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Commentary

Real Estate: Builders Not Delivering, High Unsold Inventory and Then, Defaults

In real estate, for you on a Monday, is not good news. They aren’t finishing their projects, says Mansi Taneja at Business Standard.

Till July this year, of the committed supply of 406,539 housing units, only 143,838 had been completed, according to data from real estate research firm PropEquity. That comes to 35.38 per cent — just a tad more than a third.

In Gurgaon, the committed supply was 22,571. But till July, only 7,645 units, or 33.9 per cent had been delivered by developers. In Noida, of the 36,847 units promised, only 7,672, or 20.8 per cent, were delivered. Mumbai fared a little better, delivering 7,990 of the 18,725 promised units — 42.7 per cent. Pune also scored much better than the National Capital Region (NCR)by delivering 26,376 of the 59,766 units committed (44.1 per cent).

This means they took money and haven’t delivered their projects yet. While they blame many factors for the slowdown in finishing it, they seem to simply have run out of money. And since the only way to get money without doing any work is to announce a project and have greedy real estate investors rush for “pre-launch” payments, they just announce new projects while not delivering on the old ones.

And meanwhile, the amount of “unsold inventory” – that is, stuff they’ve built and not sold – are at new highs of Rs. 58,000 cr.

Of the Rs 58,000-crore pile-up, DLF, India’s largest real estate developer, accounted for almost a third. As of March-end, the Delhi-based company reported an inventory worth Rs 17,600 crore, 18 per cent more than that two years earlier. The company’s consolidated net sales declined from Rs 9,561 crore to Rs 7,773 crore during this period. Following DLF is HDIL, which reported an inventory of Rs 12,043 crore at the end of March this year, more than six times its net sales last financial year.

Third on the list is Indiabulls Real Estate, with an unsold inventory worth Rs 5,111 crore, nearly four times its 2012-13 net sales.

This is not going to be good. Defaults have started. Orbit Corp defaulted on Rs. 96 cr. of loans from LIC Housing Finance:

The housing Finance company has classified the account as a non-performing asset and served a recovery notice to the developer known for its premium south and central Mumbai developments. Through a public notice on Monday,LIC Housing Finance also restrained the developer from creating any third-party rights on over 2.40 lakh sq ft across three of its projects that were mortgaged for securing the loan along with hypothecated receivables from seven of its luxury projects.

As has Hiranandani on a 76 cr. Tata Capital Loan in July:

According to the petition reviewed by ET, the developer defaulted on loan obligations from December 2012 and is now liable to pay 82.6 crore, including an annual interest of 18.5%. It adds that Hiranandani Palace Gardens had applied for a 100-crore term loan that was sanctioned in July 2011. Of this, Tata Capital had disbursed 76 crore

The defaults are starting. The inventory is going up. Prices are starting to come down. We’re seeing the beginning of India’s largest real estate train wreck, in 0.25x speed.

  • Anish says:

    Hi Deepak, whats keeping the prices and especially in mumbai so high? on any matrix of affordability (lets say for eg price/disposable income) its clear that the salaried class or end consumer is not in the scene anymore. then came 80:20, then black money, politician money, investor money.. which is not looking for return on capital, but only looking for return of capital. but even this capital at some point will start to flow back. elections could see that when politicians will need to raise cash.
    Just keep thinking about subprime in the US where guys like paulson, mike burry and zimmermann started shorting right from 2004-05 and ultimately it all started coming apart in 2007 a good 4-5 years later. I remember a time in Mumbai when prices fell by 30% between 1997-2003 in actual terms (not time correction which is a logic most of my friends tell me to justify that prices will not go up but will stay here and not go down either – btw these are all guys who have bought real estate). Maybe we will see a repeat of that soon as RE cycles are very long and change course very slowly. Whats your view?

  • ARP says:

    One of the primary reasons for the Orbit Corp default is the regulatory issues in their 3 projects – Orbit Heights, Orbit Grand and Orbit Residency Park.
    Various government agencies in Mumbai are playing games with developers – giving permissions (and NOCs) and then withdrawing, etc and hyper judicial activism.
    Consider the case of Orbit Heights which was given all regulatory approvals by various state and BMC (Mumbai city) authorities.
    After 15 floors were constructed, a few months back suddenly BMC withdrawal permission saying that the tower posed a security risk because it was next to the infamous Arthur Road jail where hardened criminals and terrorists are kept.
    Orbit corp spent some 70 cr and now they cannot continue construction !! So now the project is in a limbo.
    Most defaults are happening because of regulatory issues rather than financial / liquidity issues. Nowadays builders in Mumbai have to pay bribes by square foot to various departments – including the fire department for the final OC (Occupation Certificate). Yes … the fire department charges bribes by the square foot.
    And then there are NGO fronts and RTI activists who blackmail builders and extort money.
    So even a genuine builder is forced to cheat.

