred choice of homebuyers across the country, commanding around 3.7 per cent premium over under-construction properties, as per Magicbricks.com. Ramesh Nair, CEO and Country Head, JLL India, says that the model has positive prospects for end users as there is no risk of construction delays and the consumer does not face any lock-in period.

Sound business sense

Coming to the business economics of this model, DLF authorities say that the working capital available for construction is available at attractive rates and the new business model will help the company achieve higher realisation as price of completed project has higher valuation than the price at the project launch time.

Investment expert, Harsh Roongta is also of the opinion that though in the current model of financing through customer advances/EMIs, builder gets finance at the rate of around 8.5 percent , institutional financing/overseas funding is available under the new model, though at a little higher rate. However, under the new model, the turnaround will be faster and builder will be saved from interest cost especially delays due to bureaucratic hurdles.

But, challenges remain

But financial challenges of this model can’t be overlooked. Vineet Relia of SARE Homes says the biggest challenge is to fund land which is the major cost of the project as there is no bank funding available for this. Vivek Dahiya, MD, (North), Cushman & Wakefield, says that though the business economics are yet to be evolved, this model will require higher equity or strong institutional support during the construction period and unless the capital market evolves, very few developers will be able to manage this model .

Moreover, there is a risk of buyers’ interest dwindling and market softening after the project gets ready. Nair adds that there is risk to builder as over a period of time, on account of market dynamics, the sale price may not be as per the projected profits. Also to ensure that there is limited period between sale and repayment of debt, the company has the challenge of offloading inventory within a stipulated time. And if the developer fails to do that, his cash flows will be impacted. Niranjan Hiranandani, Founder & CMD, Hiranandani Communities & President Naredco, says that you don’t expect home buyers to buy out ready stock within a year of completion. And after a year, the unsold stock will invite additional levy of taxes.

Its biggest impact will be that developers may not commence work on a tower unless they have confirmation about guaranteed sales. Or they will complete the tower but won’t apply for occupation certificate unless they have confirmed sales. As such, creating more housing stock, will not make good business sense and this in turn, will limit the choices for homebuyers.

A hybrid model

In this scenario, Vivek Dahiyatalks of a hybrid model. “To tackle financial challenge, developers may go for project launch when all civil works are complete and finishing work is about to begin. This way they can get customer funding for finishing”.

Considering the enormity of financial challenges of this model, a fear is being expressed that this model may favour big developers and discriminate against small and medium players. Nair expresses this fear saying that the model will be to the advantage of big players and small and medium players will be inconvenienced unless they are in high demand market and have smaller projects with faster turnaround time. Manav Singh, however, dispels this fear, saying that one doesn’t have to build the entire development; one just needs to be ahead of the sales curve. Dahiya says that there is challenge for both big and small players in this. “Smaller developers will struggle unless they professionalise their systems and processes and are able to secure institutrional support. Even the big players who don’t have the basics in place, i.e professional management, strong back end support systems , will find going tough”. The jury is also divided on whether the new model suits affordable housing or luxury housing. Ramesh Nair says that the model is more suited to luxury housing than affordable housing. “The new model may well suit luxury housing better from the point of profile of buyers who are not price sensitive. In the affordable housing segment, since the buyers are price-sensitive, they may like to go for under construction property, to take advantage of entering at lower price point”. Mittal discounts the requirement of the model for affordable housing, considering low holding cost due to low share of land cost and tax benefits for affordable housing. Dahiya, however, talks about the suitability of the model for affordable housing. “As upfront capex is comparatively lower in affordable housing, so subject to institutional investor support, many developers of affordable housing, would want to evaluate this model”.

All said and done, the industry stakeholders are optimistic about the adaptability of ‘Build & Sell’ model, especially as developers will continue to face pressure to deliver and cut high inventory amidst persisting trust deficit of buyers and ongoing risks pertaining to delays.

Only for big players?

Sushil Mittal, Founder VP NAR India & Chairman, ACRI is of the opinion that this model will suit developers with deep-pockets, especially those having regular income from rent- yielding assets and realty funds will invest in developers with good track record. Relia endorses, saying that the new model suits credible developers with good track record, irrespective of whether they are engaged in affordable or luxury housing. Manav Singh , MD, Imperial Holding, believes that though it is more feasible to fund the projects through construction-linked payments, yet if the market sentiment is low and one is confident of his project, it is worth taking the risk of building first and selling later.

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