Last week, there was an article in a pink newspaper that spoke in glowing terms of a new scheme, launched by a large real estate developer, under which buyers of apartments have to pay only 20% up front, 20% when construction starts and 60% when the apartments are ready. The article was amusing because it presented this stratagem -as something unique and an extraordinary favour to the buyers of the apartments on offer.
More so for me because just the day before that I had spent some time with an old friend who has been in the housing finance industry for years. He described, in considerable detail, the utter chaos that prevails in residential housing. Practically every developer is functionally bankrupt, all forms of finance have dried up, and there are literally lakhs of units for which developers have taken some payment from customers and which are years behind schedule. Vast amounts of customers' money has been bled away in developers' launching of more projects. And all the time, there is a growing gulf between the prices which developers want and what real customers are willing and are able to pay.
`Investors' who have parked their cash in unsellable apartments are looking for any way to attract customers, including -if one is to believe advertising one sees -elaborate attempts to improve the claimed `vaastu' of their holdings. Anyhow, the kind of scheme that the article referred above described is yet another way for developers to try and get future customers to finance them. On the face of it, this sounds reasonable. And yet, given the continued absence of actual functioning on-the-ground control over what developers do with the funds, this amounts to customers financing the developer in general, rather than the specific apartment that is being constructed for those customers.
The whole business of developing and selling real estate is full of regulatory and governance fail ures of all kinds, but this particular failure -that of developers being able to bleed funds from projects -is the one that has caused most damage to customers' interests and eventually to the developers themselves. The proof of this lies in the handful of developers who have stuck to the straight and narrow and instead of being a giant and bankrupt business, are smaller yet profitable.
Anyhow, where does this leave those who want to buy a house?
Unlike other forms of questionable investments that can just be avoided, buying a house to live in is not an avoidable need. Given the state of the entire sector, what should have been a simple exercise is one fraught with serious financial risk. The first thing that potential house-owners do is to forget about becoming financiers of real estate developers. Except for a (very small) handful of developers, this should be treated as a zero-trust indus try, where name and size and repu tation count for nothing. If you don't believe that, ask the thousands of buyers who got taken in by names like Unitech in the decade past. Unless you'd like to take a needless risk with what is likely your largest invest ment, buy a fin ished, ready to move in apartment. The ticket price on this is likely to be higher than the ones supposedly under development, but when you take into account the risk that you take of your money going into a neverending limbo, it's not worth it.
The on-ground reality is that there is a considerable supply of ready apartments that can be bought. Fuelled by black money that has nowhere else to go, sellers are supposedly able to hold on to high prices. And yet, there is every indication that prices are finally cracking and despite the pretence, actual buyers are able to negotiate large discounts.
Unbiased (meaning not developers or their consultants) observers can see clearly that there is a sort of an endgame on now, of the 15-year period of unjustified excesses in the real estate sector. As a customer, the last thing that you should do is to hitch your wagon to a sinking developer's ship by paying in advance.
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