  • mangoman says:

    Super….I think the great unwinding started..start music

  • PrAvEen says:

    In Bnglr, many of colleagues/friends bought aptmts in last two years with various mid-sized builders (none from those Corporate builders). All of them got their plots on time & none of those got delayed. One of the reason is also that many of them took utmost precaution in selecting the builder

  • DJ says:

    Hiranandani seems to be following the Trump template of spinning off projects into separate subsidiaries and allowing them to go bankrupt if they turn out to be unprofitable. I was surprised to see the Hiranandani default. But, then saw that they let the subsidiary default and made the right PR noises like saying that we offered to plug the gap, but the subsidiary is restructuring with the lenders, etc. As if, if Hirco wanted to make up the loss, the subsidiary would decline. Ha!

  • Mehul says:

    I would like to request Deepak’s and other learned opinion on the following matter:
    Recently, various state govts. (I know of Gujarat and Maharashtra) have revised ‘Ready Reckoner (RR)’ rates to bring them at par with prevailing market rates for land and constructed buildings of various purpose (e.g. Residential, Commercial). RR rates are the scheduled rates are like govt. benchmark rates used also to calculate applicable stamp duty on sale agreements, land lease agreement, etc. Until recently, these rates were much below market rates (RE market kept appreciating at frantic pace and govt -I guess, do not have any set frequency to revise RR rates). It seems govt realized they are losing a big amount of stamp duty (as transactions were carried out at lower RR rates (as mentioned in registered agreement) and balance amount transacted in ‘cash’) and to curb cash component, revised RR rates and brought them almost at par with market rates. These rates differ as per location, road frontage, land use zone, etc. Overall, In my opinion revised rates are about 5-10% lower than market rates across locations. I know of an area in south Mumbai where builder sale price is lower than RR rate)
    Now, interestingly, transaction value shown on the agreement can not be lesser than the RR value (can’t show undervalue). It is allowed when one is buying from a builder as for builder it is ‘stock-in-trade’. But, in case of second sale, transactions carried out below RR rate will attract IT sleuths. So, if the RE market crash in coming months and prices drop by, lets say, 20-30% (I know, many will like me just for wishing so); the agreements will still need to be carried out at RR rates which will be higher than market rates (I bet, govt won’t revise RR rates downwards swiftly)! Will RR rates act as some kind of a bottom for RE rates? I hope not. I guess market will disregard this ‘support’ if it decides to fall, however will be interesting to understand implications of high RR rates.
    Views?

    • You can’t show undervalued transactions, of course, so you have to pay tax on the RR rate. However, people do sell for lower than RR, I have seen that a long time back. High RR rates means people will have to show taxable income of that much so they will try to factor it in…

  • Avinash says:

    Interesting comments from DJ, Mehul.
    In case real estate is heading for a time/price correction of say 20 % or more over the next 1 to 2 year and then stagnating there (at least 10 % and more as happened due to stagnation over the last 1 year period in certain places in NCR). The loss is 19 % (minus the rental and rental yields in india are low 2 to 3% in most cities) when compared to an fd in the last year. For a property worth 2 cr , this translates into about 3.9 million. A fallout of this is that ,those of us who have sizeable percentage of net worth in real estate (even if that is only home they own) should consider selling and looking for rental or cheaper options…thoughts?
    I know this will lead to more selling and not everyone will be able to sell.We must remember real estate is a very illiquid asset in unfavourable /iffy times. And lets be thankful for a generous and common >900% rise in the asset values in 10 years (often 900 x , x being number of properties sold ).
    Recently an investor (Sandeep mohan) was talking of lending to realty firms as a good option.I had come up with it myself and am exploring that especially from the safety of capital point of view and other options .Would appreciate your detailed views very much, later, if not possible now. I know your plate has a lot on it !

  • lohit says:

    If you are nostalgic for the good old days, read about the RE crash of 1997 in India – http://indiatoday.intoday.in/story/real-estate-business-in-india-faces-unprecedented-crisis-as-prices-plummets/1/276369.html
    I think that every 15-20 years, a new set of investors will lose their shirts and learn how hard it is make real (not nominal) gains in any asset class. Nobody learns from history, only from actual experience 🙂

  • Avinash says:

    Deepak , folks – please share your views on my point/question above? , ie, ow strong is te case for selling in case there is considerable investment in property. thanks.