India - Don't buy unfinished homes

Pooja Sarkar

Liquidity crunch delaying projects, only 30% price cut can help: Experts

MUMBAI: Want to buy a home this festive season? Then don’t go for a one that is still under construction, warn experts in the realty sector. The global slowdown and crash of financial markets has left builders with little money and they are struggling to wrap up even the half-finished projects, let alone going for new ones, according to industry analysts. Experts warn that the financial strain on realtors is causing indefinite delays in the completion of many projects.

“Those who intend to buy property should go for only completed flats. It’ll be too risky to buy properties under construction,” said an analyst with a foreign brokerage who did not wish to be named.

Real estate is an end-user sector where the money mainly comes from home buyers and development happens in phases.

“But developers across the board raked in money from initial public offerings and invested them in buying land parcels paying huge premiums. Now, banks have stopped lending, money from private equity is very costly and unorganised lenders are charging interest rates as high as 30%. So how can developers complete projects profitably,” asked the analyst.

He cited the example of a Mumbai-based realtor whose high-end residential project in Lower Parel, one of the city’s commercial hubs, was to be completed in 2006 but has now been delayed till 2009. Uncertainty looms large over whether even this deadline will be met, he said.

An official of the realtor in question had earlier told DNA that the project would be rolled out before Diwali this year. An email sent seeking clarification on the new deadline remains unanswered.

This isn’t an isolated case. Analysts say delays of three to four years are likely in under-construction projects.

Despite the headwinds, developers have stubbornly stuck to their pricing. This could be one of the reasons why sales have failed to pick up, even though builders are offering freebies such as free stamp duty registration and parking space, modular kitchens and interiors, and interest-free EMIs till the buyer gets possession of the flat.

“A price correction of a minimum of 30% is required for sales to pick up. If this correction does not come in six months then some listed developers will end up being negative cash companies. Even if buyers are desperately looking for houses, they should wait for a minimum of three months before taking the plunge. Also, they should look only for properties that are ready and available for possession,” said an analyst of a domestic brokerage.

Vikas Oberoi, managing director of Mumbai-based developer Oberoi Constructions, agrees. “Buyers should be wary of under-construction projects because developers who are overleveraged will not be able to complete their projects. So a buyer should look at a developer’s past projects. At these times, it’s all the more important for people to be careful about where they invest,” he said.

And though the slump is pinching, consolidation in the industry is not seen coming. An analyst said, “Even if a developer gets land at a discount of 35-45%, he will not buy it to save money for construction. Those who haven’t seen free cash flows in the last 6-8 months will halt their launches and sit tight till the tides turn in next 18-24 months.”