News: Solvency of developers emerging as a major factor for homebuyers-15.11.2017

Solvency of developers emerging as a major factor for homebuyers

Too big to fail was the benchmark by way of which homebuyers would judge a real estate developer earlier. Bigger the builder, more confident was the buyer in investing in projects floated by him. Not anymore! Post-insolvency proceedings against Amrapali and Jaypee Infratech Ltd in Uttar Pradesh, homebuyers have become far more cautious and solvency of a builder has become an important decision breaker.

If it was factors such as late delivery of projects or funds being diverted to other projects that made buyers take that all important decision to invest in a real estate project, today it is the financial well-being of a developer that is calling the shots, say real estate experts, adding that the only issue buyers had experienced before was that of reasonable delay in a project. Situation of insolvency and the idea of non-delivery was unheard of and has come as a shocker to homebuyers who have invested their hard-earning savings in these projects.

“This is an additional dimension, an added worry. Homebuyers are now cautious and have realized that the big fish that were too big to fail are the ones that have leverage the most. The issue of real estate companies facing bankruptcy is an added angle. Decisions are now being made on the basis of which developer has delivered projects in the past, willful default or actual insolvency, financial health and track record of the company. Buyers are also looking seriously at the stage of construction of the project,” says Mudassir Zaidi, executive director (north) at Knight Frank India.

Solvency issues has also impacted demand. “Among cities, demand in the National Capital Region has wilted the most over the past 4-5 years and is unlikely to recover in the medium term. The sheer number of disputes between buyers and developers there is a clear indication of lost confidence of not just the end-users but also of the investor community,” says Binaifer Jehani, Director, CRISIL Research.

Other factors that buyers are considering before deciding to invest money in property are whether the project is registered under RERA or not and also the new timelines committed by the developer under the regulatory regime.

“The current market environment poses an inertia. Credible developers have defaulted and not delivered on time. This has caused a dent in perception and consumer confidence. Another reason is that since investors are out, there is no price surge and the market is in correction mode. But after RERA, some trust is building up and the market may see an improvement of at least 20 percent at the end of the December quarter this year,” says Pankaj Kapoor of Liases Foras.

Solvency of a builder is an absolute mandatory requirement. Buyers today are purely taking decisions based on whether the developer has registered with RERA and the brand name of the builder. They are cautious before investing and concerned about non-delivery in the past. Having said that, it is difficult for buyers to procure all details, especially that of financial health of a developer, and they, therefore, will have to depend on whatever information is available in the public domain.

Majority of buyers are preferring ready-to-move-in projects over under construction ones.

There are risks associated with delivery of under-construction projects, especially delays in getting possession from the developers, which deter buyers. Resurgence in buyers’ confidence will happen only when they see the Real Estate (Regulation and Development) Act (RERA) working in their favour, says the report by Crisil.

Another agency ICRA, said that only organized developers will survive. “While the impact of demonetisation on the industry has been gradually waning, the implementation of RERA and GST over the first half of FY2018 has created short-term disruption in sales volumes of many developers. Moreover, the industry faces demand headwinds on account of subdued macro-economic environment and consumer sentiment. What provides a ray of hope is the growth in volumes reported by a few developers which could be indicative of the scope for organised players to consolidate their market share under the new regulatory regimes of RERA and GST,” says Shubham Jain, Vice President and Sector Head, ICRA.