Ready-to-move Vs. Under-construction – Caveat Emptor!

 

RERA was supposed to save the day for homebuyers, but that doesn’t seem to have happened – at least not yet. In many states RERA, in its present form, is currently either non-existent or a pale shade of what it was intended to be. It is a fact that RERA has been diluted in some states to favour developers while in few others it hasn’t even been deployed yet.

RERA’s primary area of focus is under-construction properties. After all, this is the area where buyers had been facing the most challenges on account of project delays, project plan deviations and various other issues.

As things stand now, states like Maharashtra, Uttar Pradesh, Gujarat, Karnataka, Punjab, Madhya Pradesh and Rajasthan have the benefit of operational RERA, but even in these states, the registration numbers are far from motivating.

While Maharashtra comes out on top with over 18,300 projects registered under it, other states where RERA has been implemented are lagging far behind. Uttar Pradesh has around 4000 projects registered, Gujarat just around 3,300, and Karnataka and Madhya Pradesh less than 2000 each.

The RTM Assurance

Ready-to-move properties thus offer a good value proposition for cautious homebuyers, and are doubtlessly the least risky at the current time. Not only do they offer instant gratification and a WYSIWYG (what you see is what you get) assurance, they also do not attract GST.

However, under-construction properties do fall under the purview of GST, which is levied at a massive 12% of the base cost of a property.

Also, the price margin between ready and under-construction properties has narrowed down significantly because of the humungous unsold stock in most cities. Nevertheless, even if a RTM property costs slightly more, its value is assured.

To draw a parallel, it is the difference between money in the bank and an investment in the stock market. The first option is ‘as safe as houses’ – the other is subject to market risks.

Finally, the mental and physical rigours of a house-hunting spree definitely reduce once one has decided to stick to ready-to-move options. The due diligence process becomes much simpler, too.

Of course, this does not mean that all RTM properties are risk-free by default. The high numbers of illegal constructions or projects with non-sanctioned additional floors now being identified stand mute testimony to that fact.

In any case, buyer preferences are currently heavily tilted towards RTM properties, according to ANAROCK’s recent consumer sentiment survey. More than 49% property seekers now prefer to buy ready properties in order to avoid risks such as project delays in particular and unethical builder practices in general.

Let’s take the National Capital Region, where buyer grievances have been by far the highest. Nearly 94% property seekers in NCR prefer to buy either ready properties or those which show enough construction progress to indicate completion within the next 6 months.

There is certainly no shortage of RTM options. ANAROCK data suggests that as many as 4.25 lakh units are currently ready-to-move-in across the top 7 Indian cities. These projects were essentially launched from 2013 onwards.

The Under-construction Proposition

The crux of the under-construction or ‘off-plan’ debacle lies in the fact that thousands of projects in the country have been seriously delayed or are altogether stuck. A mind-boggling 5.75 lakh units cumulatively worth in excess of Rs. 4,64,330 crore have been delayed since they were launched in or before 2013, as per ANAROCK data.

The massive burden of delayed housing projects has been generously covered by both the domestic and foreign the media, and is certainly no secret except to those who live their lives completely off the news grid. ANAROCK’s consumer survey also confirms that only 5% of current property seekers are considering under-construction projects. Like the stock market, the real estate market is a fickle thing driven by market dynamics as well as news-fed sentiment.

This, however, does not mean that under-construction projects should not be considered at all. They can still offer a number of advantages (always depending on the project in question). For instance, many ongoing projects can be in better locations, have better amenities, and do still come at a lower cost. The idea is to find under-construction projects that are the least risky to invest in.

Identifying viable under construction projects

As is invariably the case in all things real estate, the first thing that matters is location. Some locations in India are currently over-burdened with unsold inventory. It makes no sense to invest in a location where nothing or next to nothing is selling because that state of affairs exists for good reasons.

First of all, such locations are very unlikely to receive any serious infrastructure boosts until the market there takes off again. This has serious negative implications on their liveability quotient as well as the potential resale value of properties there (should one wish to exit).

Secondly, because of depressed or non-existent buyer sentiment in such areas, most developers there will in all likelihood not have access to the ‘running capital’ of ongoing sales. Lending institutions are now highly averse to lending to developers post the NBFC crisis. In short, many developers simply do not have the capital to complete their projects.

However, that by no means eliminates all options. Under-construction properties can be considered as long as buyers focus only the most well-capitalized developers. These are the ‘big boys’ who do not rely solely on residential project sales but are invariably diversified across other property typologies and even businesses. Let’s examine this a bit further.

What is ‘credibility’, anyway?

The constant refrain from property consultants and market pundits talking about under-construction projects is ‘stick to established developers with a good track record for timely completion’. This may seem like vapid and over-done advice, but it is still the best advice one can give. Such developers have a very valuable asset to protect, namely credibility.

What does this mean? It simply means that well-heeled and historically successful developers have a lot more ‘skin in the game’ than their smaller counterparts. They have more to protect and will protect it under any circumstances. It’s not just a question of reputation, but of future business viability.

For such developers, completing a residential project despite the absence of formal funding or even ongoing sales is not as big an issue as it is for players who rely solely on housing sales. They will not really risk being potentially numbered among the countless ‘defaulters’ that are constantly making the news these days. In short, you can expect more or less on-time delivery of a product which is exactly what was promised and signed up for in the sale agreement.

If a certain residential developer is also active in high-grade commercial real estate such as Grade A office complexes or shopping malls, he’s unlikely to run out of capital because these segments are currently doing very well indeed.

Likewise, if he’s successfully and sufficiently invested in other business lines such as power, fossil fuels, telecommunications, electronics, high-level KPO services, e-commerce or fast-moving consumer goods and other retail verticals, his account books will likely be in the green. Again, this translates into a fairly good chances of an ongoing housing project being completed on time, and as per promised specifications.

Caveat Emptor

So – going in for under-construction properties is definitely not out of the question. However, the field of good options in that segment has definitely narrowed down and will continue to shrink as the current market environment causes more drop-outs, bankruptcies and consolidations.

If one is not in any particular hurry to move in right away and if there are budget constraints, it still makes sense to opt for under-construction properties. However, both the quality and quantity of due diligence certainly increases. More than ever before, the principle of ‘caveat emptor’ (buyer beware) applies – the buyer is fully responsible for confirming the quality and suitability of the product before signing on the dotted line.