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Construction : Guest Article | May 2016 | Source : CW-India

Growth Interrupted

Construction delays lie at the nucleus of economic inefficiency, writes PANKAJ KAPOOR.
Then the economy works in equilibrium, there is efficiency across the value chain. However, when any one segment is caught in a vicious cycle, the balance is upset, and what we get is inefficiency at all levels. Currently, the real-estate sector is in a state of limbo and with forward and backward linkages, it has a cascading effect on the economy. Under-construction units rotting in prime locations for more than a decade, cash-strapped developers, sky-high prices and unhappy customers highlight the lacunae in the Indian real-estate sector.

These issues are extremely deep-rooted and have built up over the past many years. However, in an attempt to demystify the state of affairs, it can be seen that extreme delay in construction is the nucleus of this vicious circle. Delay in construction completion, resulting in low sales or technically a low inventory turnaround ratio, has effects across the value chain.

Delay requires capital, which is mostly sourced from informal lenders that demand high returns, thus making the cost of capital high. Economics of such returns doubles the price in two to three years, making it unaffordable.

About 34 per cent of the supply in the leading 26 cities in India is over 12 months delayed. Cities leading this pack are NCR, MMR, Bengaluru and Pune. MMR as well as Hyderabad have many units that are delayed for more than five years. The direct consequence of this practice is massive housing stock. Today, the inventory across major cities in India stands at 1 million units, clocking in a growth of about 22 per cent on an annual basis.

It is noteworthy that this piling inventory over the past year has been mainly owing to existing unsold stock, because new launches in 2015 have dropped around 36 per cent year-on-year. The pace of increase started diminishing from 2012 itself. In 2013, the annual increase was 10 per cent, while in 2014 it slowed to a mere 2 per cent.

Causes of delay in construction
Too many approvals and permissions:
One of the major reasons for delay is the long list of approvals and permissions required by developers. Over 50 permits from various authorities in the Centre and state governments are required, making it a long-drawn process. The concept of single-window clearance mooted by the Real-Estate Regulatory Bill is still at a nascent stage. Many a times, builders start a project before even acquiring the land title, which makes the process even more cumbersome.

Last-minute changes in development plan and building layout: Deviation in project configuration can happen when the governing authorities are making rules on a flawed basis. Sudden changes in regulations must be avoided and there should be a body to monitor the progress of each project with proper transparency. Only then will the goal of timely execution be achieved.

Fund diversion by the developer: The usual practice of developers raising funds from pre-launches of one project and using them to commence other projects, acquiring land parcels or paying off existing debt is a major issue. This might work in situations when rapid sales are the order of the day. But in the current scenario, where sales velocity is poor, the money generated from pre-launches and initial sales should be utilised for faster completion of the project and enhancing the pace of sales.

Too many new launches promised beyond capacity: Project delays have been on a rise after 2011 and peaked during 2012-2013. During the boom phase, developers launched projects beyond their means and later found it difficult to deliver. Many small developers also entered the market to capitalise on the existing scenario, but later backed off citing capacity issues, leaving buyers in the lurch.

Subdued pace of sales: While it is a common belief that delay in construction across cities in India is a major cause of lower sales and unsold stock, it could also be the other way around. Delay in construction is a result of slow sales and a reduction in cash flows to developers. While a long list of approvals and clearances cause delays, exorbitant price levels and low volume of sales also give developers a run for their money. Despite rate cuts by the RBI and freebies, many potential homeowners simply don't want to get into the market. Lack of confidence on the part of developers is also one of the main reasons for this.

Lack of proper market intelligence by developers: Weak analysis of market conditions leads developers to keep pumping stock into cost brackets that are already burdened with high inventory and low sales. For instance, in NCR and MMR, maximum fresh stock has been added in cost brackets that already have high months inventory. In both these cities, it will take about four to five years to offload existing stock; yet developers continue to add fresh stock leading to a state of paralysis. In MMR, it is inexplicable as to why developers are adding so much stock in the luxury and ultra-luxury segment even as the sales movement is slow.

The issue is deeply ingrained in the system and is difficult to be solved in a short span of time. Well-defined norms, effective governance and a disciplined approach from developers have to work in tandem to make a difference. In recent times, the Real-Estate Regulatory Act has highlighted certain reforms that will go a long way in solving the blatantly obvious issue of delays in construction.

However, developers also need to function with increased accountability. They, too, do not gain anything from these delays, apart from a tarnished reputation. Effective cash management and proper construction planning are the needs of the hour. Only a combined and committed effort will yield a concrete change.

Is the Real-Estate Regulatory Act the answer?
Provision

'Likely period of time' within which the promoter undertakes to complete the project or phase thereof will be disclosed.
Builders will pay interest to home buyers for any default or delays at the same rate they charge them.
They can also have legal implications and imprisonment for violation of norms.
Minimum 70 per cent of realisation to be deposited in a separate bank account to cover land and construction cost

Effect
Timely completion will lead to reduced speculation and sales at justified price points.
Diversion of funds or proceeds to different projects and other motives like land accumulation will be curbed.

About the author:
Pankaj Kapoor, Founder and Managing Director, Liases Foras, is a well-known name in the real estate industry with over 15 years of experience, particularly in the field of valuation, risk assessment and forecast of the price behaviour.

 
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