Investor play = cash-flow issues for realtors

Developers, who were unable to sell a thousand flats in nearly a year, have sold over 16,000 across the country in just the last two quarters.

But the feel-good run may be over before long, say market watchers.

Between April and September this year, DLF, the largest real estate developer in the country, has launched and sold over 2,000 flats in its mid-income housing range. Unitech, the second-largest player, generated Rs 4,000 crore of sales in seven months by selling 10.11 million square feet from over 30 new launches. Among others, Parsvnath Developers booked 400-500 flats, while Omaxe claims sales of 400 flats in the same period.

All thanks to aggressive marketing, advertising and tie-ups with brokers and investors.
But lest this be construed as a sign that the sector has turned around, market watchers would like to caution us it’s a bubble. Going by them, developers, who are riding high on affordable housing, could soon face execution delays and payment issues as a significant portion, around 50% or more, of flat buyers are speculative investors.

An industry source cited the example of DLF, which launched Phase 2 of its Capital Greens project in Delhi at a 10-20% premium to Phase 1, launched in April. “Speculative brokers and investors have forced DLF to launch it at a premium so as to sell the inventory from Phase 1 at a discount.” 

“The developer will face default problems in 2010 if the brokers and investors are not able to find buyers by that time, as they have now paid just about 10% of the flat amount,” the source said, requesting anonymity.

In mid-2008, most developers had claimed that speculative investors had fled the housing market, leading to massive payment defaults, freezing of demand, a fall in housing prices sending sales down by as much as 90% in some cases, and execution delays.

However, after March 2009, developers were able to pull things back significantly as they aggressively focused on the lower-margin, but higher-volume affordable housing segment. The margin in this segment is around 23-30% depending on the location and offering.
Besides the biggies, developers such as IREO, Jaypee, BPTP and Raheja had also announced forays into affordable housing.

Many of these ventures could now be in trouble, say analysts.

“We visited 16 new project launches by developers such as Unitech, Jaypee and DLF. We observed that construction activity has not started for most projects, even 6 months after launch. The reasons cited for the delay were lack of approvals and waiting periods of 4-5 months where investors are given time to pay up the balance booking amount (20-30% of the value),” Adhidev Chattopadhyay, an analyst at Centrum Research said.

“Even Unitech has said they would wait for 6 months or till the time investors come up and pay 20% of the booking amount of the projects, which they have to pay. Most of these flats are being booked with Rs 50,000 or Rs 1 lakh as booking amount, which is negligible for an investor to give up if he doesn’t find a buyer,” said an official from one of the big realty firms.

An analyst covering Unitech said execution is likely to be a key risk as it proposes to deliver 27 million sq feet in next 30 months whereas construction activity has not even started for any project launched by the company in the past six months.

The way it works, developers collect a large portion of the total cost upfront and use a part of these cash flows to invest in larger projects, an analyst with an institutional equities firm said. “A large portion of the project is sold to intermediaries rather than actual end-users at a small-upfront deposit. In such a scenario, intermediaries are not in a position to pay further instalments and projects do not even begin construction.”

Patrick Ramsay, FRICS head of residential division at Knight Frank Global, recalls the trend that brought about the fall of residential realty globally. “Earlier, somebody used to buy an apartment and you put a tenant in it, and the tenant pays the rent and you borrow some of the money.

As long as the tenant is paying significantly above the interest rate, you are making money and you are holding it in order to get the capital appreciation of that investment. But what had happened in a number of places is that the developer sold the apartment to the investor and the investor put down 5% as down-payment of the purchase price when he signed the document and would put rest of the money when the project is completed.
Then the credit crunch came along, the project was not completed, and this investor walked away and abandoned his 5% because the value of this block had gone down by 30%. So if he (the developer) completed it, he was bound to lose money and nor did the developer find any buyer. So, now, the developer has to start reselling the entire project at lower prices.”

Ironically, even construction of these flats at the new launches looks a distant possibility today, as the necessary approvals for construction to start are still stuck between various government agencies.

All the same, some believe there are buyers out there for developers. “Today prices are going up by 50% and suckers are out there to buy at any price. So I think buyers would come in,” a senior research analyst from a domestic brokerage said.