Thursday, 2 April 2015

Who’s at fault?

Reams of newsprint have been dedicated to discussing the sufferings of consumers in the Indian real estate sector. Particularly, homebuyers’ woes related to late delivery of projects, deviation of housing projects from promised quality, additional payments due to change in apartment area and inadequate protection of their rights have been well-documented.

The question that invariably arises is whether the developer is at fault, or whether larger market forces beyond the control of developers are at play?

Construction delays - developer or approvals?

Technically speaking, the time consumed in obtaining all approvals adds to the total time expended in completing the project. Any approval, which is needed between the launch to the actual start of construction up till handover of the apartments to the buyer, will be an additional time factor. Hold ups here will cause cascading delays in delivering the project as per the promised deadline.

Before a project is officially launched in the market and offered to buyers, there are myriad approvals that a developer needs to obtain from the state and central agencies and ministries. In any business, the longer raw material is held, the higher is the holding cost, which in addition to interest costs in case of borrowed funds, causes an increase in the overall price of the finished product.

This analogy, when extrapolated to the real estate sector, considers land as the basic raw material for real estate development, with construction materials being the variable costs. The longer a developer has to hold his land without getting any receipts through the sale of proposed apartments, the higher his project costs escalates.

This can, in fact, be a very costly proposition all around. In the current scenario, obtaining the 57-odd permissions to begin construction of a project can take as much as two years. During this time, the cost of acquisition or even just holding the land for a project rises. Builders already have to cover external and internal development charges, license costs and often charges for change of land use from various departments, which have also risen. Cost of construction has gone up by more than 50 per cent, as well.

However, this is only one side of the picture. Many developers intentionally undertake a slower pace of construction if sales in their project are sluggish or a larger part of the project is unsold. They may have diverted a sizeable chunk of the revenue generated from pre-launch sales to another project, or utilised it to pay off a pressing bank debt. At other times, the authorities can be blamed for not granting timely projects approvals.

Project quality and deviations:
A major concern has been the difference in the promised quality and actual delivery status of the apartment, which remains a concern for real estate buyers. A change in the apartment area after buying from the developer can occur if a change in project plan is necessitated due to a design or approval issue. A deviation of up to 10 per cent is usually acceptable – for a higher deviation, a customer must definitely seek legal recourse. That said, project deviations can also happen because of structural deficiencies of the overall system, wherein the governing authorities are making rules in a reactive manner rather than on a proactive basis.

There are readily recallable examples of how abrupt changes in regulations governing real estate development can work against both developers and buyers. The revisions made in the DCR regulations in the Mumbai metropolitan region (MMR) a couple of years ago caught the industry unawares, and added to development costs by about 15 per cent. This included the fungible premium payable if the builder opted to take the additional 35 per cent floor space index (FSI) option. These cumulatively accounted for a 20 per cent hike in construction costs. This move has led to an increased pressure on the developers’ margin, which, in turn, resulted in price increases across most projects in MMR.

The fact that developers had to re-work their project specifications (upcoming as well as on-going unapproved projects) resulted in significant project delays. The result was an exacerbation of the cash-crunch on developers, and an outcry from their buyers.

This is not to say that developers do not tamper with overall project quality or make arbitrary changes in their project designs with a clear intent to maximise profit. By pinching off space from designated open spaces, children’s play areas, compound perimeters and guest parking areas in an originally approved plan, an unscrupulous developer can make a limited plot yield more saleable space.

Recourse for consumers:
To begin with, the onus of primary investigation on the credibility and track record of a developer lies on the consumer. In this respect, the parameters a buyer must follow in buying property are the same as in the acquisition of any other valuable asset. A prospective buyer should check into the developer's credibility, past projects and performance and delivery record. He should also ensure that the project is funded by a known bank and that the project has all the correct approvals. A buyer is entitled to ask for a copy of the project's drawings, duly stamped by the municipal authorities. If there is any reason for initial doubt, conducting a property purchase through an attorney qualified and experienced in handling real estate-related issues is certainly advisable.

Should one need to exit a delayed project?

It depends on whether there is sufficient evidence that the developer will be able to complete the project in a reasonable span of time. If the project is in a good location and developer has a good reputation and is facing issues that will be resolved in the foreseeable future, it is advisable to stay invested as long as one has the financial holding power. Much depends on the level of need. It is possible to off-load a unit in a delayed project to an investor, but one should expect to take a hit on the bottom-line.

Regardless of what causes delays or abrupt changes in project blueprints, consumers must be able to get justice. Many examples of customers obtaining favourable decisions upon approaching consumer courts exist, and the power of these forums should not be under-estimated. However, the larger and less wholesome truth is that the current legal dispensation is ill-equipped and under-regulated to offer complete consumers protection in matters related to real estate.

Potential lifebuoy - real estate regulation and development bill:

The real estate regulation and development bill — long languishing on the policy drawing board and still under consideration by the government — was intended to offer vastly enhanced protection to buyers. However, after the most recent revisions to real estate regulatory authority (RERA), it seems that it will in fact now be less protective towards buyers. While the bill aimed at providing an alternate redressal mechanism, the new provisions are talking of taking no recourse to other consumer forums. This can, in fact, lead to pressure on this regulatory body in terms of an increased log of cases, though it will reduce instances of multiplicity of suits.

Consumers should be aware that a certain degree of due diligence and awareness about their rights can protect them against unscrupulous practices by developers. In the first place, due attention should be paid at the time of drafting the sale agreement. A property buyer should fully understand the contents, if necessary with the help of a lawyer, and make a clear note of what the developer has agreed to deliver.

Any developer’s sales team will usually present a buyer with a ready-made agreement format, and a buyer must ensure that this captures every relevant detail. If it does not, the buyer is fully entitled to ask for missing details to be included and potential grey areas to be clarified. A copy of the final agreement must be retained under any circumstances, as this will serve as the primary evidence in a legal action filed for agreement violations.

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